What if we taxed market share?

Apr 18 JDN 2459321

In one of his recent columns, Paul Krugman lays out the case for why corporate tax cuts have been so ineffective at reducing unemployment or increasing economic growth. The central insight is that only a small portion of corporate tax incidence actually seems to fall on real capital investment. First, most corporate tax avoidance is via accounting fictions, not real changes in production; second, most forms of investment and loan interest are tax-deductible; and the third is what I want to focus on today: Corporations today have enormous monopoly power, and taxing monopoly profits is Pigouvian; it doesn’t reduce efficiency, it actually increases it.

Of course, in our current system, we don’t directly tax monopoly profits. We tax profits in general, many—by some estimates, most—of which are monopoly (or oligopoly) profits. But some profits aren’t monopoly profits, while some monopolies are staggeringly powerful—and we’re taxing them all the same. (In fact, the really big monopolies seem to be especially good at avoiding taxes: I guarantee you pay a higher tax rate than Apple or Boeing.)

It’s difficult to precisely measure how much of a corporation’s profits are due to their monopoly power. But there is something that’s quite easy to measure that would be a good proxy for this: market share.

We could tax each corporation’s profits in direct proportion—or even literally equal to—its market share in a suitably defined market. It shouldn’t be too broad (“electronics” would miss Apple’s dominance in smartphones and laptops specifically) or too narrow (“restaurants on Broadway Ave.” would greatly overestimate the market share of many small businesses); this could pose some practical difficulties, but I think it can be done.

And what if a corporation produces in many industries? I offer a bold proposal: Use the maximum. If a corporation controls 10% of one market, 20% of another, and 60% of another, tax all of their profits at the rate of 60%.

If they want to avoid that outcome, well, I guess they’ll have to spin off their different products into different corporations that can account their profits separately. Behold: Self-enforcing antitrust.

Of course, we need to make sure that when corporations split, they actually split—it can’t just be the same CEO and board for 40 “different corporations” that all coordinate all their actions and produce subtle variations on the same product. At that point the correct response is for the FTC to sue them all for illegal collusion.

This would also disincentivize mergers and acquisitions—the growth of which is a major reason why we got into this mess of concentrated oligopolies in the first place.

This policy could be extremely popular, because it directly and explicitly targets big business. Small businesses—even those few that actually are C corporations—would see their taxes dramatically reduced, while trillion-dollar multinationals would suddenly find that they can no longer weasel out of the taxes every other company is paying.

Indeed, if we somehow managed to achieve a perfectly-competitive market where no firm had any significant market share, this corporate tax would effectively disappear. So any time some libertarian tries to argue that corporate taxes are interfering with perfect free market competition, we could point out that this is literally impossible—if we had perfect competition, this corporate tax wouldn’t do anything.

In fact, the total tax revenue would be proportional to the Herfindahl–Hirschman Index, a commonly-used measure of market concentration in oligopoly markets. A monopoly would pay 100% tax, so no one would ever want to be a monopoly; they’d immediately split into two firms so that they could pay a tax rate of 50%. And depending on other characteristics of the market, they might want to split even further than that.

I’ll spare you the algebra, but total profits in a Cournot equilibrium [PDF] with n firms are proportional to n/(n+1)^2, but with a tax rate of 1/n, this makes the after-tax profits proportional to (n-1)/(n+1)^2; this is actually maximized at n = 3. So in this (admittedly oversimplified) case, they’d actually prefer to split into 3 firms. And the difference between a monopoly and a trinopoly is quite significant.

Like any tax, this would create some incentive to produce less; but this could be less than the incentive against expanding monopoly power. A Cournot economy with 3 firms, even with this tax, would produce 50% more and sell at a lower price than a monopoly in the same market.

And once a market is highly competitive, the tax would essentially feel like a constant to each firm; if you are only 1% of the market, even doubling your production to make yourself 2% of the market would only increase your tax rate by 1 percentage point.

Indeed, if we really want to crack down on corporate tax avoidance, we could even charge this tax on sales rather than profits. You can’t avoid that by offshoring production; as long as you’re selling products in the US, you’ll be paying taxes in the US. Firms in a highly-competitive industry would still only pay a percentage point or two of tax, which is totally within a reasonable profit margin. The only firms that would find themselves suddenly unable to pay would be the huge multinationals that control double-digit percentages of the market. They wouldn’t just have an incentive to break up; they’d have no choice but to do so in order to survive.

