Niko Lusiani and Susan Holmberg write that the United States should tax profitable corporations not just to raise revenue and redistribute unequal gains but also to re-dynamize the economy by curbing the excess market power of rent-seeking corporate oligopolies.
It was no historical coincidence that between 1890 and 1914, when the first two major pieces of U.S. antitrust legislation were enacted, Congress also authorized the first corporate income tax. Like the antitrust laws themselves, the 1909 tax was an explicit check on the power of the trusts. Tax policy as an antitrust measure remained a feature of fiscal debates throughout much of the first half of the twentieth century. During the Great Depression and post-War period, preventing excess market power and ensuring fair competition continued to be critical aims of tax policy. In speaking to Congress in 1935 about tax reform, President Franklin D. Roosevelt proclaimed, “The smaller corporations should not carry burdens beyond their powers; the vast concentrations of capital should be ready to carry burdens commensurate with their powers and their advantages.”
Fast-forward to today, and it’s not hard to see a tax system designed to accomplish the reverse: incentivize market concentration and the growth of corporate oligopolies while undermining the ability of smaller businesses to compete. We now typically think of tax policy as a way to raise revenue to spend on government programs and, depending on one’s perspective, to redistribute unequal economic returns. These specific goals are absolutely essential. Yet, this narrow view on what role taxation can play in our economy limits our understanding of how the U.S. tax code exacerbates excess market power. As a result, even as we’ve seen a revitalized antitrust movement in recent years, the capacity of tax policy to fix some of the country’s deepest problems that stem from the dominance of corporate oligopolies has continued to be overlooked.
For example, take mergers, a key pathway to corporate consolidation since the 1980s when the Reagan administration adopted big-is-better merger guidelines. The U.S. federal tax code fuels certain merger and acquisition deals via tax-free reorganizations, by allowing sellers to defer (sometimes indefinitely) the gain of their sale to avoid tax liabilities. Tax policy also treats corporate debt preferentially, which subsidizes leveraged merger deals that much more.
The tax preferences for bigness go on. Unlike the personal income tax, the corporate income tax is a flat rate. This makes the corporate tax facially neutral between small and large firms. In practice, however, large multinational corporations—in contrast to their domestic competitors—can get away with paying low-to-no effective corporate income tax because of their unique characteristics; many are almost custom built to avoid tax liabilities. Global companies devise exceedingly complex corporate structures with a wide multi-jurisdictional network of subsidiaries, bringing down taxes paid by booking profits in offshore and even onshore tax havens, such as Luxembourg or Singapore, and hiring costly tax counsel to intimidate inquiring tax auditors. Because of these exorbitant tax privileges, a statutorily flat rate, in reality, means a much lower effective rate for larger, global corporations compared to smaller, domestic ones. Recent empirical research found that the top 10% of corporations pay 13% less in tax than the bottom 90% of firms. This is in contrast to near-equal effective tax rates in the 1970s between large and smaller firms. Critically, this unequal tax treatment doesn’t only change bottom lines; it changes incentives. By taxing the first dollar of profit the same as excessive profits gained from rent-seeking, a flat rate effectively incentivizes super-normal rent-seeking by dominant corporations.
State and local taxation also fuels market concentration. Jeff Bezos’s early strategy to build Amazon’s dominance, for instance, was to take advantage of disparities in tax treatment between online and brick-and-mortar sales, a tactic that hinged on which states Amazon located its operations. When explaining why he chose Washington state for Amazon’s first headquarters, Jeff Bezos disclosed, “It had to be in a small state. In the mail-order business, you must charge sales tax to customers who live in any state where you have a business presence . . . We thought about the Bay Area, which is the single best source for technical talent. But it didn’t pass the small-state test.” Bezos’ opening salvo is illustrative of the toehold tax disparities can offer aspiring monopolists.
Large corporations have also been found to collect the lion’s share of state and local economic development subsidies, which have failed to live up to their promise of job creation and local economic benefits. Meanwhile, big retail chains like Walmart have devised a strategy—called “dark store theory” that lowers their property tax bills by challenging property valuations on the basis that the buildings they occupy would be worthless if empty.
Put together, these and myriad other distinct tax breaks for bigness compound upon each other to bring down costs for large, acquisitive firms, which in turn provides them with even more dry powder to buy up their competitors and dominate markets.
They also reflect a broader point: highly profitable corporate incumbents—compared to smaller competitors—have more of the means and more of the motive to leverage their influence to rewrite federal, state, and local tax rules to their benefit, and we know that the tax code and its enforcement is particularly vulnerable to lobbying by concentrated special interests.
Put frankly, these lucrative tax advantages and tactics are not within reach for most small businesses and is in part why they are getting crushed in industry after industry by monopolies. They don’t have a fleet of attorneys at their disposal to devise novel tactics like dark store theory. Small businesses don’t often get to collect local subsidies, but as residents of communities, they are often saddled with the costs of these giveaways. Depending on how the small business is structured (like an LLC), the income of a small business is often passed through to the owner and taxed as ordinary income, which is a higher rate than the capital gains tax a corporate CEO pays, for example, on his millions in stock options.
But if today’s tax system contributes to corporate consolidation, it also has the potential to enable competition, disrupt concentrated economic power, and fuel a more equitable, multiplayer economy. To that end, we must stop subsidizing monopolization by ending tax-free reorganizations and more effectively taxing leveraged acquisitions. We should end unfair tax competition between multinational and domestic businesses by implementing a global minimum tax floor, closing onshore and offshore tax havens, and ensuring financial transparency through worldwide combined reporting and public country-by-country reporting. We should tax corporations based on their ability to pay and tax supernormal, excess profits at much higher rates to dissuade rent-seeking. And we need to tax capital income (including unrealized capital gains) at least on par with wage income.
Tax policy can’t—and shouldn’t try—to solve all ills. But, alongside robust enforcement of antitrust law, it’s time to reimagine the proactive role tax policy can have in enabling fair competition, tackling concentrated markets, and, in turn, driving productivity and innovation, lowering prices, and fueling more and better jobs. In the words of FDR, “[t]he advantages and the protections conferred upon corporations by Government increase in value as the size of the corporation increases . . . it seems only equitable, therefore, to adjust our tax system in accordance with economic capacity, advantage and fact.”
Disclosure: The authors are affiliated with the Roosevelt Institute. Read more about our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.