corporate taxes

  • Source: "From the many to the few"  

    Corporate MarkupsA "markup" is defined as the ratio of selling price to production costs. A markup of 1 for a firm means it is selling everything at cost. A new paper from Loecker and Eeckhout of University College London shows that corporate markups have been increasing steadily since the 1980's. There are obvious tax implications in that increased markups usually result from reduced competition that allows firms to raise prices.

    From the article: "America and Europe saw the biggest increases (see chart). But in many emerging markets markups barely rose. In China they fell. That suggests rich-world firms may have been able to increase markups by outsourcing to cut labour costs. Another possibility is that corporate concentration may have increased because of lax antitrust enforcement or the growing heft of companies benefiting from network effects, like internet firms.

    Policymakers should take note. Greater market power for firms may also mean less bargaining power for workers, and hence lower wages. A recent study by David Autor of the Massachusetts Institute of Technology and four other economists found that workers’ share of income in America has declined most steeply in the most concentrated sectors.

    A recent IMF working paper found that companies with relatively low markups invested more when markups increased, whereas those that had started with high markups invested less. This was particularly evident in highly concentrated sectors. And the ratio of dividends to sales was higher for companies with higher markups. Firms with greater market power, it seems, may not only have higher profits but innovate less."

    Sources:
    Global Market Power”, Jan De Loecker and Jan Eeckhout, NBER working paper, 2018
    "Global Market Power and its Macroeconomic Implications", Federico Diez, Daniel Leigh, Suchanan Tambunlertchai, IMF working paper, 2018
    The Fall of the Labor Share and the Rise of Superstar Firms”, David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, John Van Reenen, 2017

  • Source: "Getting the most out of business taxes"  

    No connectionThe standard GOP narrative involving corporate tax rates is that if you reduce the rate, you will increase business investment. The Economist divided the OECD countries into four quartiles based on their corporate tax rates, highest to lowest. They then looked at the relationship between the level of the corporate tax rate and bot business investment and corporate tax revenue - there is not much of a relationship. See chart. 
    Some features of corporate tax rates - first, differences in rates can cause some companies to shop around for the best rate But other factors determine company location besides tax rates (supply chains, transportation access etc.). Also, the highest corporate tax rates tend to be in resource-rich countries. Natural resource extraction creates captive companies. Why don't we just eliminate the corporate tax rate altogether and just tax shareholders directly? First, many shareholders like pension plans are tax exempt. Also, eliminating the corporate tax would give incentives to individuals to incorporate themselves.