How I’d run an airline

Mar 1 JDN 2458910

I’m traveling this week, so I have less time for blogging than usual and airlines are very much on my mind. So I thought I’d write a short post about things I would change if I were to run my own airline.

1. Instead of overpriced first-class seats, offer the option of seats with more space for a proportional amount. First class prices are almost never worth it, and people seem to be figuring that out: Use of first class is in decline. But sitting in that middle seat is so miserable, why not simply eliminate it? I think a lot of people would be willing to pay 50% more for 50% more space.

2. Offer every passenger two free checked bags, but charge for the carry-on. Carry-on bags are far more awkward and disruptive, and slow down boarding and deboarding much more, than checked bags. The airline should be trying to incentivize passengers to use checked baggage as much as possible. I’d still give each passenger a free personal item (like a purse, backpack or laptop bag), and some people would still want a carry-on bag (e.g. for cameras that can be damaged by radiation); but most people really don’t need to have a roller bag as a carry-on.

3. Power outlets in every seat. This is a trivial amount of cost in terms of manufacturing and electricity, compared to what an airplane already requires; but it makes flying much more convenient for your passengers, and thereby allows you to demand higher prices. This is a no-brainer. (Some airlines, like Delta, already do this.)

4. Assign seats and load the plane based on the seating positions. The first boarding group should be the people who sit furthest in the back, so that no one needs to pass seated passengers in order to find their own seat. Ideally window seats would be filled before aisle seats, but since people like to board and sit together, that might not be feasible. But at the very least we can make boarding faster by seating the back rows first.

5. Give pilots and flight attendants reasonable hours and plenty of vacation time. Airline pilots around the world are dangerously overworked and sleep-deprived. This is dangerous for customers, and if it leads to crashes or lawsuits it can be very expensive for the airlines too. Having an aircraft idle overnight really isn’t that great a cost, especially since red-eye flights command lower prices and are thus less profitable for the airline. Working fewer hours makes people more productive per hour—often to the point of making them more productive overall.

6. Explain why you need to put on your own oxygen mask first. Standard airplane safety instructions always include the line “Put on your mask before assisting others.” But since they almost never explain why, I strongly suspect that in a real emergency a lot of parents try to put on their children’s masks first and thereby needlessly endanger themselves. Wording these instructions might be tricky, because any talk of such things is bound to scare people, but the core idea is this: Hypoxia will cause delirium or unconsciousness long before it will cause permanent brain damage or death. You want to first make sure you aren’t incapacitated, and then you can help save others. If you put on your mask first, your kid may get confused or pass out, but you’ll be able to help them and they’ll be fine. If you put on your kid’s mask first, you may get confused or pass out, and your kid won’t be able to help you. Then unless someone else saves you, you may die pointlessly because you didn’t follow instructions. Depending on altitude and how severe the hull breach is, you have about 30 seconds before you lose consciousness. But your kid has at least three minutes before you need to worry about permanent brain damage, and probably as many as fifteen before they’d die.

7. Include carbon offsets in the ticket price, and advertise this aggressively. Despite the fact that airplanes are a major source of carbon emissions, carbon offsets are actually remarkably cheap compared to the cost of airline tickets. Adding offsets would typically raise the price of a ticket by about $30, which on a $300 ticket is unlikely to shock people. And by advertising the carbon-neutrality of your airline, you can probably get a lot of customers who are willing to pay more, potentially even more than the additional cost of the carbon offsets themselves. This could be a win-win for the airline and the environment.

8. Invest heavily in research on more efficient jet engines. The second-biggest cost for an airline is fuel expenditure. (First is the wages of the crew.) If you can install more efficient engines on your aircraft, you can both reduce your environmental impact and dramatically lower your cost. Current state-of-the-art engines can reduce fuel consumption by as much as 20%; future research could improve this even further.

