

Fixing ‘too-big-to-fail’ - willismichael
http://blogs.reuters.com/great-debate/2013/02/04/fixing-too-big-to-fail/

======
jandrewrogers
This article ignores two giant elephants in the room.

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.

~~~
fluidcruft
> There are many industries and companies where the economics of the business
> essentially require large companies to be viable.

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.

~~~
aetherson
It favors high unit margins. This is a law that says, "Corporation, if your
gross sales profit is $200 million, you're way better off if your gross sales
revenue is $1 billion instead of $10 billion."

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.

~~~
fluidcruft
If there is demand of $10 billion for buying a service/product, it can be
satisfied by 10x$1 billion companies or 1x$10 billion company. Shouldn't
increased competition keep prices down? (and if not why not do the obvious and
fast-forward to the inevitable single-employer economy?)

~~~
aetherson
"Competition" doesn't just keep prices down magically. Competition keeps
prices down when firms compete to increase market share at the price of unit
margin.

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.

~~~
sageikosa
And with more enterprises floating around, stockbrokers would definitely have
more to do, and I thought the idea was to get rid of them.

Gosh, this forcing fiscal motivators on people sure causes some tricky
unintended consequences.

------
bcoates
Using Microsoft as an example and conflating TBTF with antitrust is just
weird. The solution proposed wouldn't be specific to the kinds of firms that
get "bailouts".

"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.

~~~
taligent
> that in no way prevents making an example of the people who are in a
> position of responsibility

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.

~~~
bcoates
I'm not talking about punishing people for destroying the economy and I agree
that a lot of people have a lot of misplaced anger about it.

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.

------
benaiah
The problem with "big business" is not, and never has been, that it is big.
Big businesses tend to be far more efficient in certain areas that benefit
from very tight integration and efficient operations, such as retail (Walmart)
or managing overseas suppliers (Apple).

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...](http://arstechnica.com/tech-policy/2012/11/your-criticisms-
are-completely-wrong-stallman-on-software-patents/)

~~~
politician
_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._

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?

------
jerrya
I've wanted to see something like the BRAC Commission but run out of the
President's Economic Advisor's Office or similar.

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.

------
ataggart
Stop propping up firms, and the sustainable sizes will emerge. "Too big to
fail" is just an excuse for government to Do Something (be it break 'em up or
bail 'em out); just stop.

~~~
mfringel
At a large enough scale, you can't handwave away the eggs you'll break on the
way to your omelet.

~~~
akkartik
Another metaphor: you can let large trees fall, sure, but they cause a lot
more collateral damage on the way down.

------
haberman
For what it's worth, there is existing work in progress to address "too big to
fail":
[http://www.telegraph.co.uk/finance/newsbysector/banksandfina...](http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9733463/Too-
big-to-fail-plan-outlined-by-UK-and-US-authorities.html)

~~~
arethuza
From what I can see that sounds more like a controlled way of handling a bank
that is already failing rather than stopping banks getting to the point of
failing.

~~~
haberman
No one can guarantee that a bank won't fail. Nor should anyone. Banks are
money-making enterprises; to allow private parties the spoils of risk while
insuring them against any losses is anti-capitalist, and is at the heart of
what creates perverse incentives for bankers.

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.

------
nova
I don't understand this.

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.

------
CrLf
In Portugal we already have something like this, but I bet it's completely
unintentional...

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.

------
farnja
" Companies have many accounting tactics for reducing their declared profits –
so if the tax is levied on profits, they will likely game the system. "

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.

~~~
bjustin
Given that lawmakers are people, we will never have a perfect legislative
system. Were we to somehow get a perfect, loophole free tax code, it will
suffer death from a thousand papercuts. Lawmakers will get provisions that
benefit their states at the expense of the others, and we eventually end up
around where we are now. For example, they decide how you should calculate
profits from revenue & expenses.

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.

------
lifeisstillgood
Partly it's brilliant (progressive tax rates on corporation profits encourages
corporations to split themselves up)

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

~~~
jerrya
One problem with taxing on profit is that you encourage accounting tricks.

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.

~~~
aetherson
But taxing on gross means that you penalize low-margin companies.

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.

~~~
fluidcruft
In your scenario, isn't the "luxury" company smaller than the "economy"
company? The point is to encourage smaller companies. So the "economy" company
could find some way to split into separate companies (say, one that produces
desktops and one that produces laptops and one that produces computer
displays).

~~~
aetherson
In my scenario, the luxury company is smaller than the economy company in
terms of gross sales, but bigger in terms of earnings.

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.

~~~
fluidcruft
The proposal isn't to fix to lobbying--it's to fix the problem of corporations
being so large that the public is forced to play helicopter parent and coddle
them and these companies subsequently become emboldened to act like reckless
entitled brats. The only point the article makes about lobbying is that it
interferes with our current mechanism that is supposed to allow regulators to
breaking up companies that are too big or that the Administration can just
decide not to prosecute any cases.

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.

------
hopeless_case
What common sense moral principle would such a law be based on?

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.

------
sismoc
I have advocated this for years. We should also tax corporations on market cap
and individuals on net worth. Taxes based on how much money you have, not how
much money you made.

~~~
shepik
So i should be taxed more, if instead of spending all my income month-to-month
i shopped wisely and saved some money in the bank. That sounds right!

~~~
pekk
It doesn't make any more sense to say that people should be taxed more for
spending their money. Even less if they are spending all their money on
basics/necessities because they don't have a big surplus. In the US, domestic
spending is the basis of the economy

~~~
aetherson
Well, we by and large don't say that people should be taxed more for spending
their money. The US's main tax revenue comes from an income tax, not a
consumption tax.

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.

------
grecy
Big companies like Apple and Google are already avoiding tax and paying very
little. This will change nothing as long as they can get away with that.

------
Nelson69
How would you feel if banks paid interest that was proportional to their
profits? How would that alter things?

