Return to Neptune, I: Incidence

As I've said before, the conversation sparked by Rod Long's Cato Unbound essay has been rididulously lively.  Now I'd like to append a few points that - as far as I can tell - no one else has made.  (Please point out any blind spots in the comments). 

I shall start with the problem of incidence.  I might be reading Rod uncharitably, but analysis of who ultimately benefits and suffers from government policy seems naive.  He argues, for example, that government support for corporations allows them to survive despite blatant inefficiency:

Those who have worked in such environments know from their own experience how completely clueless the highly paid upper managers tend to be about what is actually happening, and how much of the firm's success depends on workers simply ignoring the insane directives from above and doing what needs to be done. When those with such experience hear free-market advocates assuring them that their daily experience is just how things would continue to be in a free market, they are likely to conclude "so much the worse for free markets." But in fact they should conclude that something artificial is propping up these hierarchies...

But does this really make sense?  Suppose, for example, that the government made corporations tax-exempt.  Would this actually benefit corporations?  In the short-run, yes.  But these short-run profits would encourage the formation of more corporations - and the dissolution of non-corporations.  This process would continue until corporations earned only a normal rate of return.  Even with favorable tax treatment, corporations based on "insane directives" would still go bankrupt.

This doesn't mean that differential tax treatment is harmless.  When you encourage less efficient forms of business, you reduce production, and the world gets poorer.  But the primary victims of these inefficiencies aren't small businesses; they're consumers - the ultimate inelastic resource.

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