Fixing ‘too-big-to-fail’
blogs.reuters.com
blogs.reuters.com
First, when faced with the problem of "big companies buying political influence", it decides to destroy "big companies" rather than "buying political influence". There are many industries and companies where the economics of the business essentially require large companies to be viable. Rather than going after the root of the problem -- buying political influence -- they propose to preemptively punish companies based on a weakly correlated metric without regard for if those companies are engaged in bad behavior. This kind of arbitrarily selective prior restraint is considered an anathema to a free society in every other context and should be here. There is nothing intrinsically bad about big companies and many small-ish companies have out-sized amounts of political influence.
Second, the idea of taxing gross income (and its relative, gross receipts) is not new and many variants of it have been tried in a variety of jurisdictions. Due to the experience of how those implementations actually work out in practice, it is often considered a poor way of structuring taxes. Not only are there many ways to structure around it but it also creates perverse incentives and favors certain kinds of businesses over others. In particular, it tends to put high-growth startups at a disadvantage relative to established companies. In fact, the obvious disadvantage to tech startups is one of the primary considerations for changing these types of taxes in jurisdictions that use them.
In summary, the proposal both ignores the underlying problem and finishes it off by proposing a "solution" that a cursory reading of literature would suggest is obviously defective. It is not clear why we should care about Richard Stallman's opinion on this in any case, since he obviously has very limited familiarity with the subject matter.
Well, then obviously these companies would not experience price competition from smaller companies when they pass the tax on to the consumer, right? I don't see how that's a problem. If there's a demand for the product, it will be built. It will just be cheapest to build it in the smallest company. Larger companies could still persist at it if their size confers cost savings over the cost of the tax. The point is, rather than having all the financial wizards trying to figure out how to hide money and feed monolithic behemoths, they instead will be working on how to carve themselves up into independent pieces that can be held accountable.
But high unit margins are terrible. First of all, they mean higher consumer prices, which are bad in and of themselves. But also, that unit margin either becomes corporate profit (in which case it makes richer the stockholders of the company, who will, ceteris paribus, be wealthier on average than the consumers paying that cost), or it gets eaten up by the management of the company (in which case it makes richer the executives of the company, who will, ceteris paribus, be wealthier on average than the consumers paying the cost).
It is crazy to suggest that we should pursue a policy that increases consumer prices and redistributes that wealth to the wealthy.
But the point is, you're weakening that. You're making market share less valuable, and unit margin more valuable. So you'll tip the scale more in the direction of high-margin, low-market-share organizations.
Gosh, this forcing fiscal motivators on people sure causes some tricky unintended consequences.
"To big to fail" is a euphemism, it has nothing to do with the literal size of the firm. It's a rationale for paying blackmail. If the firms really were so big that allowing them to collapse would somehow create (rather than merely marking the beginning of) an economic disaster, that in no way prevents making an example of the people who are in a position of responsibility, by, for example, letting them know that next year's performance bonus will be paid in the form of time off their prison sentence.
I can't stand this argument.
If as a CEO you completely destroy a company, an industry or the entire economy that does not mean that (a) you have done some illegal and (b) you therefore deserve to go to jail for it. Yet the "witch hunt" that seems to permeate through society seems to suggest that they should.
Avoiding another GFC requires focusing on managing systemic risk not individual people.
But in this particular financial crisis there were large amounts of outright fraud and criminal activity, and the authorities are systematically looking the other way and even rewarding the perpetrators because they're well connected and it would be awkward to do otherwise.
In particular, AIG was engaging in insurance fraud, selling policies beyond any conceivable ability to pay. This is not something you do by accident, or a calculated risk that doesn't pan out.
As another example, HSBC's recent revelation that they were in the money laundering business, and the US government's public statement that nothing can be done about it because they're too important to the economy.
I'm not concerned about avoiding another GFC, those will keep happening and the consequences are manageable. The consequences of the bad incentives of parasites and criminals being allowed to prosper are much more serious.
Huh, it's almost as if people realize that the legal system is not in line with our ethical system.
Can you please explain to me why the scumbags who were responsible for the housing disaster deserve to walk scot-free?
