Monday, September 26, 2005

Taxes and firms; or, this is interesting (a continuing series)

Another factor that should be noted is that exchange transactions on a market and the same transactions organised within a firm are often treated differently by Governments or other bodies with regulatory powers. If we consider the operations of a sales tax, it is clear that it is a tax on market transactions and not on the same transactions organised within the firm. Now since are alternative methods of "organisation" -- by the price mechanism or by the entrepreneur -- such a regulation would bring into existence firms which otherwise would have no raison d'etre. It would furnish a reason for the emergence of a firm in a specialised exchange economy. Of course, to the extent that firms already exist, such a measure as a sales tax would merely tend to make them larger than they otherwise would be...But it is difficult to believe that it is measures such as have been mentioned in this paragraph which have brought firms into existence. Such measures would, however, tend to have this result if they did not exist for other reasons.
-- Ronald Coase, "The Nature of the Firm," Economica, 4:16 (Nov. 1937), 393.


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