Fixing ‘too-big-to-fail’

By Richard Stallman
February 4, 2013

The United States is plagued by large corporations with outsized political power. They are “too big to fail.” So if they are about to fail, they get rescued. Many are so big that they can block the laws needed to stop them from destroying the economy or the environment.

We need to replace them with smaller companies, but U.S. antitrust law is inadequate. It exists, but has been weakened over the past decades. Consider the proposed “Volcker Rule,” which would make many banks split into two companies, one for risky investments and one for loans based on savings, as the old Glass-Steagall law required.  This would address some problems, but would not make banks small enough.  Eliminating “too big to fail” banks means making sure that each is small enough that regulators, prosecutors and elected officials won’t hesitate to let it suffer the consequences of its own decisions.

Using anti-trust law now to split up a company requires a lawsuit, and many large companies can make that costly – as Microsoft did each time it was convicted. Corporations can also use their political influence to avoid being split, as Microsoft did when last convicted.

It is clear that the larger companies get, the harder it is to enforce antitrust laws against them. Yet, a business-friendly government can vitiate the law simply by launching no antitrust cases – as the Bush administration did.

When the government wins such a suit, the court splits up the company to remedy the specific anti-competitive behavior proved. It can’t split the company into 50 parts just to ensure they are all small enough. We can’t fix the problem of too-big-to-fail companies this way.

I propose another method ­– one that can be applied to all companies. It works through taxes. There will be no need to sue companies and split them up – because they will split themselves up.

The method is simple: a progressive tax on businesses. 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.

Corporations today are often multinational, and can play accounting games between their divisions in various countries. Yet we should not let this thwart the plan: A multinational company’s tax rate for income in the U.S. should be based on the size of its operations worldwide.

Companies have many accounting tactics for reducing their declared profits – so if the tax is levied on profits, they will likely game the system. It is far harder, however, for a company to disguise its gross income. So let’s compute the tax based on gross income. This is larger than the profit, so the tax rate we apply to gross income should be smaller than what we would use to tax profits.

Another advantage in this is that an inefficient company pays the same tax rate as an efficient company of the same size. A tax on profits would tax the efficient company more, because its profit would be a larger fraction of the same income.

You can also think of this as a variable-rate sales tax.

When corporations all pay the same sales tax rate, they pass the cost along to customers. Thus, if the goal is to tax wealthy business owners, a fixed sales tax doesn’t do the job.

However, businesses can’t pass the entire amount along to customers if they pay different tax rates. If a large company pays 5 percent and a competing small company pays 1 percent, they could both pass along 1 percent but no more. The owners of the large company would have to pay the other 4 percent – which is exactly what might convince them that splitting up is desirable.

This tax would operate gently but firmly on a long time scale. It would surely not make every large company split up in the first year. But it could well change a structure that promotes mergers into one that promotes dividing.

PHOTO (Top): A variety of logos hover above the Microsoft booth at the International Consumer Electronics Show (CES) in Las Vegas January 10, 2012. REUTERS/Rick Wilking

PHOTO (Insert): A man walks out of an Internal Revenue Services office on Tax Day in New York, April 15, 2009. REUTERS/Lucas Jackson

Copyright 2012 Richard Stallman
Released under the Creative Commons Attribution Noderivatives 3.0 license


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The premise of this article is wrong. There is no company out there that is “too big to fail”. That is a Bush era term that should have disappeared along with GB’s anti-capitalist policies. Punishing a growing business with progressive taxation on gross income is simply unamerican. Think of all of the jobs that would never be created with a system that punishes growth. Think of all of the jobs that would be lost as these companies break up and seek efficiencies in a punishing market. Look, I’m no fan of Walmart. It was my account for over 5 years. The truth is, though, that I can buy my groceries at Walmart for about half of what it would cost me to buy at an independent grocer. Big business is not the problem. Government intervention is the problem. Success should NEVER be punished. NEVER.

Posted by urukhai2 | Report as abusive

The author goes from banks to companies in general, which is coinfusing. Unfortunately, Mr. Stallman never discusses why large is bad other than repeating the same tired line from the administration. I agree with an earlier commenter about production and economies of scale. Unless the author can also suggest how incomes are to increase in order to pay for the higher prices smaller companies will charge consumers for services due to their higher marginal costs, the Chinese model of thousands of cooperatives replacing the few large corporations won’t work.

Posted by AltonDrew | Report as abusive

Don’t encourage mergers. Mergers almost always result in reduced competition. The resulting firm is more profitable, at the consumer’s expense.

Competition among producers is what benefits the public. We want them competing for customers and competing for labor. Lower prices and higher wages.

Posted by AdamSmith | Report as abusive


Mr. Stallman doesn’t need to discuss “…why large is bad…”. We know from the antitrust laws that are on our books, increasingly unenforced.

Fortunately there aren’t many places where it seems the gas stations call each other before changing prices, or a few families control all liquor prices within a state. But there are places where the fox is in charge of the henhouse.

If there were more genuine competition for variety TV, the cable and satellite companies could not force consumers to pay for hundreds of channels they never watch just to get those relative few they do.

In Texas, it appears the energy regulating process is effectively controlled by the energy companies, it’s insurance commission by the insurance industry, it’s funeral “industry” by those providing such services.

Lawyers and judges seem to be accountable to no one but themselves nationwide. With so many of them in politics, I find it hard to deem that CONFLICT OF INTEREST a coincidence.

