<p>Progressive income taxes on <em>individuals</em> is not very likely to have any real impact on market power, but progressive income taxes on <em>corporations</em> can certainly have this effect. The key idea is that in many industries (for example, the financial industry), there are geniune economies of scale: having a big balance sheet allows an investment bank to take advantage of various synergies, meet demand from customers at lower costs and therefore at lower prices. This means that there is a natural pressure towards concentration in the financial industry. High levels of concentration, however, allow firms to price out their competitors from the market due to their size and the aforementioned scale effects, and can lead to a scenario of oligopoly.</p>

<p>The government can try to deal with this problem by introducing negative incentives for corporations to get bigger. This can be in the form of an explicit limit on the size of corporate balance sheets rel to GDP, as advocated by Stiglitz, or it can be in the form of income taxes, or capital requirements, which are "progressive" in the sense that they impose higher marginal costs on larger and more complex firms over smaller ones. Such a measure can offset the natural incentive towards aggregation in the financial industry, for example. This is already done to some extent by Dodd-Frank (perhaps unintentionally) in the US, which raised capital requirements for SIFIs (which are well-integrated financial institutions with large balance sheets). The adverse effect is that by doing this, a country can effectively price its financial institutions out of international markets. </p>

<p>In turn, a policy which reduces market power can have positive effects on the income distribution, as it would lead to lower prices and higher wages. The problem is to find the right balance between the benefits (lower costs) and costs (market power) of concentration in the marketplace.</p>

CC BY-SA 3.0
2017-09-30T11:26:14.250Z
2017-09-30T11:26:14.250Z
Ege Erdil
<p>I find that most treatment of monopolies is not very well thought through. The cases where monopolies happen and what their actual effects are is not straightforward. Its not clear that natural monopolies are really a problem that we can solve with tools we have. Most monopolies are created by government regulations. These kinds of monopolies can't be solved by taxes because the powers keeping those monopolies in place will adjust to continue to protect them.</p>
<p>While as Ege said, progressive taxes don't usually apply to businesses. But if one was instituted, this would give an incentive for a natural private monopoly to perhaps reduce in size in such a way that allows for competition. However the tax would have to be high enough, and the problem is that monopolies are already setting the price higher than efficient for the market. Higher taxes would push that price even higher.</p>
<p>If this tax were done to <em>all</em> businesses regardless of whether or not they're considered monopolies, it would surely be a harmful policy. However, even if only monopolies were taxed in this way, it doesn't seem at all clear that the additional competition it would be able to create would be worth the cost.</p>

CC BY-SA 4.0
2023-07-22T16:58:35.210Z
2023-07-22T16:58:35.210Z
Governology
<p>I presume that if a company misuses its dominant position, it should be ultimately reflected in unusually high profits. That suggests that a progressive tax could decrease the incentive to charge customers higher prices purely because of a dominant market position.</p>
<p>So does progressive tax work as an effective instrument at regulating market dominance?</p>

CC BY-SA 3.0
2017-09-29T21:04:52.450Z
Are not progressive tax and competition policy entirely orthogonal? I don't see the connection. You can have one, or the other, or both, or none. They tackle different issues.
luchonacho
CC BY-SA 3.0
2017-09-29T21:35:11.297Z
Certainly. Inequality is a highly multidimensional issue, affected indirectly by virtually everything. But that does not mean that they have to be dependent on each other. Anti-trust and related policies are primarily aimed at fostering competition, not at reducing inequality (although many have called for such objective too, e.g. Stiglitz), just as central banks are primarily oriented towards low and stable inflation (+ high employment in the US). Their actions do have consequences on inequality for sure (e.g. QE), but as an economist I don't remember said, one target, one instrument.
luchonacho
CC BY-SA 3.0
2017-09-29T21:37:26.633Z
In any case, you would like to see less competition (why would someone, besides an incumbent in a monopolistic form, want that?), which will increase inequality, compensated with more progressive taxation? May I ask why?
luchonacho
CC BY-SA 3.0
2017-09-30T01:16:47.523Z
I don't understand how the economic benefit of a progressive tax is "debatable".
Hot Licks
CC BY-SA 3.0
2017-09-30T07:24:06.367Z
@luchonacho This regulation would aim against fusing conglomeraters but I see this (more intense cooperation between the large bussinesses) could be a large pitfall. But it certainly would create a better environment for the newly starting bussinesses.
Probably
CC BY-SA 3.0
2017-10-06T03:14:29.153Z
A progressive tax helps lessen the "CEO Pay Machine" effect, which does not directly reduce monopolistic practices but makes them less likely.
Hot Licks
<taxation><monopoly><regulation>
How effective is progressive tax at regulating monopoly?
Probably
# How effective is progressive tax at regulating monopoly?

