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Fixing ‘too-big-to-fail’

Richard Stallman


Originally published on at this page.

The United States is plagued by large corporations with outsized political power. They are “too big to fail.” So if they are about to fail, they get rescued. Many are so big that they can block the laws needed to stop them from destroying the economy or the environment.

We need to replace them with smaller companies, but U.S. antitrust law is inadequate. It exists, but has been weakened over the past decades. Consider the proposed “Volcker Rule,” which would make many banks split into two companies, one for risky investments and one for loans based on savings, as the old Glass-Steagall law required. This would address some problems, but would not make banks small enough. Eliminating “too big to fail” banks means making sure that each is small enough that regulators, prosecutors and elected officials won’t hesitate to let it suffer the consequences of its own decisions.

Using anti-trust law now to split up a company requires a lawsuit, and many large companies can make that costly – as Microsoft did each time it was convicted. Corporations can also use their political influence to avoid being split, as Microsoft did when last convicted.

It is clear that the larger companies get, the harder it is to enforce antitrust laws against them. Yet, a business-friendly government can vitiate the law simply by launching no antitrust cases – as the Bush administration did.

When the government wins such a suit, the court splits up the company to remedy the specific anti-competitive behavior proved. It can’t split the company into 50 parts just to ensure they are all small enough. We can’t fix the problem of too-big-to-fail companies this way.

I propose another method ­– one that can be applied to all companies. It works through taxes. There will be no need to sue companies and split them up – because they will split themselves up.

The method is simple: a progressive tax on businesses. We tax a company’s gross income, with a tax rate that increases as the company gets bigger. Companies would be able to reduce their tax rates by splitting themselves up.

With this incentive, over time many companies will likely get smaller. They could subdivide in ways they consider most efficient – rather than as decided by a court. We can adjust the strength of the incentive by adjusting the tax rates. If too few companies split, we can turn up the heat.

Big companies can afford clever lawyers. They may try, for example, to pretend to split up into several companies that effectively work together as one. So the new tax law must recognize this and treat such entities as one company that pays the rate for its combined size. As for how to recognize and define such combinations, we can probably borrow solutions from antitrust law.

Corporations today are often multinational, and can play accounting games between their divisions in various countries. Yet we should not let this thwart the plan: A multinational company’s tax rate for income in the U.S. should be based on the size of its operations worldwide.

Companies have many accounting tactics for reducing their declared profits – so if the tax is levied on profits, they will likely game the system. It is far harder, however, for a company to disguise its gross income. So let’s compute the tax based on gross income. This is larger than the profit, so the tax rate we apply to gross income should be smaller than what we would use to tax profits.

Another advantage in this is that an inefficient company pays the same tax rate as an efficient company of the same size. A tax on profits would tax the efficient company more, because its profit would be a larger fraction of the same income.

You can also think of this as a variable-rate sales tax.

When corporations all pay the same sales tax rate, they pass the cost along to customers. Thus, if the goal is to tax wealthy business owners, a fixed sales tax doesn’t do the job.

However, businesses can’t pass the entire amount along to customers if they pay different tax rates. If a large company pays 5 percent and a competing small company pays 1 percent, they could both pass along 1 percent but no more. The owners of the large company would have to pay the other 4 percent – which is exactly what might convince them that splitting up is desirable.

This tax would operate gently but firmly on a long time scale. It would surely not make every large company split up in the first year. But it could well change a structure that promotes mergers into one that promotes dividing.

Copyright (c) 2012 Richard Stallman Released under the Creative Commons Attribution Noderivatives 3.0 license