"The Tax Advantage of Big Business"

At work in the early 1980s, sometimes I'd go into the office and ask the bookkeeper what happens with the receipts people turn in for work-related expenses. What I finally figured out was that there is an endless variety of different ways expenses can be categorized, and pretty much all of them are tax-deductible.

I think business expenses are tax-deductible because it helps business grow. But that plan doesn't seem to work very well these days. Perks may be percolating, but economic growth is not strong.

Back in the early '80s, I thought the encouragement of unrestrained business spending might be contributing to the inflation. It was still the "Great Inflation" back then.

I also thought, and still think, that all  those tax deductions give the biggest tax advantage to those businesses that can spend the most. And that seems to be a very bad idea.

 
Recently I found the open access paper "The Tax Advantage of Big Business: How the Structure of Corporate Taxation Fuels Concentration and Inequality" by Sandy Brian Hager and Joseph Baines. I thought I'd found a paper where they might be thinking what I was thinking.

From the Abstract: 

Corporate concentration in the United States has been on the rise in recent years, sparking a heated debate about its causes, consequences, and potential remedies. This article examines a facet of public policy that has been neglected in the debate: corporate taxation.

Exactly!  In discussions of business concentration, certainly, the effects of taxation are sadly neglected. Hager and Baines point out "a striking tax advantage for big business at home and abroad." A tax advantage that favors bigness would favor mergers and acquisitions and all sorts of business concentration.

Hager and Baines:

The analysis goes on to show how persistent regressivity in the tax structure is bound up with the increasing relative power of large corporations

I couldn't have said it better. Regressiveness means a bigger tax advantage for bigger corporations. Based on the "effective tax rate" (ETR) -- the percentage of income actually paid -- they find the business tax to be regressive. Bigger businesses pay a lower percentage: Advantage bigness. This finding is extremely important and must not be neglected. 

Hager and Baines show this figure:

The vertical bars in the lower half of the figure compare profit margins of large (the biggest 10%: the dark bars) and small (the other 90%: the light bars) nonfinancial corporations. The upper half of the figure shows a line graph. It shows the profit margins about equal in the 1970s, one-to-one. But big business made a gain in the 1980s. In the 1990s and later, profit margins for largest 10% of corporations are double those of the smaller 90%. Wow!

Then I took the dogs out. But I could still see their figure in my mind: "Profit Margins" it says, there in the middle of the graph. And below that, "Net Income" over "Revenues".

"Revenues" is the total business revenue received (per year). We who are not in business might call it gross income -- "gross" meaning before anything is subtracted out.

"Net Income" is what's left after all the expenses are subtracted out. All or pretty much all the expenses.

The difference between "revenue" and "net income" is the spending a business does. Businesses collect receipts for that spending, and use the receipts as evidence of the spending so they can get the tax deductions (as I described above).

 

Maybe I'm using the wrong terminology, lumping everything together as "tax deductions". But I'm not doing the taxes. I'm just describing them in simple terms.

 

Hager and Baines find that the biggest businesses have the highest profit margins: They have the lowest spending per dollar of profit.

This is just the opposite of the problem I thought I saw in the 1980s: that the tax code encourages business spending -- driving spending up and profits down -- and the biggest businesses had the biggest tax advantage, because they could spend the most.

I'm not arguing that I was right. I figure Hager and Baines are right. I didn't do a study. I only had a thought. I do still think the tax deduction for business spending favors bigness, but other factors also play a role. After decades of supply-side economics, all of policy has been redesigned to favor business and economic growth. 

It doesn't seem to work very well. Part of the problem may be that policy sometimes encourages growth by making things better for big business than for small. But big business doesn't even have to grow to take advantage of such policy. Unlimited tax deductions for business spending are the example that comes first to mind.

Imagine big business today as the result of a well-intentioned idea in the tax code, a well-intentioned idea gone awry. Imagine what the world would be like if businesses were no longer encouraged to grow beyond their economies of scale or, perhaps, if the business tax code favored not bigness, but competitive size. The world would be a different place.