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Richard Stallman's Solution To 'Too Big To Fail'
lcam writes "A Richard Stallman opinion piece appears at Reuters addressing the 'Too big to fail' view that has recently caused large corporations to be bailed out by taxpayer dollars. His solution is elegant: 'We tax a company’s gross income, with a tax rate that increases as the company gets bigger. Companies would be able to reduce their tax rates by splitting themselves up.' However, it could use some refining. For example, his measure would create a required minimum 'Return on Investment' scale that corporations need to follow to be viable, and these types of metrics are very industry specific. Another issue is that many large corporations stay in business because they don't take unnecessary risk. Companies like Intel, Lockheed, Walmart are very large and have a very low chance of failure, yet Stallman would have them split up as a result of the excessive risks that banks and insurance companies were seen to have taken. It also has the potential to cause problems with the global market; some multinationals may find it better to simply 'move out' to a country that doesn't compromise their business models. How can this idea be made better?"
How about we just don't bail them out?
Ugh, this read like a computer law proposal from an old senator-- This, is completely out of his areas of understanding.
Or one can simply use the current Sherman Act (in US) as it is currently written. The tools for trust busting are already there, there's simply no will to use them.
The greatest enemy to capitalism are the capitalists and the tendency for consolidation. If you want to keep capitalism healthy simply make sure there are plenty of capitalists.
The banks should have been broken up as part of the bailouts. No need for any complicated new tax codes.
It's a suggestion, not a claim. You don't take a grain of salt with a suggestion, you evaluate it on its merits. What are your problems with this one?
Don't bail them out. Don't let them fail and have the knock on effects take down half the economy with them.
Instead if they get to the point that they need a bail out they are nationalized. The share holders get *nothing*. The bond holders get *nothing*. The board and C?Os get a grand jury/under oath senate hearing/SEC/whatever investigation and the book thrown as them. The government does the splitting up and selling off over time (so no fire sale) to divest.
Sure that sucks for people who have pensions/401ks/IRAs/etc invested in those entities (directly or indirectly). But if it's the predetermined outcome upon "failure" then everyone involved knows this going in and should be factoring that risk into the price they're willing to pay and allocation size they are willing to make.
And yes the government is still effectively bailing out the next level down (that's how the knock on effects are being avoided).
Your grain of salt is too large, it must first be split into smaller grains first.
The theory sounds great, but this won't work in practice. Why? Simple.
Corporations pay ZERO taxes. Period. If you disagree with this, you don't fully understand the system. While there is in fact a corporate tax rate/code, it doesn't matter. Every corp either 1) hides their revenues offshore, usually through Ireland and other European subsidiaries or the Caymens, or 2) PASSES THE TAX ON TO THEIR CUSTOMERS in the form of higher prices.
So either you pay via prices going up... or you lose because that money is now held overseas. Oh, and both of these systems are insanely regressive/repressive vs. small corporations & startups; they don't have the national presence to hide, nor do they have millions to pay crack tax teams to squeeze through loopholes. Option #1 out the window. Option #2 is problematic; they can raise their prices but then customers often flock to a lower priced competitor exercising option #1. This is how many, many startups die; they produce excellent product at reasonable prices but are eviscerated by regulations and tax codes bought and paid for by their multinational brethren, for the sole purpose of ensuring no upstart gets off the ground and actually competes.
We can argue about how things SHOULD be, but the above is a stark and accurate assessment of how things ARE, and we have to live and work in the real world. Stallman either does not realize this or chooses to ignore it and operate in a utopa.
You want a real solution? Eliminate the corporate tax code entirely. Then the money stays at home, and you implement the Fair Tax. That's a national sales tax which replaces ALL forms of federal taxation in favor of a tax on consumption. It's made non-regressive via a pre-bate.
First of, the economy isn't a machine, it's organic, and this engineering approach generally fails. Companies react to regulation, and regulation itself is the result of government, another organic entity. When this type of laws are enacted, the first thing that happens is that concentrated business interest will make sure they actually benefit from the regulation. It can take many forms. Maybe some corporations will be grandfathered in and therefore manage to keep at bay competitors who can't reach a competitive size, maybe the law will have exemptions that only politically connected firms can obtain. It's misguided to push for a law without taking into account the way it will be distorted by the political process. Contrast this to the viral - hence organic - approach the GPL took.
Second, too big to fail is about the systemic risk that some financial firms exhibited. Walmart is big, Google is big, but they're not too big to fail in the sense that their failure wouldn't particularly cause havoc. If Walmart fails, many different sellers can buy the stores and keep supplying them with goods. In the case of financial companies, the argument went as follow: if a bank fails, many other financial companies may be in trouble if they hold financial instruments whose collateral ultimately is guaranteed by that bank. Unfortunately, it can take a long time to sort out who is really it, and during that time, it becomes very risky to lend to anyone, for fear that they might be exposed to the failing institution. This in turns cause more financial companies to fail in a domino effect. That's the theory at least. I don't know if I buy it, but at any rate, it makes the case that the banks were too heavily interconnected to fail, not too big. Columbia professor Rama Cont has suggested that the solution to this problem is to emphasize clearing houses to bring in transparency in who holds what.
