Richard Stallman's Solution To 'Too Big To Fail' 649
lcam writes "A Richard Stallman opinion piece appears at Reuters addressing the 'Too big to fail' view that has recently caused large corporations to be bailed out by taxpayer dollars. His solution is elegant: '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.' However, it could use some refining. For example, his measure would create a required minimum 'Return on Investment' scale that corporations need to follow to be viable, and these types of metrics are very industry specific. Another issue is that many large corporations stay in business because they don't take unnecessary risk. Companies like Intel, Lockheed, Walmart are very large and have a very low chance of failure, yet Stallman would have them split up as a result of the excessive risks that banks and insurance companies were seen to have taken. It also has the potential to cause problems with the global market; some multinationals may find it better to simply 'move out' to a country that doesn't compromise their business models. How can this idea be made better?"
Re:I have a better idea... (Score:3, Interesting)
Bail out the taxpayers, but not corporations.
My simple solution (Score:5, Interesting)
Don't bail them out. Don't let them fail and have the knock on effects take down half the economy with them.
Instead if they get to the point that they need a bail out they are nationalized. The share holders get *nothing*. The bond holders get *nothing*. The board and C?Os get a grand jury/under oath senate hearing/SEC/whatever investigation and the book thrown as them. The government does the splitting up and selling off over time (so no fire sale) to divest.
Sure that sucks for people who have pensions/401ks/IRAs/etc invested in those entities (directly or indirectly). But if it's the predetermined outcome upon "failure" then everyone involved knows this going in and should be factoring that risk into the price they're willing to pay and allocation size they are willing to make.
And yes the government is still effectively bailing out the next level down (that's how the knock on effects are being avoided).
Re:I have a better idea... (Score:3, Interesting)
Or, since corporations are "persons", why not tax them in an analogous fashion?
For instance, divide their income by the number of full-time employees they have (averaged over the year, not just on a particular date), and determine their tax rate based on that metric. For this purpose, a full-time employee would be one to whom they pay a salary which exceeds the local minimum and additionally receives full social benefits. Social benefits in the U.S. would mean health insurance and suchlike; in much of Europe, it would mean the extra social taxes which often amount to an additional third to half of the pre-tax salary.
Part-time employees would count as fractions of a full-time employee. The fraction being determined as the lesser of the fraction of hours worked and the fraction of social benefits received. No benefits would mean they are not employees at all.
Novel solution, but not the right one. (Score:4, Interesting)
The theory sounds great, but this won't work in practice. Why? Simple.
Corporations pay ZERO taxes. Period. If you disagree with this, you don't fully understand the system. While there is in fact a corporate tax rate/code, it doesn't matter. Every corp either 1) hides their revenues offshore, usually through Ireland and other European subsidiaries or the Caymens, or 2) PASSES THE TAX ON TO THEIR CUSTOMERS in the form of higher prices.
So either you pay via prices going up... or you lose because that money is now held overseas. Oh, and both of these systems are insanely regressive/repressive vs. small corporations & startups; they don't have the national presence to hide, nor do they have millions to pay crack tax teams to squeeze through loopholes. Option #1 out the window. Option #2 is problematic; they can raise their prices but then customers often flock to a lower priced competitor exercising option #1. This is how many, many startups die; they produce excellent product at reasonable prices but are eviscerated by regulations and tax codes bought and paid for by their multinational brethren, for the sole purpose of ensuring no upstart gets off the ground and actually competes.
We can argue about how things SHOULD be, but the above is a stark and accurate assessment of how things ARE, and we have to live and work in the real world. Stallman either does not realize this or chooses to ignore it and operate in a utopa.
You want a real solution? Eliminate the corporate tax code entirely. Then the money stays at home, and you implement the Fair Tax. That's a national sales tax which replaces ALL forms of federal taxation in favor of a tax on consumption. It's made non-regressive via a pre-bate.
Scrape the idea (Score:5, Interesting)
First of, the economy isn't a machine, it's organic, and this engineering approach generally fails. Companies react to regulation, and regulation itself is the result of government, another organic entity. When this type of laws are enacted, the first thing that happens is that concentrated business interest will make sure they actually benefit from the regulation. It can take many forms. Maybe some corporations will be grandfathered in and therefore manage to keep at bay competitors who can't reach a competitive size, maybe the law will have exemptions that only politically connected firms can obtain. It's misguided to push for a law without taking into account the way it will be distorted by the political process. Contrast this to the viral - hence organic - approach the GPL took.
