Sunday, April 7, 2013

Reasons for a Progressive Tax on Corporate Gross Receipts

Posted as part of a discussion of a progressive tax on corporate gross receipts, on Quora:

Good Morning, Tom Byron

Thank you for your thoughtful response to this critical question.  Our views may differ, but your critique gives us an opportunity to examine the issue in detail.  Since my answer on Quora will not appear as primary text, I will also post it on my Quora blog and invite you to be an additional author, so we can continue reasoning our way to a rational conclusion.

re: "Why is too big to fail a problem? Too big to fail is only a problem when public tax dollars are at risk. Many many businesses have failed and disappeared. Who decides how big is too big?  Bureaucrats? It is more likely that a large business would want to self-deconstruct into separate entities for better product identity."

Organizations that become 'too big to fail' are a problem, not only because they put public money at risk, but because they become uncontrollable.  Randall Forsyth, in a column titled "Too Big to Jail", in the March 11, 2013 issue of Barron's, wrote:

In a hearing of the Senate Judiciary Committee on Wednesday, he (Iowa Senator Charles Greeley) expressed concern to Attorney General Eric Holder that some institutions had become "too big to jail"  (... text omitted ...)  Holder agreed: "The concern that you have raised is one that I frankly share.  (... text omitted ...) But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy."

Forsyth's column, including the omitted text, is available at:

Too Big to Jail: What Eric Holder told a Senate Committee -

Another aspect of the adverse effect of excessive size is our government's unwillingness to enforce our laws penalizing corporate crime.  An instance was described by Jack Willoughby in a column titled, "SEC spares UBS a Worse Fate", describing how the Securities and Exchange Commission, in an abject failure to meet its obligation to protect the public interest, exempted UBS Securities from a mandatory 10-year ban on its activities after it was found guilty of securities crime.  Corporations cannot be expected to stop criminal activity when they know they will not be punished.

Willoughby's column is available at:

SEC Lets UBS off the Worst Hook

These examples are but the tip of an iceberg of problems with firms that become "Too Big To Fail".

As you imply, no-one can decide "how big is too big?".  We want to give our entrepreneurs the freedom to grow.  Corporate growth can be good, and healthy, and desirable.  Some business must be larger than others (public utilities are an example), so it is impossible to make a judgment that a given size is good or bad.  Size is merely a method of description.  Since there cam be no objective measure of 'too big', we need a mechanism that uses the market to detect excessive size.

If, by the nature of its business, an enterprise must be large, it is not injured by a progressive tax on its gross receipts because all competing businesses must attain a similar size.  However, when a company grows beyond an economically justifiable size, the tax acts to protect the public interest without additional regulation.

re: "The Bell System was a classic monopoly. The company provided national access to a communications system with innovation and research.  Service was widely available and market penetration was in the high 90%.  Capital was invested in the network and growth was steady. It can be argued that rural customers were the last to receive telephone service. This was due to cost per mile for construction. These costs were shared across the rate paying public and regulated by Public Service Commissions. The cost causers were the cost bearers. Your rates were based on where you lived. It was economies of scale."

The Bell System is a good example.  When it was young, dynamic and growing, it was a boon to society.  After it matured and began perpetuating its own existence (something all of us would like to do, but are prevented by the cycle of life), it became injurious to society by suppressing alternatives.  As soon as the Bell System was broken up, alternatives mushroomed and the market blossomed with diversity.

re: "Profitability is the core driver of a capitalist system.  We are introducing an 'amorphous' societal influence of what 'feels good' for customers in the product they choose to buy."

We must not forget that competition is the leavening force in a capitalist system.  The quest for profit, though vital as a driving force, does not justify the elimination of competition.  Competition is a necessary ingredient the ensures quality products and fair pricing.  It is unwise to pay lip service to capitalism by endorsing profit while ignoring acts that diminish competition.

re: "Exploitation is paid for in the taxes levied on the corporation in consumption of resources. These are Federal Excise Taxes, local taxes, state taxes, etc."

Oh, I agree that there is no shortage of taxes.  Neither is there any shortage of ways in which they are avoided.  In corporations, transforming of profits into expenses is a fine art.  As a matter of fact, enacting a progressive gross receipts tax, without reserve or allowance, will be a major challenge in a political environment controlled by political parties that depend on the financial support of big business.  Still, even that's not cast in concrete.  In time, in the same way that we gradually came to acknowledge the earth is not flat, we will learn the folly of letting vested interests control our political leaders.

re: "The society determines the fairness of the product when they freely choose to consume the product. They arrive at a price they are willing to pay out of their disposable income. An additional extraction of fees for use of a product will go to the government for what? Reducing the cost of the product? For supporting social welfare projects? For subsidizing those who can't afford this product?"

The additional fees simply reduce the benefit of monstrous growth.  A progressive gross receipts tax has no meaningful impact on a company until it begins to exceed its economically justifiable size.  It is the one way society can eliminate companies that are "Too Big To Fail" while enhancing competition and automatically fighting inflation.

re: "How does layering an additional tax on a product not make it more expensive? Who pays for this added cost to the end-user of what they have decided was a fair price for a useful service?"

As you say, taxes are an expense of doing business.  They increase the cost of doing business, and that cost is added to all other costs to determine the price of the company's goods and services.  Taxes are always passed on to the consumer.

That is exactly the point of a progressive tax.  When a company attains unwarranted size by manipulating the rules in its own favor or dominating its competitors to the detriment of the public, the tax adds a cost to its operation.  It encourages the growth of smaller companies by providing an umbrella protecting them from improper domination.  It has the added advantage that it allows companies to meet the tax in their own way.  Some (like those that absorbed suppliers or competitors) may elect to spin those entities off, to resize their operations to a smaller tax base.  The option is theirs.

Fred Gohlke

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