Tuesday, April 2, 2013

Corporate Taxation: Gross Receipts Tax

Posted in response to this question on Quora:
Politics: Why don't we have a progressive tax on corporate gross receipts?

Viet Vu said:  "It needs to be noted that the firms choose to innovate and compete because it believes that it will, one day, benefit from a monopolistic profit - the highest level of profit any firm can make."

Firms seek profit because that's their reason for being.  They may dream of monopoly, but not achieving it does not dampen their ardor for seeking it.

Viet Vu said:  "It is certainly a good idea to create equality but a balance needs to be made between how free we let the entrepreneurs pursue monopoly and how tight we need to manage it (anti-trust laws)"

Balance is attained by making the Gross Receipts Tax progressive.  It then operates automatically, providing the lightest amount of management possible.  It eliminates the need for anti-trust laws and encourages entrepreneurs by ensuring they are not squeezed out of business by monopolies.

The tax starts at a very low level and gradually increases as the size of the enterprise grows.  To give you an idea of the concept, this example assumes the tax starts at 2% on gross receipts of one million dollars and increases by 1% each time the gross receipts increase by one order of magnitude (one decimal position):

    Gross Receipts  Tax Rate             Tax           After Tax Net
            1,000,000      2%               20,000               980,000
          10,000,000      3%             300,000            9,700,000
        100,000,000      4%          4,000,000           96,000,000
      1,000,000,000     5%         50,000,000        950,000,000
    10,000,000,000     6%       600,000,000     9,400,000,000
  100,000,000,000     7%    7,000,000,000   93,000,000,000

The tax will bring equilibrium to the economy because taxes are passed through to the consumer.  It does no injury to firms whose size is reasonable and proper.  At the same time, firms whose size is not economically justified price themselves out of the market.

Viet Vu said:  "Monopoly is bad for the economy overall and yet it is still what keeps the firms competing in hopes that it will reach that level some day. Destroying this incentive may ... mean a reduced level of firm activities."

Monopoly is not only bad for the economy, it is destructive - as shown by the recent financial collapse that threatened the world.  However much firms wish for monopoly, they will continue to innovate and compete in search of profit.  That's why they exist.  Preventing companies from becoming "Too Big To Fail" will not limit innovation and competition, it will encourage entrepreneurs and broaden participation in the economy.

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Kim Amourette asked: "Wouldn't that imply that this tax should be implemented in every system world wide - as companies can always go oversees for earth resources and human resources?"

I think that's a valid implication.  Corporations, like other organisms, consider self-preservation the first law of nature.  Though the methods of self-preservation vary, they are generally applauded as "survival of the fittest".  However, carried to extremes, self-preservation can be destructive of the preserved entity's habitat.  Beneficial though Darwinism may be in a purely theoretical sense, if our society and our environment are the specifics being destroyed, we must do what we can to prevent it.

Even so, there is a wide difference between what should be done and what can be done.  Seeking to accomplish such a reform world-wide would be a major challenge.  It is better to concentrate in an area where success is possible.  In the United States, companies deemed "Too Big To Fail" provide the impetus for action (although, judging by the underwhelming response to this question, that may be an optimistic assessment).

Kim Amourette asked: "... if tax were to be imposed on resource usage - then who would own the resources? The government? How will that be done then, as at the moment all resources are in the hands of corporations?"

Correct me if I'm wrong on this, but I believe, in the United States, the resources are owned by the people and allocated by the government.  The problem is that, because the large corporations control the purse strings of the political parties and the parties control the choice of candidates for public office, the large corporations control the government and are able to demand, and get, the resources they desire.  If the allocation is improper, the only way we can correct it is by devising an electoral process that lets the people choose the best of their number to advocate their interests in the government so resources are allocated for the benefit of the people rather than the corporations.

Kim Amourette said: "Just trying to get a better understanding of how this 'gross receipts tax' would work"

The Gross Receipts Tax would work by increasing the tax rate on corporations as their gross receipts increase.  The problem of businesses becoming "Too Big To Fail" is a contemporary issue in the United States.  The question was posed because I'm not sure why this solution to the problem is not being discussed.  Among its many advantages, a progressive tax on gross receipts has the remarkable quality that, when a corporation grows beyond an economically justifiable size, the tax acts to protect the public interest without additional regulation.

Kim Amourette said: "... probably the reason why it has not yet been considered by the government is that we are still putting money and profit/price over what would be best for life on earth and thus also ourselves."

Is not the reason more likely to be "because the large corporations control the purse strings of the political parties and the parties control the choice of candidates for public office"?  Does this not put control of government in the hands of the very people who put "money and price" above what is best for life on earth?  Theodore Roosevelt, in his State of the Union Address on December 3, 1906[1], warned the American people of the "unholy alliance between corrupt business and corrupt politics".  The circumstances we now condemn flow directly from that unholy alliance.  We would do well to break its grasp on our government.

Kim Amourette said: "I mean it would only make sense to make sure that we don't use up all the resources and pollute the environment through what we use and produce in our system - yet that seems to be a point of common sense that has not actually hit the major players in this world - who ever that may be that is in charge of resource distribution and management."

In looking for sense in the modern world, one must not overlook the fact that, whatever the judicial rationale supporting the decision that corporations are persons, corporations are not human.  They have no natural life-cycle of birth, adolescence, maturity, death.  They have no morality except that of pursuing their own interest.  They have no future, except the extent to which they can self-perpetuate.  Using up all the resources and polluting the environment have no meaning for corporations.

We can say that those who direct the operations of corporations are human and should want to avoid using up all the resources and polluting the environment, but when those worries are set against the almost incalculable benefits of power and recompense corporate executives enjoy, such concerns are minor, indeed.

Probably the most difficult thing to accept is that these executives are not vile persons.  Most humans would act as they do, however much we would like to believe otherwise.  The pursuit of self-interest is universal.  The ability to suppress immediate gratification for future welfare, particularly when the threat is based on reason rather than experience and the welfare is of generations yet unborn, is not abundant.  It exists in sufficient quantity to benefit humanity, but is widely dispersed.  We've yet to devise a means of aggregating that quality, so vital to the benefit of society.

Kim Amourette said: "So, as long as we live in a system that is founded upon this crazy idea that profit comes before life - government will never make decisions that will actually really benefit the people, but will always make decisions that benefit only the share-holders of major corporations - and as you say, are the ones who are also in office, as the ones who will profit."

And that's the point.  The problems we endure flow directly from our political system.  If we wish to live in a system that is not "founded upon this crazy idea that profit comes before life", we must devise a political process that filters the large number of citizens to find those with the qualities necessary to advance our common interest.  We will probably find that a central feature of the process will be harnessing human nature by making probity a necessary quality for those who wish to achieve public office.

Lest I be misunderstood, I do not know what is best for life on earth.  What I know is, we must find the people most disposed to seek those conditions.  It is unwise to allow control of government to fall into the hands of corporate executives who profit by the laws the government enacts.

I appreciate Kim Amourette's interest in this question.  It would be nice if there were a site where it could be explored in detail and, hopefully, attract other thoughtful people to help examine such questions objectively.  Quora does not support the in-depth investigation of serious issues as can be seen by the need to repeat these comments at the "Answer" level.  Being of modest internet ability, I haven't found a site that encourages careful, objective examination of the serious questions that face us.  If you know of one, I'd like to examine this issue and some of its natural extensions in detail.

Fred Gohlke

[1] Theodore Roosevelt (December 3, 1906)

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