Fax the Corporate Tax …… Avert Regulatory-, Social- and Fiscal Capture ! (Psst: Dangereux !)
Fax the Corporate Tax …… Avert Regulatory-, Social- and Fiscal Capture !
(Psst: Dangereux !)
GangaPrasad Rao
Energy, Environmental and Mineral Economist
gprasadrao.blogspot.com
gprao64.blogspot.com
Disclaimer:Dangereux !
Introduction
Macro- and Regulatory Economics are not exactly close cousins. One dwells on the operation and administration of entire economies by designing optimal fiscal and monetary policies that foster a larger, globally-competitive, nominal economic paradigm; the other seeks to contain the concentrated and diffused social, environmental, safety and health externalities caused by real-immeserizing, profit-seeking firms in globalized nominal capital markets while ensuring a low-cost and efficient pathway for businesses to achieve long-run sustainability. And though there seems hardly an overlap, it is the stimulation of the nominal economic paradigm by means of unbalanced fiscal and monetary policies that engenders SESH externalities.Hence, the two often go hand in hand, or they’d ideally. In reality however, political parties seeking to expand their political bases by offering populist policies, have been receptive to the employment-creating and tax-generating potential that Corporations bring to their constituencies. Over the decades, Corporates too, have increasingly relied on the political process to pursue their nominal expansion and capitalist-aggrandizing plans. Corporate taxation imposed upon firms1, and sovereign bonds issued in the public capital market are the two primary sources of Government revenue beyond product sales taxes, trade tariffs, and personal income/wealth taxes. As businesses expand and contribute to a nation’s tax revenues and employment, they assume a significance beyond their immediate legal and economic role. Governments that administer public services, do so by securing revenues through corporate and personal taxes. Corporate taxes, both, collectively, and by distinct economic sectors, often constitute a significant share of revenues to local and regional governments. Such a source of annual monetary resources, upon which the Government builds a socio-economic edifice, turn it sensitive to, if not dependent on businesses and regionally-important sectors, to offer livelihood and enhance the lifestyles of the voting public. Over time, taxed businesses, and generally the economic sector, begin to wield informal, though significant hold and sway over the local regional economy, due which policies and decisions made by governments at various levels are clouded and biased toward protecting and favoring those businesses. Such ‘fiscal capture’ is increasingly evident in many nations, states and precincts around the world. The fiscal capture is incremental to ‘social capture’ - a phenomenon in which nominal firms in a precinct influence household and voter preferences for the employment they generate and the power they wield in the labor market, and ‘regulatory capture’ that occurs when non-pecuniary externality-causing nominal businesses capture Government officials through their political lobbying and secure biased regulatory outcomes favorable to them. Together, these pecuniary externalities have effectively diluted the Compact that the Public has with its elected representatives in the Government, and lured, induced, even forced the latter to accept a divided, right-leaning, inequitable society. The global nominal economic paradigm has induced local, regional and federal governments to compete against each other – locally, regionally and globally, and bound them with regulatory-, social-, and fiscal capture in to administering an externality-exacerbating, right-leaning government that, though ostensibly for the people, by the people, and of the people, negotiates politically-convenient, bureaucratically-enlarging and privately-aggrandizing deals with Business, and neglects the diffused and public externality exacerbations that it generates, while ‘satisficing’ the public privately.
Problem
The populist policies necessary to compete in, and win multi-party elections, particularly in developing nations, imply political Government find resources to fund their various public subsidy programs and private political give-aways. To this end, it must juggle its sources of revenues – corporate taxes, personal income and wealth taxes, beyond exchange rates, trade tariffs and sales taxes – to fill its budgetary requirements, and borrow from the public against issue of Sovereign Bonds, to the extent taxes and tariffs fall short. Consumption taxes on mass-consumables, such as on gasoline and diesel, constitute an important source of revenue despite the fact their consumption engenders many SESH externalities. Such taxes, whether at the extraction, processing or consumption/disposal stage, accrue to a significant share of total government revenues, and turn important to the continuation of existing short- and long programs and policies – both, SESH-corrective, and socio-economic.
Pigouvian taxes on consumer essentials in a per-capita nominal economic paradigm – whether couched as a Consumption tax, or explicitly an Externality charge, obtain a steady and expanding revenue stream to the political Government. The fact that holding back pigouvian tax increments on consumer essentials exacerbate externalities locally and globally, must be weighed against the reality of tax revenues funding social essentials such as education, consumption subsidies2, even public health. Populist governments, which seek their vote from the bourgeoisie electorate, are therefore protective, even nurturing of their revenue sources despite the fact product consumption is associated with environmental externalities. Successive elected governments count on these taxes as they campaign and plan their policies. Over time, the tax pot turns in to political milch cow that potentially turns the government and the underlying political apparatus dependent on errant, SESH-unsustainable businesses to fund its public agenda and private party politicking. The Government, paradoxical to its mandate to protect public environment, safety, and health, veers off course, perversely tolerates the enlargement of externalities in overt or covert negotiations, nurtures the tax-paying, externality-causing sector, and is implicitly complicit in enlarging the externality to financially support its political agenda and social programs.
