Growth Limits

Investigation of a tax-reform idea

(This is an exercise in looking through consequences and unintended consequences, and revising a model and re-investigating. I am unlikely to ever complete this article, as the ability to type up the consequences of a thought is much less than the ability to have a thought. My thoughts go about 1000 times further than any number of steps I can ever write down.)

Idea is that the very absolute largest companies should be slowed down by a very specific set of tax laws that are intended to discourage "unbounded growth".

The reasons for punishing unbounded growth are many. In brief: it brings unbounded power to manipulate (markets, competitors, regulators, individuals, laws, governments, environments, lifestyles, culture, everything)

pre-requisite to such a special tax existing would be adequate international tax treaties.

Here's an example of how this idea could be implemented...

Naive initial form of the law:

The biggest company in the world gets hit by a special tax... it basically means that all taxable-income that makes it larger than the second biggest company is taxed at a very high rate - approaching 100%.

For example, in a 3 company universe, companies A B and C, have taxable incomes of 1000, 900 and 10 units respectively.

Company Taxable Income
A 1000
B 900
C 10

Company A's taxable income gap between it and the second largest company is 100 -- so this 100 would be confiscated as tax.

The consequence of this is that the biggest company would want to stop appearing to be the biggest. So they would rearrange their affairs such that whatever metric was used to make them appear the biggest, it would no longer be an effective metric.

Company A changes its investments such that, although its revenue was still very high, it's taxable income was now 899 units.

Company B is now the biggest, and it has its gap confiscated, i.e. 1 unit.

Company B complains that it has been taxed 1 unit, simply because the tax system rewarded Company A for some fancy bookwork.

Revised Form of the law

To counter this, I propose a scoring system that relies on several different metrics, each with different weightings. And any company that scores any points in this set of metrics would be hit by a proportion of the tax - calculated as: "how many points did this company score? divided by how many points were scored in total by all companies?"

An example of the several different metrics:

Metric Points
Largest revenue 2
Largest taxable income 3
Largest income pre deductions 1
Largest Market capitalisation 1

Now when scoring our initial case, we find these scores:

Company Largest Revenue(2) Largest Taxable Income(3) Largest Income Pre Deductions(1) Largest Market Capitalisation(1) Total
A 0 3 1 0 4
B 2 0 0 1 3
C 0 0 0 0 0
Total 2 3 1 1 7

So we find company A score 4 points out of the total 7 scored by all companies, and company B scores 3 points out of the total scored by all companies.

We have to decide what to do with these scores. We might say "Company A will therefore have 4/7ths of their 'gap' confiscated" - but what about company B? They have no "Gap"?

Here's one possible modification we can make:

Previously we were comparing the number 1 company to the number 2.

Now we could compare all companies that scored > 0, versus all companies that scored 0.

So we might confiscate, from each company, the difference between their taxable income, and the highest taxable income amongst all companies that scored 0.

Our "3 company" universe immediately shows the interesting consequences on this.

  • Company A would have ((1000-10) * 4/7) units confiscated, i.e. 565 units.
  • Company B would have ((900-10) * 3/7) units confiscated, i.e. 381 units.

This is an interesting state of affairs. Apart from Company A and B wanting to arrange their own affairs very differently, it would also mean that they want Company C to increase its taxable income considerably.

Furthermore -- from an investment point of view, it shows that it would be very difficult to predict how much income company A and B would be allowed to keep, unless we can also predict how much taxable income company C is going to record in the coming year.

In terms of things that the companies may do to change their affairs: let's look at 2 of them.

Company A may voluntarily split itself into two companies: A1 and A2. Company B would certainly encourage company A to do that!

And, in a different simulation, Company B may partition a part of its business into a separate company, B2.


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