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Taxing monopoly power
Can and should we use tax systems to regulate corporate power?
Welcome to The Counterbalance, the newsletter of the Balanced Economy Project.
From windfall taxes to monopoly taxes
Windfall taxes are popular again. Large technology companies enjoyed super-profits during the pandemic, energy companies earned windfalls, after Russia's invasion of Ukraine, and it has been a similar story for banks amid a spike in interest rates.
In a relatively rare show of unity, most sane economists, and the general public in every country, have tended to agree that excess or unearned income and wealth (such as pandemic windfalls, or war profiteering) should be taxed - and at surprisingly high rates.
But windfalls are, by their nature, temporary things. Tech firm valuations have fallen back from their highs, and energy prices and interest rate differentials (e.g. between bank deposits and bank loans) will fall again.
Yet there are other sources of excess profits, beyond sudden ‘gifts’ from nature or from geopolitics. A deeper and more long-lasting source of unproductive unearned income is, of course, monopoly power.
Can tax systems be used to tackle this, to help push back against encroaching oligarchy? And if the answer is ‘yes’ - how?
Today the Balanced Economy Project, the Roosevelt Institute and the Tax Justice Network co-publish a collection of five short essays from some of the world’s best-known experts in tax and monopoly power, to start a debate on this question.
The Five Rs of tax
People usually associate tax with raising revenue, but as this collection of essays show, tax also has a long and distinguished role through history of serving other goals - including, notably, to regulate corporate power.
Tax should not be the main toolkit for tackling power - the central role must be played by "antitrust" (as they call it in the U.S.) or "competition policy." Governments can use antitrust directly to shape and structure their economies by (for example) breaking up giant firms, blocking mergers, or preventing abuses of economic power. Antitrust is supposed to address the balance of wealth and income in an economy before or as it is generated: tax policy, by contrast, is more often associated with re-distributing wealth after it has been generated. Pre-distribution versus re-distribution, if you will.
Antitrust, however, has been distorted and blunted by a pro-monopoly paradigm nurtured and protected by an elite ‘competition establishment’ — a knotty problem that we’ve covered extensively here in The Counterbalance. So tax can and must play a powerful auxiliary role. And it’s broader than this: we have long argued, as others have, that anti-monopoly needs to be a broad front involving a wide range of measures: antitrust, plus effective financial regulation, privacy laws, labour laws, tax — and so on.
So: what is tax for? It has several functions, which have been described as the Four or Five Rs.
The first 'R' is Revenue, the most commonly understood role for tax. Tax, in a general sense, helps pay for education, infrastructure, security and so on.
The second 'R' is Redistribution, as mentioned. It is a commonly accepted principle that poorer people should pay lower rates of tax than richer people: not just for reasons of natural justice, but also because poorer people spend a larger share of their income on essentials like food and shelter than the rich, who often have large excesses over and above their basic needs. It’s a similar story with corporations: larger ones, often monopolists, tend to have larger excess profits than smaller ones in competitive markets. Tax systems don't always reflect this progressive principle, of course: powerful people and corporations constantly push in the other direction.
The third 'R' of tax is Repricing: you tax public 'bads' (such as tobacco, or fossil fuels) at high rates, to discourage their consumption or production, or give tax breaks for things you like, such as green investment.
A fourth, less well-understood 'R' is Representation. When American colonists struggling to throw off Britain’s imperial yoke cried "No Taxation Without Representation!" they put their finger on a key function of tax: it is a bargain between rulers and citizens, where citizens consent to pay their taxes, but only in exchange for representative government that serves their needs.
Tax pays for useful stuff, and if citizens don’t get what they pay for, they will fight back, and this keeps government on its toes. This function, long recognised by political scholars, is a big part of the reason why oil-rich countries like Venezuela, Angola or Russia perform so badly: the easy oil money means rulers don't need their citizens much (except perhaps as "logs into the train's furnace" in unjust wars.) In petro-states, this crucial 'representation' function often breaks down.
The fifth 'R' is the main subject of this edition. Tax can be used to Restructure our economies. And as our essays show, it turns out that tax has a long and venerable history as a regulator of corporate power.
In his editorial, Niko Lusiani of the Roosevelt Institute lays out a long history of the relationship between monopoly power and tax in the public conscience, and explores how current domestic and international tax systems promote monopoly power - and how tax can be re-invigorated to curb it.
Next, Sue Holmberg and Stacy Mitchell of the U.S. Institute for Local Self-Reliance (ILSR) show brilliantly how U.S. tax policy has turbo-charged Amazon’s monopoly power, giving it a competitive advantage over alternative retailers and others. They look at the tricks and dodges Amazon has used to escape paying tax, such as the "Dark-store loophole" - and lay out a powerful agenda for transforming the tax system from the monopolist's friend, into an anti-monopoly tool.
Reuven Avi-Yonah then follows this with a fascinating short history of international tax, noting that when the United States enacted its first corporate income tax over a century ago, the main purpose was not to generate revenue but to regulate corporate power. He notes a history of countries imposing not just progressive corporate income taxes - lower rates for the first slice of profits, then higher tax rates on the next slice, and so on - but also excess profits taxes as high as 95 percent during the Second World War. He advocates a return to progressive corporate taxation, with top rates high enough to "persuade corporations subject to it to split up".