Similarly, Corporate taxes constitute a significant share of the nation’s revenue budget, and support a variety of citizen services. An expansion of Corporate taxes monies permits the government bureaucracy, comprised of officials, institutions, offices, and accouterments, to expand and fill the financial space, turning bureaucrats in to authority-wielding entities with a vested interest in developing business-friendly relations with their governed/regulated constituency. A revenue-seeking tax, as opposed to an externality-abating tax, will over a period of time, be politically negotiated by the Business to maximize its inter-temporal sales and profits, thus watering down any environmental benefits that might flow from imposing the tax. The taxes lose their original significance – that of compensating and supporting the society for its real sacrifices in permitting the operation of a dichotomising nominal paradigm - and turn in to financial streams and pots that are staked out by the expectant political- and growing bureaucratic constituency toward the continuation of their reigns and offices. Such ‘regulatory capture’ turns (corporate and) product taxes into strategic negotiating macro-instruments in the hands of the Businesses, and perversely, serve as bargaining tools for them to secure and grow their market under the protection of the government, irrespective of their sustainability credentials, or technological merit. Consumption taxes, when entrenched in to the macro-economy of the society, permit Businesses, through political lobbying, to capture the Government environmentally, fiscally and politically. Such capture negates the power of the people to govern themselves through a representative government, turns the government subservient to the diktats of businesses subscribed to the globalized nominal paradigm, and inimical to its social and environmental sustainability. A continuation of the perversity turns the state an arm of the Nominal Business, and the society its feudal inferior. Environmental externalities continue to exacerbate even as the society leans on Business for its basic functions, in the limit leading to an inequitable, unbalanced and dysfunctional society.
An Outta d’ Box Design
If pecuniary externalities result from societal and governmental dependence on tax revenues, then the solution too, must focus upon, and resolve the sources of government revenues. The design proposed here, leans on Bond finance to obtain an alternate source of revenue, and SESH Cause Bonds to deny bureaucratic leverage in matters regulatory. The Bond implicitly charges the SESH Externality-causing nominal Corporate activity, and rewards them for partnering to resolve the same. Toward this intent, consider the Sovereign Government choosing to source its revenues, not from taxation of corporate profits (or, revenues from product consumption taxes), but from the sale of ‘National Security Bonds’, NS Bonds, to Corporates annually, of tenure equal duration to end of political term, in aggregate amounts equal its budgetary obligations. National Security Bonds may be thought of as ‘Issuer non-redeemable’, zero-coupon, albeit tradable and ‘fully convertible-to-equity’ ‘Democracy Real Social Pareto-SSA EO Subsidy PV3:: RoW Pareto Bakey-Mirror ZS OE-SESH AO :: Sov.Nominal-Armament Efficiency4-SSA Employment FV5100% Convertible’ Bonds6that must be mandatorilypurchased by Corporates, and which thereafter, may be held for the social pareto it imbues, converted to private equity7, or traded to other Corporates and IPOs in the market. Since mandatory NS Bond purchase requirements relate not to profits, but to Revenues and SESH Bond performance, firms have an incentive to privately maximize profits for any given revenues, or, market capitalization. Corporates,whether listed in the capital market, or otherwise, would necessarily subscribe to fresh issues of NS Bonds annually. Those purchases would relate to SESH Bond NAV, and Corporate Revenue as in (1):
Social Security Sandwich Tax rate, st= [pt(1-pt)] * [1-(pt(1-pt))] (1b)
Social Security Budget, SSBt, = st*∑iCBi,t (1c)
Government Bond Receipts, GBtNet= (1-st)*∑iCBi,t (1d)
Government Budget, GBtNet= BInternal, t+ BExternal, t= pt.GBNet + (1-pt). GBNet (1e)
Expressions (1a) to (1e) constitute a set of simultaneously-determined shares and functions that specify the mandatory annual NS Bond purchases by any Corporate, and how the aggregate of those purchases by Corporates are apportioned across Social Security, internal socio-economic, and external (defence) sectors to obtain the Government Budget, GBNet,post allocation of the Social Security annual Budget, SSB. (1a) suggests mandatory Bond purchase by a firm, CBit, representing a combination of social and externality payments, would increment with its revenues, CORPREVit, but shrink with superior performance of publicly-subscribed SESH Bonds10in which the Corporates are, de facto, OC-OB-OE members. Social Security tax rate, s,is determined by how balanced, or unbalanced the allocations, p and 1-p, are tointernal and external budgets11, BInternaland BExternal– the SSA incentivized to seek and ensure a balanced allocation between internal and external budgets.