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RMS's idea predates the latest bank bailout era with many many years. his idea was not inspired by 'too big to fail' at all. his idea is simple a mechanism to make sure there are fewer big companies - and only in cases where a larger size is indeed increasingly profitable, so that it's still worth to have the larger organization which has to pay more taxes because of its size.
RMS's experience is simply that 'large entities' don't behave in a 'good' manner, and thus there is a clear advantage to society of having fewer of them.
You can say what you will about the War on Drugs. If I decide to parley some jars of loose change into the highly lucrative cocaine distribution market, I stand to make a market-torching return on my initial investment. The reason I pass on this incredible business opportunity is because in the event I become indicted, there's a very real chance the unborn grandchildren will be grown & gone before I come up for release. As long as white collar mega-crime is punishable by a maximum 50 lashes from a wet noodle, there is no negative incentive to modify their collective behavior.
Happiness in intelligent people is the rarest thing I know.
Ernest Hemingway
RMS' idea sounds kind of neat, but it suffers from a fatal problem: All that happens when you force crazy high taxes onto big companies is that they leave the US. This is exactly what's happening in France right now, with their recent tax reforms.
The correct solution, as others have already pointed out, is to simply let these companies fail. Funnily, the "experts" who said "if we let Citibank/MorganStanley/etc fail society will turn into a Mad Maxian nightmare where we'll all be forced into cannibalism" are the exact same people who would have lost a lot of money without a bailout.
Part of what taxes -- and especially taxes on businesses -- pays for is their participation in a Rule of Law society.
This means you have access to an independent court of law for adjudication of claims against you and claims you may make (especially important when you rely on intellectual property), a civil and military security force to protect your physical assets and employees from harm, and a transparent law-making regime you may lobby to see your interests are represented.
I'm just fine with companies moving, but I'm just as fine with not allowing them to participate in the benefits provided by a Rule of Law society. Feel free to relocate to the third world and feel just as free to see how well the Cayman Islands or Lichtenstein or some of these other tax-dodge nations can protect your global shipments or your factories or your intellectual property.
There's only a small handful of countries able to provide a Rule of Law society and they should band together via treaty to inhibit transnational games and tax dodges.
he wants corporations to be enslaved.
It seems to have worked well for almost 60 years, during which time the global economy did pretty well.
Simplest solution: reinstate Glass-Steagal, and stick to that shit this time.
Next simplest solution: make "Bail-out" == Nationalization. if we taxpayers are footing the bill, we have every right to own that motherfucker.
Yea, it really is that easy.
An enigma, wrapped in a riddle, shrouded in bacon and cheese
he wants corporations to be enslaved.
As opposed to our current system of corporations enslaving us and the .gov
Sounds good to me!
Personally I'd like to see direct participatory democracy wrt granting, renewing, and eliminating corporate charters. Convince all of us that your crooked little monopolistic cabal "deserves" citizenship via individual national referendum every 10 yrs or so ... or your corporation is dissolved in one year. You think a certain bank sucks? Vote it out of existence. Sounds good to me. If they behaved themselves, like my local non-profit childrens hospital, they probably wouldn't have much fear of extinction. That also sounds good to me.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Please note that on a branch count basis, more bank branches have failed during the current second great depression than during the first. That would seem to be direct experimental evidence we were better off with smaller banks last time around.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
The founders of the United States banned a state religion in the First Amendment ("Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof") because they realized churches were competing power structures.
Nowadays, we have the new church, corporations and specifically corporations of the financial sector.
You really want to know who runs this country? Here are four data points from which you can draw your own conclusions:
1) The head of Goldman Sachs goes before Congress and admits he was selling bad products to clients, products which he was betting against. A classic swindle. Nothing ever came of it. Or any of the other revelations.
2) There was a PBS show called "The Untouchables" which chronicled why Wall Street executives were never prosecuted for fraud.
3) However, someone you'd think was powerful and connected, a former Michigan state Supreme Court justice is facing jail time for lying to a bank which she was working with in order to get a short sale completed for a house she owned. Her crime? She tried to hide another asset, a paid off house, from the bank.
4) Another person you'd think is powerful and connected, the chairman of the Washington DC City Council, Kwame Brown, was removed from office and convicted of a felony for lying about his income on a pair of loan applications, totaling around 200,000 dollars. Absolute small potatoes. Also a very common practice in the mid-to-late 2000s, on home loans.
Noticing a trend? If you're a financial sector executive, you run the show. It doesn't matter that you've swindled billions of dollars from the country, nothing is going to happen to you.
However, If you cross the financial sector, even over relatively trivial matters and sums, it won't matter if you're the elected head of the city council or a justice on the state supreme court, you will be removed from office and suffer significant consequences.
The financial sector runs this country.