Annually, this commission would put out a list of any company in any industry deemed too big to fail. That could be a bank. It might be a manufacturer that is basically the default monopoly manufacturer for some very large industry. The list would include reasons of why they were too big to fail, the likely outcomes of their failing, and how the US would probably be forced to prop them up, and various parameters and formulas for sizing them.
Once listed as too big to fail, the company should have 90 days to appeal and one year to reduce to a smaller size, however they want to do it.
If there was some engineering problem, in which components of a system could grow too large and force the entire system to become dependent on them, what are the steps and engineer would take to analyze, quantify, and possibly rectify the system?
It is interesting to me, that we can allow too big to fail to happen, and then having happened, happen again and again.
If you're concerned about exposure, then avoid doing business with risky firms. It's entirely possible that a smaller firm is more risky than a larger firm; it's the risk that you choose to take on that matters, not some arbitrary measure of "bigness".
But let's set that aside: if many people think "big" firms are more risky on that basis alone, and they choose to avoid them, then smaller firms will emerge from the market process.
Fixing "too big to fail" isn't about making everything safe enough that banks never fail, it's about allowing an insolvent bank to fail without causing a domino effect that affects the whole economy.
Big companies are good at finding loopholes. They have the size advantage. Taxes and regulations may slow big companies, but they completely kill small businesses. It's the old proposal to tax the rich and powerful, which doesn't work for the obvious reasons.
It's not uncommon for companies to split above a certain revenue level, in order to save on taxes. Now, this is a fake split as they mostly remain one single company but, after reading this, suddenly what looked like a bad thing starts looking like a potential good thing, if properly defined/implemented.
This is the first time in years that I've read something by Richard Stallman which I've not immediately considered just some utopian dream. The current crisis in the eurozone would never have happened if states didn't have to bail out banks (either directly or indirectly). For this, kudos to RMS.
The solution for this is not taxing revenue, which as mentioned in other comments would destroy a lot of legitimate business models, but instead, improving the art of accounting. It suffers from the same plague of "large corporations with out-sized political power" and the sway of a lot of misaligned incentives. Putting in one stop-gap solution for another doesn't seem like the best way to fix the system.
Taxing revenue not only limits methods that businesses can use to reduce their tax burden, but also limits opportunities for corruption or favoritism as compared to taxing profits.
Partly it's not thought through (tax on gross income not profit - but that would tax Dell on a thousand dollar laptop when they might make 20 bucks)
And partly it's plain crazy - taxing a company till it becomes smaller is like having agent provacteur for cartel prosecutions
Consider the reputation of the movie industry where actors and authors and everyone up and down the line are screwed because they took a percentage of the profits and it turns out according to the studio accountants, their megablockbuster never actually turned a profit.
Take two basically identical companies. They sell, say, computers.
One company has a "luxury" brand and they sell 1 million units at $2,000 a piece with a $500 profit on each. They have gross sales of $2 billion and profit of $500 million.
The other company has an "economy" brand and they sell 5 million units at $1,000 a piece with a $50 profit on each. They have gross sales of $5 billion, and a profit of $250 million.
The luxury company is taxed at 1%, and the economy company is taxed at 5%. The economy company's entire profit is eaten by the tax, so they must raise their prices to $1,050. The luxury company may or may not raise their prices at all -- if they do, they raise them to $2,020, maintaining their profit level.
We have effectively propped up the luxury company's business model. They have reduced the price differential between themselves and their competitor, and the people paying the difference are the tax-payer. Why did we do this? Do we like corporations having very high profits? I'm not aware of that as being a national goal.
The economy company is often going to have a hard time managing a split-up. It presumably benefits from economies of scale at the size that it is, and it is not clear that two companies half its size could get the same deals from suppliers etc. that allow it to make its products relatively cheaply. At the very least, the "two smaller companies" version of it will almost certainly increase administrative overhead.
But, more so, it's unclear that the economy company is a bigger problem than the luxury company in this scenario. To the extent that it is lobbying for its interests, the luxury company has more money with which to do this than the economy company. The economy company probably employs more people, and puts more money into the local economy, and it can use those as a bludgeon. That is, in fact, the dynamic that Stallman appears to be envisioning.
My point is that this dynamic that he is envisioning is a very narrow view of the entire situation.