9. Include snacks at every seat before passengers even board. Putting a bag of pretzels and a water bottle at every seat would be trivially easy, and would allow passengers the opportunity to be eating while the plane takes off—and chewing reduces the discomfort of changing air pressure. If the worry is that people will try to put their tray tables down (which is genuinely unsafe during takeoff), install electronic locks that prevent tray tables from being lowered except when authorized.

10. Install seats that don’t recline. The additional comfort for the passenger reclining is far smaller than the reduced comfort for the passenger behind them. Combine that with the additional cost of maintaining the seats and the additional risk of injury during rough landings, and the answer is obvious: Seats shouldn’t recline.

11. Offer better food. Charging less for airplane food honestly isn’t feasible: Because space and weight are at such a premium, it really is that expensive to store and transport food on an aircraft. But the cost comes mostly from the bulk and weight of the food; it really doesn’t much matter what kind of food it is. To that end, airlines should offer high-quality food that people feel more comfortable paying such high prices for. A steak weighs about the same as a hamburger, and champagne has about the same density as Sprite.

12. Reduce, or even eliminate, fees to change flights. Yes, it’s expensive to have empty seats on a moving airplane. But most flights can be filled by standby passengers, and those that can’t often weren’t full anyway. It’s actually fairly rare for a cancellation to result in an empty seat that would otherwise have been full. And the additional goodwill you get from making life easier for your passengers will make up the difference. (Southwest figured this out; other airlines don’t yet seem to have caught on.)

Would these changes revolutionize air travel? No. But I do think they’d make it a bit more pleasant, without greatly reducing the profits of the airline.

How can we stop rewarding psychopathy?

Oct 1, JDN 24578028

A couple of weeks ago The New York Times ran an interesting article about how entrepreneurs were often juvenile delinquents, who then often turn into white-collar criminals. They didn’t quite connect the dots, though; they talked about the relevant trait driving this behavior as “rule-breaking”, when it is probably better defined as psychopathy. People like Martin Shkreli aren’t just “rule-breakers”; they are psychopaths. While only about 1% of humans in general are psychopaths, somewhere between 3% and 4% of business executives are psychopaths. I was unable to find any specific data assessing the prevalence of psychopathy among politicians, but if you just read the Hare checklist, it’s not hard to see that psychopathic traits are overrepresented among politicians as well.

This is obviously the result of selection bias; as a society, we are systematically appointing psychopaths to positions of wealth and power. Why are we doing this? How can we stop?

One very important factor here that may be especially difficult to deal with is desire. We generally think that in a free society, people should be allowed to seek out the sort of life they want to live. But one of the reasons that psychopaths are more likely to become rich and powerful is precisely that they want it more.

To most of us, being rich is probably something we want, but not the most important thing to us. We’d accept being poor if it meant we could be happy, surrounded by friends and family who love us, and made a great contribution to society. We would like to be rich, but it’s more important that we be good people. But to many psychopaths, being rich is the one single thing they care about. All those other considerations are irrelevant.

With power, matters are even more extreme: Most people actually seem convinced that they don’t want power at all. They associate power with corruption and cruelty (because, you know, so many of the people in power are psychopaths!), and they want no part of it.

So the saying goes: “Power tends to corrupt, and absolute power corrupts absolutely.” Does it, now? Did power corrupt George Washington and Abraham Lincoln? Did it corrupt Mahatma Gandhi and Nelson Mandela? I’m not saying that any of these men were without flaws, even serious ones—but was it power that made them so? Who would they have been, and more importantly, what would they have done, if they hadn’t had power? Would the world really have been better off if Abraham Lincoln and Nelson Mandela had stayed out of politics? I don’t think so.

Part of what we need, therefore, is to convince good people that wanting power is not inherently bad. Power just means the ability to do things; it’s what you do that matters. You should want power—the power to right wrongs, mend injustices, uplift humanity’s future. Thinking that the world would be better if you were in charge not only isn’t a bad thing—it is quite likely to be true. If you are not a psychopath, then the world would probably be better off if you were in charge of it.

Of course, that depends partly on what “in charge of the world” even means; it’s not like we have a global government, after all. But even suppose you were granted the power of an absolute dictatorship over all of humanity; what would you do with that power? My guess is that you’d probably do what I would do: Start by using that power to correct the greatest injustices, then gradually cede power to a permanent global democracy. That wouldn’t just be a good thing; it would be quite literally and without a doubt the best thing that ever happened. Of course, it would be all the better if we never built such a dictatorship in the first place; but mainly that’s because of the sort of people who tend to become dictators. A benevolent dictatorship really would be a wonderful thing; the problem is that dictators almost never remain benevolent. Dictatorship is simply too enticing to psychopaths.

