Friday, May 5, 2023
Weekly SSRN Tax Article Review And Roundup: Roberts Reviews Clausing’s Capital Taxation And Market Power
This week, Tracey Roberts (Cumberland; Google Scholar) reviews a new work by Kimberly Clausing (UCLA; Google Scholar), Capital Taxation and Market Power.
On Tuesday the Wall Street Journal reported that Americans are facing continued price increases, not because of pandemic-related supply-chain disruptions or because of rising energy costs following the Russian invasion of Ukraine, but because corporations are simply padding their profits. How is this possible in a free market? Well, the market is not exactly free. Mergers and consolidations have given large corporations the ability to exercise market power. Because so few companies compete with one another for customers, they can set monopolistic prices. Likewise, when there are fewer companies competing for workers or resources, they can engage in monopsony, paying lower wages and lower prices than they would be able to claim in a competitive market. Scholars and journalists have reported that employers are forcing employees across many sectors to work longer, for less pay, and in more difficult conditions, and are effectively reducing employment opportunities.
Powerful, tax-favored entities have also been extracting economic rents by acquiring projects and products for which there is inelastic supply (energy supply, housing) or inelastic demand (life-saving drugs, life-flight services). Furthermore, the tax system has supported the systematic hoovering up of Americans’ equity in their professions, farms, and more recently, in pensions and other retirement vehicles. These activities have exacerbated inequality, supported race and sex discrimination, and undermined consumer welfare.
In her new article, Capital Taxation and Market Power, Kimberly Clausing has surveyed the recent economic scholarship on these trends, underscoring that declining competition has also undermined market fundamentals, reducing investment, quality, productivity, innovation, economic growth, and market dynamism. Furthermore, corporations enjoying market power redirect their profits toward government capture to ensure their continued extraction of economic rents. More importantly, she has also proposed a reform: modifying the corporate tax to apply progressive rates to the highest levels of corporate income. She argues that the corporate tax is a better instrument than antitrust regulation to address these ills because regulation has been slow to resolve issues and enforcement has been sporadic. In contrast, the corporate tax is direct, transparent and immediate. While other tax reforms have been proposed, she notes that entity-level taxation is really the only way to reach income from investment. Seventy percent of stock holdings are not subject to income tax at the individual level because they are held by foreigners, retirement plans, nonprofits, and insurance companies. The remaining investors who are subject to the income tax may easily avoid taxes on capital income by deferring sale of their assets until death, when they receive a step-up in basis under IRC §1014. Therefore, individual taxation is not a good solution.
By imposing the higher rates on corporate income in excess of $100 million, the United States would be able to increase revenue while avoiding the adverse effects on entrepreneurship, useful risk-taking and workers’ wages. Numerous broad-based studies show that the corporate tax base is comprised primarily of above-normal returns to capital, excess profits. These profits are also concentrated in largest companies. By structuring the graduated rates system to apply higher rates to only the highest corporate incomes, Clausing leaves the vast majority of corporations (and normal returns to capital) unburdened. Most corporations would, in fact, likely benefit from a more competitive environment. Furthermore, higher rates would not undermine existing tax subsidies that support entrepreneurship, such as income averaging via net operating losses and preferential capital gains treatment for founders’ stock. She notes that other policies and institutions may be as, or more, important than taxation in spurring innovation: education, immigration, research, and legal, banking, telecommunications, and transportation infrastructure.
The most significant challenge to her proposal will be addressing the likely behavioral responses: corporate inversions, profit-shifting, corporate divisions, and change in entity form. She notes that implementation of the OECD / G20 / Inclusive Framework establishing a corporate minimum tax of 15% could be enforced by adopting countries against corporations headquartered in non-adopting countries by topping up the tax they owe through an Under-Taxed Profits Rule. Existing benefits of agglomeration, economies of scale and scope, and cost-beneficial synergies from internalization may also offset the pressure to avoid the higher rates through corporate de-mergers and splits. Nevertheless, the reforms may need to be expanded to encompass all U.S. business entities to be truly effective. Unfortunately, it may be an arduous task to enact these policies precisely because the business entities facing higher rates under the proposed reforms have already amassed such significant market power and influence in politics.