If companies are naturally downsized by market/tax forces then they won't be lobbying to maintain their monolithic state. Rather then the financial engineers in the companies working out perverse ways to keep "profit" low, they instead have to focus on carving themselves into optimally-sized independent units. I'm assuming gross revenue isn't as easily gamed as profit is.
In your scenario, "luxury" going into bankruptcy isn't a problem--people can just buy the more common computer.
It's just a game - but nations will have to get better at playing it. That is simple - however taxing Dell on income at the same rate as taxing a law firm is unfair on a basic level.
Isn't it?
Reading the article, they claim an operation like this is an ideal remedy to being "too big" yet their proposed tax plan makes it untenable.
The business does not make money appear from thin air. Any money that goes from the business to the tax authority has to have originally arrived in the business from a customer buying the product or service offered.
There are three basic ways to tax people:
1. On Income
This is the way that most tax revenue comes in to the US. It says, "When you make $100, the government takes, say, $20 of it. And then the remaining $80 is entirely yours."
2. On Wealth.
This is how, say, property taxes work. "When you make $100, the government takes, say, $10 of it this year. Next year, if you still have the $90, the government takes another $8 of that. The year after that, if you still have the remaining $82, the government takes another $7 of it. The year after that, if you still have the remaining $75, the government takes $6 of it..."
3. Consumption taxes.
This is how sales taxes and VAT taxes work. "If you get $100, it's all yours. But if you SPEND say $50 of it, the government takes $10 of that."
The common argument in favor of income taxes is that wealth taxes just make sure that people buy frivolous crap instead of saving, because saving is penalized, and that consumption taxes tend to be regressive because the rich just can't/don't spend all that much of their money (there's a limit to how richly it is possible to live), while the poor must spend all of their money. So the poor get taxed on a greater percentage of their income than the rich.
And the basis of every financial crisis, it seems...
I am at a loss to think of any. Without one, a law with such powerful enemies is not going to resonate widely enough to pass.
There is certainly a problem, and it is a huge problem - the fact that big businesses get special treatment from the government. Arguments over whether government has any business dealing with the economy in the first place aside, it is absurd on the face of it that we should give the biggest companies special advantages, allowing them to defeat competition on uneven ground. There is nothing wrong with a natural monopoly in an environment in which companies compete on even ground, because it is extremely fragile, particularly if the holder attempts to exploit it. The only reason monopolies or near-monopolies are a problem are because of government regulations which restrict competition (for a disgusting example of this, see the New York dairy licensing scheme). Anti-trust legislation wouldn't be necessary (if it is actually necessary) if it weren't for regulations that cause monopolies that a competitor can't attack.
This central problem of special treatment is surrounded by a slew of other problems which both contribute to and are aggravated by it - bribery, buying political influence, the wedding of political parties to specific industries and companies, etc. Taxing big business won't solve the problem at all, and will probably only make it worse, as the corrupt businesses use their political cronies to avoid the tax, and the uncorrupt businesses go out of business because they can't afford to fight their competitors and the government.
I may have unusual views on economics, but I think this should be immediately evident no matter your political bent (barring, of course ideologies such as communism - I use the term in the technical sense, not as polemic - which advocate state control of business).
Stallman made some cool things a long time ago, and he has many valid points on other subjects, but he needs to talk about things that he actually has a clue about, and he needs to actually descend to the earth and engage in actual debate with his opponents, instead of screaming polemic over the top of them like a spoiled schoolboy. It's sad when a man capable of intelligently debating topics such as patents and copyrights refuses to do so and instead resorts to simply stating that he's right, which is Stallman's usual tactic.[1] He ends up seeming much more reasonable than he is most of the time, because his allies explain the rationale behind his ideas, but if you simply listen to him argue an opponent, you'd never hear it. Listening to him, it comes across as "I am right because I am Stallman and Stallman is right".
(Personally, I think the government has no business touching the economy in the slightest, and should limit itself to the point where a simple head tax would suffice for its operation. This would require vast societal changes that few would agree with me on, so I don't intend to bring it into the argument - I think Stallman's idea falls flat regardless of whether you believe in an unfettered free market or not).
[1] For example, see http://arstechnica.com/tech-policy/2012/11/your-criticisms-a...
What regulations prevented competition with Standard Oil? Wasn't it the case that there were, in fact, no regulations and Standard Oil exploited that by dumping?