TaxProf Blog

Fiscally favored powerful entities have been extracting economic rents through the acquisition of projects and products for which there is an inelastic supply (energy supplier, accommodation) or inelastic demand (life saving drugs, life flight services). The tax system has also supported the systematic pursuit of fairness by Americans in their Professions, farmsand more recently, in pensions and another retirement vehicles. These activities exacerbate inequality, foster discrimination and undermine consumer well-being. Declining market competition also undermines market fundamentals by reducing investment, quality, productivity, innovation, economic growth, and market dynamism. Furthermore, corporations that enjoy market power redirect their profits toward government capture to ensure their continued extraction of economic rents.

In his new article, Taxes on capital and market power, Kimberly Clausing has reviewed recent economic studies on these trends and has proposed a reform: modify the corporate tax to apply progressive rates to the highest levels of business income. The corporate tax is a better instrument than antitrust regulation to address these ills because regulation has been slow to resolve problems and enforcement has been sporadic. On the other hand, the corporate tax is direct, transparent and immediate. While other tax reforms have been proposed, she points out that taxation at the entity level is really the only way to get investment income. Seventy percent of stock holdings are not subject to income tax at the individual level because they are held by foreigners, retirement plans, non-profit organizations, and insurance companies. Remaining investors who are subject to income tax can easily avoid capital income taxes by deferring the sale of their assets until their death, when they receive an increase in basis under IRC §1014. Therefore, individual taxation is not a good solution.

By imposing higher rates on corporate income above $100 million, the United States could increase income and avoid adverse effects on entrepreneurship, useful risk-taking, and worker wages. Numerous broad-based studies show that the corporate tax base is made up primarily of above-normal capital returns, excess profits. Those gains are also concentrated in the largest companies. By structuring the graduated rate system to apply higher rates only to the highest incomes, Clausing leaves the vast majority of corporations (and normal returns on capital) unburdened. Most companies, in fact, would probably benefit from a more competitive environment. In addition, the higher rates would not undermine existing tax subsidies that support entrepreneurship, such as earnings averaging through net operating loss and preferential capital gains treatment for founders’ shares. She points out that other policies and institutions may be as or more important than taxes in stimulating innovation: education, immigration, research, and legal, banking, telecommunications, and transportation infrastructure.

The most important challenge of your proposal will be to address the likely behavioral responses: corporate investments, profit transfer, corporate splits, and change in entity form. The implementation of the OECD/G20 Inclusive Framework setting a corporate minimum tax of 15% could be enforced by adopting countries against corporations based in non-adopting countries by increasing the tax they owe through a taxable profits rule. below. The existing benefits of agglomeration, economies of scale and scope, and profitable synergies from insourcing may also offset the pressure to avoid higher rates through spin-offs and corporate mergers. However, the reforms may need to be expanded to cover all US business entities to be truly effective. Unfortunately, it can be an uphill struggle to enact these policies precisely because the very business entities that would face the highest rates have already amassed such significant market power and policy influence.

In 1944, Fredrick A. Hayek published the path of bondage, arguing against central economic planning and in favor of decentralized markets and competition. Far from expressing strident anti-government rhetoric, Hayek emphasized that some forms of regulation could be healthy, such as those that create conditions in which competition would be most effective, breaking up monopolies and preventing fraud and deception. The basis of Hayek’s arguments for competitive markets was his insistence on the rule of law, granting equal legal rights to all, rather than reserving them for the powerful few. The tax system has been a key tool through which “would-be monopolists have obtained the help of the state to enforce their control.” In Taxes on capital and market power, Clausing has identified key reforms that could reduce corporate consolidation of market power, restore economic competition, and strengthen the rule of law. We can only hope that we have the political will and intelligence to carry them out.