In 1944, Fredrick A. Hayek published The Road to Serfdom, arguing against central economic planning, and in favor decentralized markets and competition. Far from voicing strident anti-government rhetoric, Hayek stressed that some forms of regulation might be salubrious, such as those that create conditions in which competition would be as effective as possible, breaking up monopolies, and preventing fraud and deception. Undergirding Hayek’s arguments in favor of competitive markets was his insistence on the rule of law, granting the same legal rights to all, rather than reserving them to the few and powerful. Unfortunately, the tax system has been a key tool by which “aspiring monopolists have obtained the assistance of the state to make their control effective.” In Capital Taxation and Market Power, Clausing has identified key reforms that could reduce corporate consolidation of market power, restore economic competition, and bolster the rule of law. We can only hope that we have the political will and savvy to see them through and abandon this new road to serfdom.
Here’s the rest of this week’s SSRN Tax Roundup:
- James Alm (Tulane), Devising Administrative Policies for Improving Tax Compliance, 70 Canadian Tax Journal/Revue fiscale canadienne 43-67 (2022)
- Roy W. Bahl (Georgia State) and Jorge Martinez-Vazquez, Perspectives in Fiscal Decentralization: Challenges and the Unfinished Agenda, 70 Canadian Tax Journal/Revue fiscale canadienne, 69-96 (2022)
- Robin Boadway, (Queen's) and Pierre Pestieau (Liège), The Wealth Tax and the Tax Mix, 70 Canadian Tax Journal/Revue fiscale canadienne 185-208 (2022)
- Vijay Burman, et al. (Eastern Finland), How Does Corporate Governance Affect Tax Aggressiveness? Evidence from Finland, Nordic Journal of Business (Forthcoming 2023)
- Andrew Carter (Australian National) and Robert V. Breunig (Australian National), Tax Bunching of Very High Earners. Evidence from Australia's Division 293 Tax, Working Paper Series, Apr. 28, 2023)
- Sijbren Cnossen (CPB Netherlands), Excise Taxation to Preserve Health and to Protect the Environment: A Review, 70 Canadian Tax Journal/Revue fiscale canadienne 159-84 (2022)
- Wei Cui (British Columbia), The Canadian Digital Services Tax, in International Tax at the Crossroads (C. Elliffe, ed., Forthcoming 2023)
- Stephen Daly (King's College London), Tax Systems - Adaptability and Resilience during a Global Pandemic, Accounting and Business Research, Working Paper Series (May 3, 2023)
- Stephen Daly (King's College London) and Martin Hearson (LSE), Global Britain: Influencing Tax Policy, Working Paper Series (May 2, 2023)
- Stephen Daly (King's College London), Fiat v. Commission: a Misconception at the Heart of the Tax Ruling Cases, Modern Law Review (May 2, 2023)
- Bridget C.E. Dooling (George Washington) and Kristin E. Hickman (Minnesota), Pre-Analysis Research Plan for OIRA Review of Treasury Regulations Project, Working Paper Series (Apr. 28, 2023)
- Jacqueline Lainez Flanagan (District of Columbia), DACA’s Tax Benefits Highlight the Need for Broader Immigration Reform, 107 Tax Notes State 955 (March 2023)
- Pierre-Pascal Gendron (Humber Inst. Tech), Public Finance in the Real World: More Questions than Answers—An Appreciation of Richard Bird's Contributions to the VAT Through Collaboration, 70 Canadian Tax Journal/Revue fiscale canadienne 335-54 (2022)
- Stefanie Geringer (Vienna), Differing Abuse Concepts in Double Tax Conventions: At What Level and to What Extent Can Equality Be Realized?, 5 Nordic Journal of Law and Society 1-65 (2022), DOI: https://doi.org/10.36368/njolas.v5i01.195
- Christopher H. Hanna (SMU) and Cody A. Wilson, U.S. International Tax Policy and Corporate America, 48 The Journal of Corporation Law 261 (2023)
- Mindy Herzfeld (Florida), Do GILTI BEAT BMT = GloBE?, 50 Intertax 888-897 (2022)
- Steven Z. Hodaszy (Robert Morris), A Review of The Whiteness of Wealth by Dorothy A. Brown, 45 Journal of the American Taxation Association 167 (Spring 2023), available at https://doi.org/10.2308/JATA-2023-009.