(Asked by: username_0 on 2017-09-29)

I presume that if a company misuses its dominant position, it should be ultimately reflected in unusually high profits. That suggests that a progressive tax could decrease the incentive to charge customers higher prices purely because of a dominant market position.

So does progressive tax work as an effective instrument at regulating market dominance?

**Tags:** taxation, monopoly, regulation

> **Comments:**
> **username_1**: Are not progressive tax and competition policy entirely orthogonal? I don't see the connection. You can have one, or the other, or both, or none. They tackle different issues.  
> **username_1**: Certainly. Inequality is a highly multidimensional issue, affected indirectly by virtually everything. But that does not mean that they have to be dependent on each other. Anti-trust and related policies are primarily aimed at fostering competition, not at reducing inequality (although many have called for such objective too, e.g. Stiglitz), just as central banks are primarily oriented towards low and stable inflation (+ high employment in the US). Their actions do have consequences on inequality for sure (e.g. QE), but as an economist I don't remember said, one target, one instrument.  
> **username_1**: In any case, you would like to see less competition (why would someone, besides an incumbent in a monopolistic form, want that?), which will increase inequality, compensated with more progressive taxation? May I ask why?  
> **username_2**: I don't understand how the economic benefit of a progressive tax is "debatable".  
> **username_0**: @username_1 This regulation would aim against fusing conglomeraters but I see this (more intense cooperation between the large bussinesses) could be a large pitfall. But it certainly would create a better environment for the newly starting bussinesses.  
> **username_2**: A progressive tax helps lessen the "CEO Pay Machine" effect, which does not directly reduce monopolistic practices but makes them less likely.  

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## 2 answers

### Answer by username_3 on 2017-09-30. Score: 1

Progressive income taxes on *individuals* is not very likely to have any real impact on market power, but progressive income taxes on *corporations* can certainly have this effect. The key idea is that in many industries (for example, the financial industry), there are geniune economies of scale: having a big balance sheet allows an investment bank to take advantage of various synergies, meet demand from customers at lower costs and therefore at lower prices. This means that there is a natural pressure towards concentration in the financial industry. High levels of concentration, however, allow firms to price out their competitors from the market due to their size and the aforementioned scale effects, and can lead to a scenario of oligopoly.

The government can try to deal with this problem by introducing negative incentives for corporations to get bigger. This can be in the form of an explicit limit on the size of corporate balance sheets rel to GDP, as advocated by Stiglitz, or it can be in the form of income taxes, or capital requirements, which are "progressive" in the sense that they impose higher marginal costs on larger and more complex firms over smaller ones. Such a measure can offset the natural incentive towards aggregation in the financial industry, for example. This is already done to some extent by Dodd-Frank (perhaps unintentionally) in the US, which raised capital requirements for SIFIs (which are well-integrated financial institutions with large balance sheets). The adverse effect is that by doing this, a country can effectively price its financial institutions out of international markets.

In turn, a policy which reduces market power can have positive effects on the income distribution, as it would lead to lower prices and higher wages. The problem is to find the right balance between the benefits (lower costs) and costs (market power) of concentration in the marketplace.


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### Answer by username_4 on 2023-07-22. Score: 0

I find that most treatment of monopolies is not very well thought through. The cases where monopolies happen and what their actual effects are is not straightforward. Its not clear that natural monopolies are really a problem that we can solve with tools we have. Most monopolies are created by government regulations. These kinds of monopolies can't be solved by taxes because the powers keeping those monopolies in place will adjust to continue to protect them.

While as Ege said, progressive taxes don't usually apply to businesses. But if one was instituted, this would give an incentive for a natural private monopoly to perhaps reduce in size in such a way that allows for competition. However the tax would have to be high enough, and the problem is that monopolies are already setting the price higher than efficient for the market. Higher taxes would push that price even higher.

If this tax were done to *all* businesses regardless of whether or not they're considered monopolies, it would surely be a harmful policy. However, even if only monopolies were taxed in this way, it doesn't seem at all clear that the additional competition it would be able to create would be worth the cost.


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