Big Business Catches a (Tax) Break--Again

It's no secret that most markets are dominated by only a few large firms: think Lowe's and Home Depot when it comes to home improvement, Target and Walmart when it comes to discount stores, or Delta, United, American, and Southwest when it comes to airlines. Or at least it shouldn't be a secret. Economists and other observers have been pointing that out since at least the 1930s, when economists such as Joan Robinson and Edward Chamberlin began identifying so-called imperfect or monopolistic competition.

The last few years have seen a renewed attention to the subject. In 2017 and again in 2018, for example, the business school at the University of Chicago held two conferences on the dangers posed by oligopoly, the technical term for a market dominated by only a few companies. That such events were held at Chicago is notable in itself: Chicago has long been identified with an approach to economics that emphasizes that people make good decisions. If oligopoly exists, it must be because consumers deem it good for themselves.

Missing from recent discussions, however, has been taxation. That's where an article in the June 2020 issue of Politics & Society comes in. The article, titled "The Tax Advantage of Big Business: How the Structure of Corporate Taxation Fuels Concentration and Inequality," is by two political economists in London, Sandy Brian Hager and Joseph Baines. Hager and Baines show that the taxes paid by the biggest corporations have declined over the past forty years to the point where the biggest now pay a smaller percentage than those below them.

In other words, taxation, when it comes to corporations, is regressive. According to Hager and Baines, in the mid-1970s, the biggest corporations had an effective tax rate of 37%. Today, the rate is 28%. At the same time, the rate for all other corporations has risen from 34% to 41%.

Hager and Baines are the first researchers to "map" the effective tax rates of corporations. They are able to take into account and distinguish among domestic, foreign, state, and federal tax rates. Their sample consists of US corporations, and it numbers anywhere from more than 1,300 to more than 5,000 companies.

Hager and Baines argue that the regressive tax rates on the largest corporations is all of a piece with the trend toward regressive tax rates overall. Corporate concentration, income inequality, employers who reward their stockholders rather than their workers—as the authors conclude, their results give an emphatic lie to the idea that cutting taxes on the rich frees up money that is then invested in the rest of us. No such thing is happening. Instead, the rich simply keep getting richer.

"Metropolitan Fragmentation," or, When Cities Divide and Hoard

Until 2012, two separate public school systems operated in the greater Memphis area. Memphis City Schools consisted of schools within the city limits. Shelby County Schools consisted of schools outside Memphis, in such small towns as Arlington, Germantown, and Bartlett. Then in 2012, Memphis City Schools gave up its charter. All schools formerly in its jurisdiction were assigned to Shelby County Schools, which by default became a single, county-wide system.

There was one problem, though. The students who were enrolled in what used to be Memphis City Schools were mostly black and Hispanic. All of a sudden, the Arlingtons and Germantowns and Bartletts of the county, whose populations are mostly white, were sharing a system with lots of black and brown students, who attended schools that many county parents regarded as "bad."

So what happened? The small towns in the county began forming their own school systems, systems that were independent from the new, county-wide system, arguing for the virtues of "local control." Where there was formerly a single, county-wide system, there are today seven or eight separate systems.

What happened in Memphis and Shelby County is a perfect example of what three researchers at MIT call "metropolitan fragmentation." Metropolitan fragmentation happens when multiple jurisdictions are created out of one and when those new jurisdictions organize to "hoard" resources.

The researchers—Yonah Freemark, Justin Steil, and Kathleen Thelen—discuss metropolitan fragmentation in an article that appears in the June 2020 issue of Politics & Society. In their article they produce evidence showing that fragmentation occurs far more frequently in the United States than in other advanced Western countries. To be sure, "no rich democracy," they write, "escapes the problems of spatial inequality that characterize metropolitan life." Nevertheless, as they explain,

the degree to which municipal boundaries are associated with highly unequal policy packages and public services is particularly pronounced in the United States. Indeed, the strategies commonly deployed by affluent US communities to separate themselves—administratively and fiscally—from their less affluent neighbors are virtually unthinkable in many other industrialized democracies.

As Freemark, Steil, and Thelen point out, there are pros and cons to local control. They build on those arguments by comparing different cities over time: Boston, San Francisco, Toronto, London, and Paris. What they find is that Toronto, London, and Paris have worked to make fragmentation harder and less rewarding, whereas Boston and San Francisco have done just the opposite. The authors hope that the example of London, Toronto and Paris can be a model for US lawmakers who want to combat fragmentation—who want to prevent communities from leaving larger jurisdictions and hoarding resources.