- Joan MacLeod Heminway (Tennessee), Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation, 23 Transactions: Tenn. J. Bus. L. 526 (2022)
- Mehmet Kara (Kansas), Michael Mayberry (Florida) and Scott G. Rane (Florida), Equity Incentives and Conforming Tax Avoidance, Contemporary Accounting Research (Forthcoming 2023), available at https://doi.org/10.1111/1911-3846.12862
- Lennart Kraft (Goethe, Frankfurt), Tax Revenue, Privacy, and Profits under Taxed Targeted Advertisements, Working Paper Series (Apr. 28, 2023)
- William P. Kratzke (Memphis), Musings: Itemized Deductions and the Changing Fabric of American Society Wrought by the Tax Cuts and Jobs Act — Observing Regressiveness Hidden in Plain Sight, 76 The Tax Lawyer 293 (2023)
- Belisa Ferreira Liotti (WU Vienna), Ruth Wamuyu (Vienna), and Jeffrey Owens (Vienna), Challenges at the intersection between investment provisions in regional trade agreements and implementation of the GloBE Rules under Pillar Two, 30 Transnational Corporations Journal 49 (2023)
- Mario Mansour (IMF) and Eric Zolt (UCLA), Personal Income Taxes in the Middle East and North Africa: Prospects and Possibilities, 70 Canadian Tax Journal/Revue fiscale canadienne 291-334 (2022)
- Orly Mazur (SMU) and Adam B. Thimmesch (Nebraska), Cooperative Federalism and the Digital Tax Impasse, 51 Florida State University Law Review (2023 Forthcoming)
- Kevin S. Milligan (British Columbia), All in the Family: Assessing Need in the Fiscal Unit, 70 Canadian Tax Journal/Revue fiscale canadienne 209-29 (2022)
- Jack Mintz (Calgary), The Global Corporate Minimum Tax: A Cure or Not?, 70 Canadian Tax Journal/Revue fiscale canadienne 231-55 (2022)
- Hyun Jong Na (Hanyang) and Taejin Jung (IE University), Passing the Shareholders’ Tax Burden to the Corporation: Evidence from Inheritance and Gift Tax, Working Paper Series (Apr. 28, 2023)
- Xuan-Thao Nguyen (Indiana) and Jeffrey A. Maine (Maine), Crypto Losses, 2024 University of Illinois Law Review (forthcoming 2024).
- Doron Narotzki (Akron) and Tamir Shanan (College of Management), Cross-Border Corporate Social Responsibility and Taxation: A New Conceptual Framework in an Era of Economic Globalization, Working Paper Series (May 1, 2023)
- Henry Ordower (Saint Louis), Unbundling Social Security from the Payroll Tax, Working Paper Series (Apr. 28, 2023)
- Benjamin Osswald (Illinois, Urbana-Champaign) and Jochen Pierk (Erasmus University Rotterdam), Crossing the Atlantic: The Role of U.S. Executives in Tax Planning of Foreign Subsidiaries, Working Paper Series (May 1, 2023)
- Luis Pica (Polytechnic Inst. Beja), The New Challenges of Artificial Intelligence, Profiling and Bigdata Analysis by Tax Administrations: Will the Right to Meet these New Challenges Be Shown?, JusGov Research Paper No. 2023-04, Working Paper Series (Mar. 28, 2023)
- Amedeo Rizzo, Intellectual Property and Tax Incentives: a Comparative Analysis of the EU and the US Legal Frameworks, TTLF Working Papers No. 101, Stanford-Vienna Transatlantic Technology Law Forum 2023,Working Paper Series (May 3, 2023)
- Luiz Felipe Monteiro Seixas (Pernambuco), Taxation and Economic Regulation: Contributions to a Regulatory Impact Analysis Model of Inductive Tax Rules, 281 Administrative Law Review 175-202 (May/Aug. 2022)
- Enid Slack (Toronto), Property Taxes in the Real World, 70 Canadian Tax Journal/Revue fiscale canadienne 133-58 (2022)
- Almos T. Tassonyi (Calgary), Financing Local Government and Development in Canada in the Aftermath of a Global Pandemic:Continuity and Change, 70 Canadian Tax Journal/Revue fiscale canadienne 97-132 (2022)
- Francois Vaillancourt, (Montreal) Robert Ebel (Georgia State), The Size, Growth, and Composition of Government: Analysis and Evidence for Canada and the United States, 70 Canadian Tax Journal/Revue fiscale canadienne 5-42 (2022)
- Scott Wilke and Lorraine Eden (Texas A&M), Public Finance in the Real World: Through the Lens (Down the Rabbit Hole?) of Transfer Pricing, 70 Canadian Tax Journal/Revue fiscale canadienne 257-90 (2022)