The cool kids have an excellent argument as to why rich people should pay more tax. The economy is becoming more concentrated (there is less competition in each sector) so the capitalists are making greater profits off our hides. Let's tax them more!
The reason this argument is excellent is that if it were true then they’d have a point. Economic profits, rents as they are called, can come from having market power. More concentration in supply is that very gaining market power. So, yes, if we were fed, watered, and clothed by actual monopolies, there would be a very good argument for taxing heavily those who owned such firms.
The argument does slightly fall down when we consider profits as a share of the economy. The standard measure does show that corporate profits have risen as a share of GDP. Thus we could say there is greater corporate power and income. But when we look at only the domestic economy, this goes away. We’ve included, wrongly according to some economists, the foreign profits of the tech giants. That does make a difference, Apple’s overseas profits alone are several tenths of a percentage point of GDP, a large number in these terms. Once we strip out again these foreign profits it’s not obvious, to say the least, that corporate profits have risen — thus, perhaps corporate power, concentration, hasn’t.
There’s a new paper which gives us another reason why this doesn’t hold up. The number of companies in any sector of the economy nationally does seem to be falling. But that’s not the same as thinking that competition is.
Think back to when we looked at the U.S. newspaper industry. The number of papers is falling. If we only counted nationally, that would show greater concentration, less competition. That’s obviously not the way things really are, though, is it? Previously the news business was a series of highly profitable local monopolies. The Internet has removed the geographic constraint, meaning the New York Times, the Los Angeles Times, the varied Tribunes and Couriers, are all basically available nationally to all at the same time and price, just like the Washington Examiner. We’re seeing a decrease in the number of market participants, an increase in concentration among suppliers, and yet a huge increase in competition at the only level that matters, that of the local market and consumers. That’s why profits have pretty much disappeared in the industry, which isn’t a sign of the creation or capturing of economic rents.
This new study insists this is true across the economy. We may well be having fewer suppliers nationally in any sector. But that is more than balanced by the manner in which nearly all suppliers are now able to address nearly all markets. Actual consumer choice, competition for consumer spending, has risen. For example, there simply are no one-grocery-store towns anymore, not when Walmart and Amazon will deliver nationally.
The Internet, as with newspapers, is killing off that geographic separation of local markets, meaning that we’re gaining more competition, not less.
Or, as we might put it, the cool kids’ argument for taxing the heck out of the capitalists doesn’t really work, because we’re seeing the creation of less market power, the generation of smaller or fewer economic rents. There’s not just less there to tax, but more importantly, less honest economic justification for the taxation of them.
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.