Fixing too big to fail February 5, 2013 at 6:31 am

Previously I have suggested a regulatory capital multiplier that is quadratic in balance sheet size over some threshold as an incentive for too big to fail banks to split themselves up. But now Richard Stallman has something I like even more: tax rates that increase with company size.

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.

With this incentive, over time many companies will likely get smaller. They could subdivide in ways they consider most efficient – rather than as decided by a court. We can adjust the strength of the incentive by adjusting the tax rates. If too few companies split, we can turn up the heat.

Big companies can afford clever lawyers. They may try, for example, to pretend to split up into several companies that effectively work together as one. So the new tax law must recognize this and treat such entities as one company that pays the rate for its combined size. As for how to recognize and define such combinations, we can probably borrow solutions from antitrust law.

That is just beautiful. The only delicate part is setting the thresholds. You’d probably have to do that on an industry-by-industry basis, using HH indices to monitor concentration and decide when to increase the size penalty.

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