Policy: Economy

How Max Baucus's 'tax reform' can hurt competition and kill business creation

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Beltway Confidential,Timothy P. Carney,Taxes,Economy,Budgets and Deficits,Max Baucus

If you're a business, the best way to get fat profit margins is by erecting (or finding yourself surrounded by) barriers to entry.

If you're making lemonade at 30 cents a cup and try selling it at 75 cents a cup, a neighbor is going to see an opportunity to undercut you, selling at 65 cents a cup. Thus in fluid, liquid industries, competition — or even the threat of competition — keeps profit margins low.

But if you're making jumbo jets, it's pretty hard for new competitors to arise — so you can enjoy decent profit margins. High fixed costs are natural barriers to entry.

Regulations are often efforts by incumbent businesses to erect barriers to entry, thus allowing for higher profit margins. This is the dynamic behind licensing requirements, why Philip Morris profits from tobacco regulation, why food-safety regs might crush local farming and help the corporate farms and so on.

Barriers to entry: good for profit margins, bad for new entrants and generally bad for economic efficiency.

That's why I'm worried about Max Baucus's corporate-tax overhaul. It reduces revenue through lower tax rates (good), but then raises revenue by lengthening the amount of time over which businesses can write off investments.

Ramesh Ponnuru explains the effects of such a plan:

This trade-off may have been made merely to get the numbers to work, but its effect is to favor past investments over future ones.

Consider a company that is still seeing payoffs from an investment it made and wrote off years ago. It enjoyed a relatively speedy depreciation schedule and will now face lower taxes on its returns: a clear-cut tax reduction ...

... the reform will favor older and established companies over startups. So the startups will have a higher total tax burden than they would have had without the reform.

I'm not saying this is corporatism — I don't think the big guys really like this deal. I'm just saying it's another example of government creating barriers to entry.

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