Tuesday, January 29, 2008

Does Business Confuse Economists?

by Ken Houghton

Thorsten Beck is smarter than I am. But he appears to be surprised by something I would consider intuitive:
Fourteen percent of firms in this sample rely exclusively on informal finance and the percentage goes up as corruption, complexity of taxation (but interestingly not tax rates) and property registration increase. [emphasis mine]

Why would this be confusing? Tax rates may change, but they are fairly stable for planning ROI. Confusion—additional uncertainty—makes rudimentary ROI calculations more problematic (if not more difficult).

It seems evident that, at the margin, a firm would feel more secure making an investment decision based on a known, say, 30% effective tax rate than making a decision that depends on subsequent rangling, even if the most probable effective tax rate is slightly lower than 30%).

What am I missing?

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