In the third article, George Dibb explores distinctions between "productive profits", on the one hand, and those profits that they simply generate because of their size or market power (economists sometimes call them "rents.") Policy-makers worried that high taxes might discourage investment, but he gives strong evidence that these fears are likely to be unfounded. There is ample room, and a range of tools, for taxing not just windfall profits, but non-windfall excess profits in a world of market power.
Next, Allison Christians takes Dibb’s arguments further, delving deeper into the thorny question of what we mean by ‘normal’ profits - in contrast to other kinds such as ‘abnormal,’ ‘excess,’ ‘non-routine,’ ‘super-normal,’ ‘residual,’ or ‘windfall’ profits. Clarity on these questions will help policy makers decide how and when to impose surtaxes on excessive profits. But she also notes that “as the world continues to navigate through crises of one kind and another, the niceties of precise rhetorical usage will likely matter less than overall public demand for reform.”
In the final article, Emily DiVito and Niko Lusiani of the Roosevelt Institute make some novel arguments about how taxing the individual wealth of rich owners of corporations and of corporate stock could change their incentives, curbing the drive to capture the rents that emerge from corporate consolidation.
In short, tax systems certainly can and should be used to push back against monopoly power, to tilt the economic playing field against encroaching oligarchy.
And there are poweful reasons for optimism here. Tackling excessive concentrations of power can prove highly popular, all across the political spectrum - and it’s the very same story with taxing large corporations. Anti-monopolists, and those seeking tax justice, can help each other out here.
Tax and Monopoly Focus: click here for the full collection.
A new European anti-monopoly movement emerges in 2022
In a blog on October 19th, we wrote that "2022 is the year when we can say that a broad anti-monopoly movement properly began to emerge outside the United States." Many people and organisations have battled against monopoly power for decades, but this has typically happened in silos. A rich and vibrant anti-monopoly movement already exists in the United States. This year, organisations from very different fields have started coming together, with a shared narrative, and now with the beginnings of a formal, funded anti-monopoly network.
We hosted the first physical meeting of this fledgling anti-monopoly network in Brussels on October 14th. Other milestones this year include the vibrant Rebalancing Power conference in May, a joint civil society submission on Amazon to the European Commission, which got wide media coverage, a training event for civil society in Amsterdam in September, at which we agreed to pursue several joint initiatives; another joint submission on democratising the 'competition bubble' in Brussels, and our highly successful Brussels event, described below. Please do get in touch, and join us.
We co-organised (with the Open Markets Institute, SOMO, and LobbyControl) a highly successful and lively event in Brussels, with a wide variety of short, sharp presentations on competition policy, labour and trade unions, privacy, national security, music, the media, civil society, human rights, economics, and civil society. More on this, soon.
The UK government is looking for applicants for the Competition Appeal Tribunal, with a closing date of Nov 11th. We’d encourage anyone qualified (and unconflicted) who feels they sit outside the pro-monopoly 'competition bubble' to apply.
More on a theme we’ve covered in past editions. The US antitrust expert Hal Singer explores the links between corporate power and inflation, describing testimony under oath from a corporate executive who said that his cartel functioned most efficiently in times of inflation. "I nearly fell out of my chair. What he was basically saying was that a small dose of inflation can serve as a focal point. A way for a bunch of different firms in a concentrated industry to focus their attention on a new target to kind of move in unison, to coordinate their pricing." (With some interesting notes on how they co-ordinate illegal activity.) For a broader, more academic look at this, see this new OECD report "Competition and Inflation"; and see also Prices, Profits and Power (Roosevelt Institute).
The big five tech firms have bought over 1,000 companies in the past decade, with pretty much no opposition. As we recently explained, the UK's surprise and welcome move last year ordering Facebook to sell Giphy was really the first big tech breakup of the modern age. The lessons are many. First, who, outside the competition bubble noticed this momentous step? Second, a fairly small country, weakened by Brexit and by political chaos, has been able to break up a giant U.S. tech firm, with global impact. (Just think what Europe could do, should it summon the political will to change its pro-monopoly approach.) Third, new arguments are being wielded, and new actors getting involved: see, for example, Privacy International's submission (PI was granted permission to intervene in this case, one of the first successful applications by a campaigning organisation to intervene before the Tribunal.
A nasty little story by the Gig Economy Project. It quotes Lucia Vasco, economist and author of ‘will an algorithm replace you?’, who opined that the enormous public advert looked like a veiled threat to use passenger data against politicians seeking to regulate its power.
In the Google / Android judgement, the EU General Court, the ruling went a little further than usual reasoning, citing not just that Google had been engaging in exclusionary abuses (see our recent climate edition on this) and that this harmed "innnovation for the benefit of consumers" - but also that curbing these abuses were necessary "in order to ensure plurality in a democratic society." That may seem like an obvious point, but courts have hitherto found it rather hard to see democracy.
To end this edition on tax and monopoly, we will highlight a couple of other developments in international corporate tax. This paper by Martin Hearson and Margarita Gelepithis for the International Centre for Tax and Development explains how there has been a breakdown in the international corporate tax consensus that structured tax competition over the past century, and it is being replaced by new norms of international tax where states re-assert their power and claim the right to tax corporate income based on presence in consumer markets, for example via controversial “Digital Services Taxes”.
See also Taxing Multinational Corporations in the 21st Century, where economist Gabriel Zucman notes that “contrary to a widespread view, it is possible to tax multinational companies (potentially at high rates) in a globalized world, even in the absence of international policy coordination.” Update: from IPPR in the UK, a welcome new paper on taxing corporate buybacks, which would take another angle on taxing monopoly power.