Posted by OneOfTheSheep | Report as abusive

A progressive tax on gross income……perhaps the stupidest idea I’ve come across in decades.

Posted by NotC | Report as abusive

stallman should braid his glorious beard like a viking

Posted by woodscrews | Report as abusive

Great idea Stallman. But how do we implement it ? How do we get rid of the old man from the back of Sinbad the sailor ? Tax laws are written by these who are too big to fall. How would you get entrance into the business of writing tax laws ?and, then there are the business men’s own the GOP . How do you get past / around them to make laws which they don’t
Ike ? Therein lies the rub .

But thank you for an open source solution. Bless you , Stallman . One day , that day too will dawn when the writing of tax laws fall into the hands of the govt. of ” we the people ” , hopefully .Thanks Reuters for voicing such original simple solutions to the complex problem of growing too big to fall .

Posted by ZZeitgeist | Report as abusive

Regarding your questioning above on my statement:
“The only way to face and control the multinational is through multinational people action, that is, world government.”

I don’t see how a particular nation of people sticking together, Canada for example, could address the issue of corporations taking, for instance, their polluting, global warming means of production to another country that is desperate for the jobs. Clearly you need global regulations to handle global polluters.

This reasoning can readily be applied to any of the means corporations off-load the costs of production on to the people of the world. As another example, corporations who use child labor off-load moral responsibility on to the consumers of the world. Or, corporations abruptly close their factory doors with no warning, leaving their host country to cope with joblessness and ruined careers of the workers. Bribes, as another example. The list of possible corporate international malfeasance, if corporations are not properly controlled, is probably infinite.

Of course, the idea of world government is very scary, but in some sense we already substantially have it, through the multi-national corporations. However, this is international government by a small elite, and is hugely undemocratic. Without the world sticking together, there is no comprehensive control of the corporations.

It seems to me that we (people of the world) need a democratic governing body for all international economic activity. However, the concern is that such a body could take over most of national sovereignty in other spheres of life. Particularly in the US, it is difficult to separate economics from any other part of life.

Posted by xcanada2 | Report as abusive

A good equation to use for this could be 1-(M/X)^(1/C) where X is the gross revenues of a company, M is the minimum amount of gross revenue a company needs to earn in order to be taxed, and C is an arbitrary tax constant meant to give the function an appropriate curve.

I’ve tested this for personal incomes with success, though I don’t know how well it would apply to businesses since they take in much more money. the behavior of this function as it approaches extreme values is a tendency toward 100% taxation, but I’m sure the right values for M and C could be chosen in order to ensure such an event does not happen without ludicrous amount of income.

Personally I’d prefer to see a system which is dependent on profits as well as gross income. Profit is what corporations’ primary objective is, it’s a responsibility they have as publicly traded companies to their shareholders. Not including this pivotal variable is ignoring a major part of what make a corporation what it is. Something along the lines of sqrt(Gross Income)/Profit = tax percentage, which gives businesses incentive to maximize profits while remaining manageable sizes, plays to the nature of the beast.

Posted by sumludus | Report as abusive

The problem with this suggestion is that size alone, regardless of how you measure it, is a poor criterion for how potentially harmful a business may be to the global economic system. Some companies grow large through designing and making stuff that people need or want, providing jobs and advancing technological progress in the process. Others, like many financial institutions have moved away from their roots in providing essential services to our economy and instead have essentially developed casino operations which dwarf their legitimate business activities, but are fatally intertwined with them.

By dint of churning massive volumes of various financial instruments with millisecond precision through the global financial system, far more than is needed to support genuine economic activity, and using the best brains and equipment money can buy to maintain marginal advantages over other so-called investors, obscene profits can be made, though largely it must be said through taking money out of one investor’s pockets to put into another’s. This inevitably leads to instability with the parasite in danger of killing the host, necessitating the massive rescues we have all had to fund.

My solution would be far simpler, and as such unlike a complex company tax regime, could stand some chance of the global implementation needed for any such scheme. I suspect that the main reason for the massive growth in unproductive and risky trading is the ability to trade assets within milliseconds of some price threshold being reached. This may reduce risk to the institutions providing such “investment” services, but promotes instability and short-termism which is the opposite of what is required to support the real economy.

I would therefore suggest that governments just agree to give all financial institutions one years notice that from a certain date no financial asset or instrument could be held by any individual or organisation for less than 24 hours. This minimum holding period should be increased by 1 day per year thereafter, for say 30 years, or until such time as trading volumes move back into line with what is actually required to operate the real economy.

Posted by fred_jb | Report as abusive

I don’t see this as the best approach. The debt ratios should be regulated. Large companies should only be allowed small debt ratios (ie GM), while small companies should be allowed large debt ratios. There could be 5 levels of maximum debt ratios, from small to big. Small companies could borrow big & many would fail but as the ones that succeed grow bigger, they would need to become less leveraged. The largest companies would be the least in debt & if they did begin to require more debt they would then have to consider breaking up, before they became over leveraged & too big to fail.

Posted by UnoNoOo | Report as abusive

I dont think that there should be such thing as “To Big to Fail” but more government is not the solution. The only way to make sure the bad businesses fail is to let them be at the mercy of the Free Market. What RMS wants is to let the government control the corporations and making sure no business grows big, even if that’s the will of the Free Market.

Posted by TomJeff1776 | Report as abusive