Taxing corporate giants to give others a chance

Antitrust enforcement died with the Reagan administration. Neither the Republican nor the Democratic administrations since then have made any real effort to promote competition. American politicians don’t believe in the free market, despite constantly giving it lip service. They should. Well-regulated markets are a wonderful thing. (Adam Smith, by the way, was not an advocate of ruthless corporate empire building. He understood that companies should be regulated for their own good and the good of others.) Oligopolies (markets in which a 3 or 4 players dominate and refrain from real competition on prices or quality) and markets in which a single giant can buy or crush any new competitor (think Amazon, Google, Apple and Starbucks) are a different matter. They lead to high prices, stifle innovation, and control governments.

Companies like Amazon and Google are difficult to regulate effectively. It is hard to define exactly what Google does for a living, so it is hard to correct its market. Amazon could be broken up, but people seem to like having a universal vendor, so the pieces would tend to re-form into a new behemoth. Arbitrarily smashing such companies may not be the best thing, but we need to have some way to keep them from using their power to destroy any company that seeks to compete against them. Their sheer size and financial power give them an automatic large advantage in any field where they choose to play. We need a handicap to counter that advantage and allow new players to enter the fields.

What do you do when you don’t want to prohibit or destroy something, but you want to keep it in bounds? You tax it. Tax can be a perfect handicap. If Google, Amazon or Walmart will have more of their profits siphoned off to taxation than Jane’s Innovative Techworks or Ginnie’s Good For You Grocery would have, then the newer, smaller businesses would have a fair chance to get solid investors and to compete. If profits would fall by a third upon being acquired by Google, then Google will have a hard time buying out and suppressing other businesses. Such a handicap would not prevent Apple or Starbucks from being successful businesses, but it would keep them from destroying the competitive market.

What would such a tax look like? It could be a simple escalating tax on the U.S. revenues of corporate groups with global revenues above a certain level, starting small and gradually rising as they go far beyond that threshold. Due to the general issues of allocating taxing rights, the tax would be limited to U.S. revenues, but the threshold and the tax level would be based on global revenues of the group. Alternatively, it could be a tax on market capitalization above a certain level, but it would be harder to make that sort of a tax work within the international context without just hurting U.S. companies and promoting their would-be Chinese equivalents. One could have a hybrid where U.S. revenues of companies with market capitalization above a certain threshold were taxed based on that market cap.

Companies like Starbucks or Inbev that are not necessarily absolute behemoths but are giants in their field present a more complicated problem. In concept, one could have a market concentration tax that applies in any situation where the federal government has identified a market in which, say, more than 75% of the revenues go to 4 or fewer players. A lot of lobbying can enter into a definition like that, since you could get different results if you define the market as “coffee shops” rather than “hot coffee sales in restaurants”, or even “producers of beer sold in bottles and cans” rather than just “producers of beer.” Since the Reagan era, our enforcers tend to use the broader definitions preferred by big players. Assume for illustration, though, that the government could and would at least manage to define markets in a reasonably useful way. Once the market was defined, reasonably accurate statistics could usually be collected on total U.S. revenues at the appropriate level (producer, retailer, etc.) in that market. The tax could then be set based on the degree to which this year’s revenues of Company X exceed 20% (or whatever) of last year’s total market revenues at that level, escalating in increments as revenues exceed 30%, 40%, and so on. That would make it difficult for the concentrated players to buy or displace competitors. Would that give the big players some incentive to get lazy, since they would not profit as much through incremental growth? To some extent yes, but that effect should be overwhelmed by the room it would create for varied and creative competitors. Making the tax apply on the basis of revenues rather than units sold would avoid creating an incentive to just raise prices. It would not be a perfect tool, but it would be better than the current blunt weapons of antitrust enforcement.

Normally, I am not a fan of revenue taxes in the global economy. Why? Because if a company knows that it will face a ten cent tax on a dollar of revenue for sales into the U.S. but will not face that tax on sales into Canada, it will simply charge ten cents more for U.S. sales. Consumers will suffer the full cost of the tax. With a market concentration tax that’s not so bad, because the main point is to allow other companies to compete. If the behemoth raises its prices by ten cents, then Ginnie’s Good For You Grocery can win customers. However, this does suggest that the revenues from such a tax should be earmarked for a particular purpose. They should be distributed to state governments that agree to reduce their sales taxes accordingly, or else they should be refunded to consumers in the same manner as carbon taxes.