Second, too big to fail is about the systemic risk that some financial firms exhibited. Walmart is big, Google is big, but they're not too big to fail in the sense that their failure wouldn't particularly cause havoc. If Walmart fails, many different sellers can buy the stores and keep supplying them with goods. In the case of financial companies, the argument went as follow: if a bank fails, many other financial companies may be in trouble if they hold financial instruments whose collateral ultimately is guaranteed by that bank. Unfortunately, it can take a long time to sort out who is really it, and during that time, it becomes very risky to lend to anyone, for fear that they might be exposed to the failing institution. This in turns cause more financial companies to fail in a domino effect. That's the theory at least. I don't know if I buy it, but at any rate, it makes the case that the banks were too heavily interconnected to fail, not too big. Columbia professor Rama Cont has suggested that the solution to this problem is to emphasize clearing houses to bring in transparency in who holds what.
Re:I have a better idea... (Score:5, Interesting)
Rather than bail them out, you can simply take over their properties when they become worthless. Or make a deal to take them over rather than them becoming worthless, and have ownership, rather than simply give money away. In the process, fire or sue those responsible for the collapse.
Or, bail out the next layer down, ensuring change and that the same exact problem can't happen again.
Re:I have a better idea... (Score:5, Interesting)
I like that idea, but it will never work. Executives will always try to maintain plausible denial, and send an underling down the river instead.
Re:I have a better idea... (Score:4, Interesting)
That's what "too big to fail" means.
No... what it actually means is you're being lied to. Most of the banks we're talking about here would still be bankrupt today if the feds hadn't suspended mark-to-market rules in 2008. They did fail, continued to fail, and are still failing today... despite the bailout. The bailout didn't save them. Allowing them to set the value of their own assets to whatever they wanted saved them. If I could claim my house was worth $10 million dollars and refinance it at whim, it'd be pretty hard for me to go bankrupt as well. It's a house of cards the government is allowing banks to build taller and taller. It WILL come down.
The "moving our headquaters" gambit (Score:5, Interesting)
Part of what taxes -- and especially taxes on businesses -- pays for is their participation in a Rule of Law society.
This means you have access to an independent court of law for adjudication of claims against you and claims you may make (especially important when you rely on intellectual property), a civil and military security force to protect your physical assets and employees from harm, and a transparent law-making regime you may lobby to see your interests are represented.
I'm just fine with companies moving, but I'm just as fine with not allowing them to participate in the benefits provided by a Rule of Law society. Feel free to relocate to the third world and feel just as free to see how well the Cayman Islands or Lichtenstein or some of these other tax-dodge nations can protect your global shipments or your factories or your intellectual property.
There's only a small handful of countries able to provide a Rule of Law society and they should band together via treaty to inhibit transnational games and tax dodges.
Re:I have a better idea... (Score:2, Interesting)
No you don't. That's Keynesian nonsense. Corporations that are poorly managed need to go bankrupt and the burden should not be placed on the tax payers. Yes, some people will lose their jobs. That's called life, sometimes it happens. The worst thing you can do is paper over it just to make everyone happy. Another company that is better managed will move in to fill the void, they always do. Now that executives of major corporations know they can rely on Uncle Sam to bail them out for making big mistakes (and they won't even go to jail if they commit massive fraud like the banking scandals of the last decade), there is no incentive for them to not take big gambles and otherwise behave more recklessly than they would if there were actual consequences.
I stopped reading at the jab towards Keynes. Please can someone put a literal bullet into the ideas of non-Keynesian Economics already. Friedman's asinine approaches to economic theory are the very reason we keep dipping into recessions and if left unchecked, great depressions.
Glass-Steagall (Score:4, Interesting)
It seems to have worked well for almost 60 years, during which time the global economy did pretty well.
Re:I have a better idea... (Score:4, Interesting)
...make a deal to take them over rather than them becoming worthless, and have ownership, rather than simply give money away...
How about getting into an agreement to buy 92% of outstanding stock, then selling it off later [treasury.gov] for a $22.5 billion profit?
Oh right, people complain about that, too.
