Did an economist really just say this?

Actually, did a Nobel Laureate economist just say this?

It is not even true that higher corporate tax rates would necessarily significantly decrease investment. As Apple has shown, it can finance anything it wants to with debt – including paying dividends, another ploy to avoid paying their fair share of taxes. But interest payments are tax deductible – which means that to the extent that investment is debt-financed, the cost of capital and returns are both changed commensurately, with no adverse effect on investment.


Interest income is taxed at the level of the recipient. Thus the tax charged does indeed change the willingness of the lender to lend. Investment is indeed affected by such taxation therefore.

That interest is untaxed at the corporate level might change the actions of the corporate: but that it is taxed elsewhere means that there is still a change in the amount of investment.

Seriouly, how can anyone say that the imposition of a tax doesn\’t change behaviour? Let alone a Nobel Laureate?

19 thoughts on “Did an economist really just say this?”

  1. “How can anyone say this?”. Simple, by being a Statist gumby with a much-lauded Nobel not in macroeconomics but trade theory, but which is used nonetheless to give gloss to his “TAX TAX TAX” mantra

  2. The U.S. system is different to the UK. The corporation tax paid by U.S. companies isn’t offset against income tax on dividends, as it is in the UK. American critics refer to this as “double taxation”; although the rates are lower so it’s more like “one-and-a-half taxation”.
    I’d have to dig further into the numbers and check how much tax is payable on bonds, but it sounds like Stiglitz could be right. As I’m not an accountant and I have work to do, I’ll leave that as an exercise for other readers.

  3. So Much For Subtlety

    It is a surprise – as well as the interesting call to make the US the world-s global policeman. I am sure that would normally go down well with the Guardian-s readership.

    But the bigger surprise is that next door George Monbiot has written something almost half decent. We should support rewilding. But of course we should ignore George and his friends. We should listen to Prince Richard of Sayn-Wittgenstein-Berleburg and his friends:


    (Oh and I liked the idiocy that claimed the Swedish riots were caused by rising Swedish inequality. Not that Swedes are unequal, but that the rioters can obviously foresee that in the future their grandchildren will be unequal and this angers them or something)

  4. what seems odd to me is that you can always think of holding the tax treatment of interest constant and then varying the tax treatment of returns to capital – the fact one may or may not offset the other doesn’t mean changing one has no effect.

    if I wanted to argue higher (effective) corporate tax rates needn’t deter investment, I’d get stuck into to the empirical evidence and argue that other determinants of investment – some of them to do with the strength of public finances and provision of public goods and other amenities – may dominate tax rates. Over some range.

  5. If economists want to cultivate a reputation as honest men, they must stop their false claims to have won Nobel Prizes, or enjoying the bogus implication of “Nobel Laureate”.

    The Swedish Central Bank’s prize is undoubtedly a nice thing to win (the husband of a friend of my wife won one and he was deservedly jolly pleased), but it’s just counterfeiting to try to pass it off as the real thing. Aren’t economists usually agin’ counterfeiting?

  6. Tim: I think you may have misread this. Stiglitz isn’t saying that tax on interest has no effect on borrowing to invest, he’s saying that corporation tax has no effect on borrowing to invest.

  7. oh no, hang on, my comment #4 is quite wrong – he’s saying if you vary one you vary the other

  8. Stiglitz seems to be saying that the expected after-tax return on investment does not affect investment decisions if capital can be borrowed. That strikes me as counter-intuitive and the flood of investment by (mostly left-wing) “celebrities” into film finance and the like instead of gilt-edged or high-risk equity shares suggests that in the real world that this is not the case.
    Using debt to finance investment only provides tax offset on that part of the return needed to pay the interest – the higher tax rate bears down on the excess of the return on investment over the interest payable on debt – which is the whole point of the investment from the view of the shareholders and their elected appointees (to wit, the board of directors)!

  9. …..But the bigger surprise is that next door George Monbiot has written something almost half decent. ….

    Not really a surprise, he is actually writing about the subject he knows for a change.

  10. Luis, it’s a symptom of a profession given to playing fast and loose with the truth, that’s why it matters. If they lie on the little, easily checked things, why should anyone trust them on anything else?

  11. Stiglitz is claiming that the tax deductibility of interest is sufficient to offset some of the impact of a a higher tax rate. This is true and he might be right that the impact of higher rates is not significant on investment, but this paper suggests that the impact of higher tax rates is quite negative for investment.


  12. Dearie

    Lying? Who is lying? There is a prize, commonly known as the Nobel prize for economics. Yes actually it is awarded by a bank and differs from other Nobels. Who gives a shit? Do you go around pointing out most vacuum cleaners aren’t actually Hoovers? They could call it th Economics Oscar for all I care its just a name.

  13. Dearie, Yes, it’s not a -proper- Nobel.But, seriously since everyone calls it that, does anyone seriously think this is a big deal? It’s like the pedants who insisted that December 31st 2000 was the eve of the new millenium.

    Charlie. No. This is MM with taxes.

    Stiglitz was saying (I’m going to arbitarily add numbers here):

    Imagine a world where a company borrows 50% of new investment costs. One day the government says it will increase corporate tax rates to 20% from 0%. Obviously this makes profits less for investors. Some projects will not take place.

    But lo since some of the money is borrowed, this bit doesnt have to pay the corporate tax, because interest income is tax deductible. So the decline in investment is less than if it were fully equity funded.

    At which point, Tim says that if interest income is taxed at individual income tax rates, some of that tax advantage disappears.

    Stiglitz may be exaggerating. Tim is being a mite tough. (Stiglitz does say some very odd things, but this isnt one of the odder ones.)

  14. It’s like the pedants who insisted that December 31st 2000 was the eve of the new millenium.

    Of course it’s not; it’s more like a local politician of my youth who claimed to have a DSM. It turned out not to be a Distinguished Conduct Medal but a District Court Martial.

  15. Like Reich (see below), Stiglitz has a go at the “corporations are persons “provisions of the American legal system (and Constitution).He appears to imply , rather than plainly state, that if a corporation were a person it would be “Plastic Man” with a “capacity to be everywhere and nowhere at the same time”.This would appear to mean that corporations claim to be persons when it suits them but not when it does n’t, like when paying tax like any mortal resident (who does not have their dematerialising super power).Reich and Stiglitz are winning this one, by the looks of it.

  16. “it’s more like a local politician of my youth who claimed to have a DSM. It turned out not to be a Distinguished Conduct Medal but a District Court Martial.”

    you what?

    this is from the nobelprize.org i.e. the “real” one:

    “In 1968, Sveriges Riksbank (Sweden’s central bank) established the Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize. The Prize is based on a donation received by the Foundation in 1968 from Sveriges Riksbank on the occasion of the Bank’s 300th anniversary. The first Prize in Economic Sciences was awarded to Ragnar Frisch and Jan Tinbergen in 1969.

    The Prize in Economic Sciences in Memory of Alfred Nobel is awarded by the Royal Swedish Academy of Sciences, Stockholm, Sweden, according to the same principles as for the Nobel Prizes that have been awarded since 1901.”

    so the Royal Swedish Academy of Sciences decide on who wins it. And who chooses the “real” Nobel prizes? let’s see now, Physics – oh look it’s the Royal Swedish Academy of Sciences

    so it’s a prize awarded by the same people on the same principles

    yes that sounds like the difference between a Distinguished Conduct Medal but a District Court Martial YOU LUNATIC

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