Question

Many U.S. companies have moved to other countries where tax rates are more favorable. Corporations argue that they owe it to their stockholders to locate where net profit is maximized. Corporations face double taxation in the United States since corporate profits and dividends paid to stockholders are taxable. Should we reduce or eliminate taxes on corporate profits in the United States to lure more of these companies back to the U.S.?

Please address the arguments on both sides of this issue.

Are consumers always better served by competitive markets? Is a monopoly ever justified? Give examples.

Answer 1

Economists are divided on this. On the one hand, if companies get to pay lower taxes, they have more money to invest in new innovations and perhaps more hires. Lower taxes could entice new companies to settle in the U.S., and could convince companies that have offshored some of their business to bring those parts back. But on the other hand, cutting taxes doesn’t necessarily mean that companies will create jobs—they could just hold onto the extra cash or distribute the profits to shareholders and those at the top.

There have been two real-world experiments in which developed countries cut their corporate tax rates in an effort to stimulate economic activity: Ireland’s tried it and so has Great Britain. Ireland for decades has touted its low tax rates as one of the reasons its economy has flourished. Its corporate tax rate, at 12.5 percent, is the one of thelowest in the developed world. Perhaps inspired by Ireland’s success, the Conservative Party in the United Kingdom, after being elected to lead the government in 2010, began to cut corporate taxes in the U.K., lowering the rate from 28 percent to 20 percent between 2010 and today. The architects of the plan say they intend to further lower the tax rate to 15 percent. First off, lowering the corporate tax rate alone won’t necessarily make any difference—there are plenty of other things that shape where companies choose where to locate—an educated workforce, a robust regulatory regime, and access to capital among them. Second, it’s entirely possible that companies can move somewhere for a low tax rate and still create little economic activity and few jobs there. Third, lowering taxes can lead to a race to the bottom in which many countries compete to lower their taxes.

Indeed, the U.S. would see dramatically lower revenues if it lowered its corporate tax rate. This wasn’t a big deal in Ireland when the country designed its tax code, because it had few companies at the time—every company that chose to locate billion-dollar businesses there meant an increase to Ireland’s tax revenues, even if it was just tens of millions of dollars. That money meant a lot to the Irish economy. But the U.S. economy, which is much bigger and already has lots of companies based within its borders, is in quite a different situation: The U.S. would lose revenues from its existing companies if it lowered its tax rate, and potentially only gain small amounts of revenue if new companies chose it as their new home. That revenue wouldn’t provide much of a bump to the U.S. budget.

2. Competition advocacy is thriving internationally. The past 20 years witnessed more countries with antitrust laws and the birth and growth of the International Competition Network (ICN), an international organization of governmental competition authorities, with over 100 member countries. Although different constituencies accept to different degrees the benefits of competition and competition policy, the strongest competition advocates, in an ICN survey, were among the academic community, consumer associations, media, and nongovernmental organizations. ‘Within OECD countries, competition is now broadly accepted as the best available mechanism for maximising the things that one can demand from an economic system in most circumstances.’

Competition officials regularly try to protect the public from anticompetitive special interest legislation. They are justifiably jaded about complaints of excessive competition. As one court observed, ‘Entertaining claims of excessive competition would undermine the functions of the antitrust laws.’This is especially relevant in an economic crisis, when competition is an attractive target.

Monopolies are generally considered to have disadvantages (higher price, fewer incentives to be efficient). However, monopolies can benefit from economies of scale (lower average costs) and have a greater ability to fund research and development. In certain circumstances, the advantages of monopolies can outweigh their costs.

• International competitiveness. A domestic firm may have monopoly power in the domestic country but face effective competition in global markets. E.g. British Steel has a domestic monopoly but faces competition globally. With markets increasingly globalised, it may be necessary for a firm to have a domestic monopoly in order to be competitive internationally
• Monopolies can be successful firms. A firm may become a monopoly through being efficient and dynamic. A monopoly is thus a sign of success, not inefficiency. For example – Google has gained monopoly power through being regarded as the best firm for search engines. Apple has a degree of monopoly power through successful innovation and being regarded as the best producer of digital goods.
• Monopoly regulation. One possibility is for a firm to have a monopoly situation, but the government sets up a regulator to prevent the excesses of monopoly power. For example, utilities like water and gas are natural monopolies so it makes sense to have one provider. The regulator can limit price increases and ensure standards of service are met. In theory, this enables the best of both worlds – the monopoly firm can benefit from economies of scale, but the consumer is protected from monopoly prices.