And what if you don’t think you’re competent enough in policy to make such decisions? Simple: You don’t make them yourself, you delegate them to responsible and trustworthy people to make them for you. Recognizing your own limitations is one of the most important differences between a typical leader and a good leader.

Desire isn’t the only factor here, however. Even though psychopaths tend to seek wealth and power with more zeal than others, there are still a lot of good people trying to seek wealth and power. We need to look very carefully at the process of how we select our leaders.

Let’s start with the private sector. How are managers chosen? Mainly, by managers above them. What criteria do they use? Mostly, they use similarity. Managers choose other managers who are “like them”—middle-aged straight White men with psychopathic tendencies.

This is something that could be rectified with regulation; we could require businesses to choose a more diverse array of managers that is more representative of the population at large. While this would no doubt trigger many complaints of “government interference” and “inefficiency”, in fact it almost certainly would increase the long-term profitability of most corporations. Study after study after study shows that increased diversity, particularly including more equal representation of women, results in better business performance. A recent MIT study found that switching from an all-male or all-female management population to a 50-50 male/female split could increase profits by as much as forty percent. The reason boards of directors aren’t including more diversity is that they ultimately care more about protecting their old boys’ club (and increasing their own compensation, of course) than they do about maximizing profits for their shareholders.

I think it would actually be entirely reasonable to include regulations about psychopathy in particular; designate certain industries (such as lobbying and finance; I would not include medicine, as psychopaths actually seem to make pretty good neurosurgeons!) as “systematically vital” and require psychopathy screening tests as part of their licensing process. This is no small matter, and definitely does represent an incursion into civil liberties; but given the enormous potential benefits, I don’t think it can be dismissed out of hand. We do license professions; why shouldn’t at least a minimal capacity for empathy and ethical behavior be part of that licensing process?

Where the civil liberty argument becomes overwhelming is in politics. I don’t think we can justify any restrictions on who should be allowed to run for office. Frankly, I think even the age limits should be struck from the Constitution; you should be allowed to run for President at 18 if you want. Requiring psychological tests for political office borders on dystopian.

That means we need to somehow reform either the campaign system, the voting system, or the behavior of voters themselves.

Of course, we should reform all three. Let’s start with the voting system itself, as that is the simplest: We should be using range voting, and we should abolish the Electoral College. Districts should be replaced by proportional representation through reweighted range voting, eliminating gerrymandering once and for all without question.

The campaign system is trickier. We could start by eliminating or tightly capping private and corporate campaign donations, and replace them with a system similar to the “Democracy Vouchers” being tested in Seattle. The basic idea is simple and beautiful: Everyone gets an equal amount of vouchers to give to whatever candidates they like, and then all the vouchers can be redeemed for campaign financing from public funds. It’s like everyone giving a donation (or monetary voting), but everyone has the same amount of “money”.

This would not solve all the problems, however. There is still an oligopoly of news media distorting our political discourse. There is still astonishingly bad journalism even in our most respected outlets, like the way the New York Times was obsessed with Comey’s letter and CNN’s wall-to-wall coverage of totally unfounded speculation about a missing airliner.

Then again, CNN’s ratings skyrocketed during that period. This shows that the problems run much deeper than a handful of bad journalists or corrupt media companies. These companies are, to a surprisingly large degree, just trying to cater to what their audience has said it wants, just “giving the people what they want”.

Our fundamental challenge, therefore, is to change what the people want. We have to somehow convince the public at large—or at least a big enough segment of the public at large—that they don’t really want TV news that spends hours telling them nothing and they don’t really want to elect the candidate who is the tallest or has the nicest hair. And we have to get them to actually change the way they behave accordingly.

When it comes to that part, I have no idea what to do. A voting population that is capable of electing Donald Trump—Electoral College nonsense notwithstanding, he won sixty million votes—is one that I honestly have no idea how to interface with at all. But we must try.