Re:RMS is a walking contradiction (Score:4, Interesting)
he wants corporations to be enslaved.
As opposed to our current system of corporations enslaving us and the .gov
Sounds good to me!
Personally I'd like to see direct participatory democracy wrt granting, renewing, and eliminating corporate charters. Convince all of us that your crooked little monopolistic cabal "deserves" citizenship via individual national referendum every 10 yrs or so ... or your corporation is dissolved in one year. You think a certain bank sucks? Vote it out of existence. Sounds good to me. If they behaved themselves, like my local non-profit childrens hospital, they probably wouldn't have much fear of extinction. That also sounds good to me.
Re:Too many and small to fail (Score:4, Interesting)
Please note that on a branch count basis, more bank branches have failed during the current second great depression than during the first. That would seem to be direct experimental evidence we were better off with smaller banks last time around.
Re:I have a better idea... (Score:4, Interesting)
That's what RICO is for. It doesn't matter if you knew about the specific acts. If you control a firm that engages in a pattern of racketeering activity, you are guilty under RICO. Mobsters play the same kinds of games that executives do, and we have tools to deal with them.
We already have the legal tools we need to put all of these people in jail. The one thing we don't have is an executive that believes in the rule of law.
The financial sector rivals the government (Score:5, Interesting)
The founders of the United States banned a state religion in the First Amendment ("Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof") because they realized churches were competing power structures.
Nowadays, we have the new church, corporations and specifically corporations of the financial sector.
You really want to know who runs this country? Here are four data points from which you can draw your own conclusions:
1) The head of Goldman Sachs goes before Congress and admits he was selling bad products to clients, products which he was betting against. [huffingtonpost.com] A classic swindle. Nothing ever came of it. Or any of the other revelations.
2) There was a PBS show called "The Untouchables" which chronicled why Wall Street executives were never prosecuted for fraud. [businessinsider.com]
3) However, someone you'd think was powerful and connected, a former Michigan state Supreme Court justice is facing jail time for lying to a bank [seattlepi.com] which she was working with in order to get a short sale completed for a house she owned. Her crime? She tried to hide another asset, a paid off house, from the bank.
4) Another person you'd think is powerful and connected, the chairman of the Washington DC City Council, Kwame Brown, was removed from office and convicted of a felony for lying about his income on a pair of loan applications, totaling around 200,000 dollars. [washingtonpost.com] Absolute small potatoes. Also a very common practice in the mid-to-late 2000s, on home loans.
Noticing a trend? If you're a financial sector executive, you run the show. It doesn't matter that you've swindled billions of dollars from the country, nothing is going to happen to you.
However, If you cross the financial sector, even over relatively trivial matters and sums, it won't matter if you're the elected head of the city council or a justice on the state supreme court, you will be removed from office and suffer significant consequences.
The financial sector runs this country.
Re:I have a better idea... (Score:4, Interesting)
Maybe my employer and yours should split their business across multiple banks such that no one failure can bring the whole thing crashing down. We have redundant power supplies, networks, backups, and datacenters, and we accept that each of those are inconvenient but necessary evils. Why would the exact same logic not apply to cash accounts?
Re:I have a better idea... (Score:5, Interesting)
Considering that the banks are making higher profits than ever while the economy continues to slump along tells me that we made the wrong choice.
Re:I have a better idea... (Score:5, Interesting)
No, considering the government has pretty much made back all of the money it put in (plus a profit in some cases) I think that was exactly the right choice.
Would it really have been better to take on another trillion dollars in debt covering all of the losses with no way to make it back? And in situations that weren't insured by the government (like universal life insurance) just tell millions of people they are fucked? At least this way the banks PAID their loans back - and then of course went back to making money hand over fist as usual, but that's really an entirely different argument that definitely needs to be addressed.
And of course, this claim that the economy is continuing to slump along today really seems to be as much a fabrication of the media as anything else. Or at least it's highly dependent on the industry. The market is on fire, tech is going great, and as you said finance/banking is back in the black. Yes, there are a lot of people who were in manufacturing who are out of work, but honestly that is not recession, that is a fundamental shift and those jobs are not coming back any time soon. But certainly letting all of the largest banks and insurance companies fail and potentially doubling the unemployment rate wouldn't have helped that no matter what you think of the economy...