Consider next, the aggregate supply of, and demand for NS Bonds. Per (1d), Government supply of NS Bonds could be expressed as:
NSBondst(STIMULUSt, SUBSDt, DFNCt, SESHNAVt-1)
That is, the supply of NS Bonds would increment with the size of its policy stimulus, STIMULUS, the size of SSA Subsidies, SUBSD, its Defence commitments, DFNC, and indeed the NAV of SESH Cause Bonds. Conversely, the demand for NS Bonds from Businesses would enlarge with aggregate corporate revenues, CORPREV, increment with market average price to earnings growth ratio,MRKTPEG12, butdecrement with SESH NAV. Additionally, the demand for NS Bonds for conversion to IPO Capital, IPODMND, too would matter:
NSBonddt= g{ΣiNSBonddit (CORPREVit-1, SESHNAVt-1, MRKTPEGt-1),IPODMNDt}
Whereas the Government may choose to expand its supply of NS Bonds to accommodate its Non-SESH budget and policy-stimulus, and participate in the SESH Cause, Businesses would reveal a demand determined, beyond mandatory cognizance of CORPREV and SESH NAV, by the market-average Price to Earnings Growth ratio of listed firms, and the demand for convertible Bonds, IPODMND, from public equity issue plans of IPO candidate firms. The equilibration of supply and aggregate demand obtains a monopsony-clearing price for the Government-issued NS Bonds, P*NSB. Fig 1 indicates how supply and demand for NS Bonds obtain an auction-determined price in the primary market, and an internal price in the secondary market. The upward-sloping Primary market supply curve shifts to the right with higher SESH scores, and obtains lower prices for businesses required to purchase NS Bonds. Conversely, Corporates display a near vertical demand for NS Bonds in the short-run. That demand shifts to the left with SESH enhancements, but to the right with incremental IPO Demand.
Fig 1
In the secondary market, firms that bought NS Bonds in the primary market, would choose between holding them as Social Capital, incrementing their Equity Capital by converting NS Bonds over to Equities in private rights issues, or choose to sell them to IPOs that seek NS Bonds to convert in to IPO Public Equity Capital13. These choices imply prices might vary, both, in the primary and secondary markets, and that prices in the secondary market could be at a discount or a premium to that in the primary market14.
Revenues from mandatory purchase of NS Bonds by Corporates would favor the Government15, net of a ‘Social Security Budget’ computed at a ‘Sandwich Tax rate’, ‘s’; the rate determined by the intended allocation of net NS Bond proceeds to internal SESH-Socio-economic and external defence expenditures. Given this design, the Government would scale back, or eliminate Corporate taxes, transfer its social obligations to the Social Security Administrator, SESH programs to a SESH Cause Bond, and apply the net proceeds from NS Bonds to operate mandatory citizen services, external defence obligations, and politically-managed, internal priorities.
Corporates (and IPOs), on the other hand, free of a tax-lien on their profits, and by design, denied conventional routes to raise incremental equity capital, must hold and convert as much NS Bonds as they seek to issue in fresh equity. They may additionally purchase NS Bonds of various vintages from within the group of Corporate firms at various prices from the secondary market. These NS Bonds, bought at various premiums and discounts, from various sellers, would nonetheless be convertible to Equity of the purchasing firm at the face value at any time within the political term of the Government. Startups and IPOs, with or without a revenue stream, would lean either on their sponsors, or IPO participants to raise the resources necessary to buy NS Bonds, and claim the social pareto and other real keys imbued in them. Trading in equity-convertible NS Bonds in the secondary market amongst Corporates would ensure marginal efficiency in the incremental issue of Nominal Equity. Firms with the highest profitability and prospects, and which would obtain a high price on their fresh issue of equity, would be willing to pay a higher price for NS Bonds than other firms with lesser prospects.
Given the continuing attenuation of nominal externalities under a SESH Cause Bond, and an upper ceiling on NS Bond sales represented by the size of the Budget that year, such bidding could raise the traded price of NS Bonds in the secondary market, and even obtain a positive return for those short. Should the size of incremental Equity issue permissible in any year, t, be limited to GBNet + SSB – the gross Government (+SSA) Budget for the year16- a premium on traded NS Bond prices in the secondary market would imply the size of the Government is small relative the demand for incremental expansion of equity base; conversely, a discount on NS Bonds could imply an over-supply of NS Bonds relative secondary market demand, suggesting a Government larger than the optimal size. This criterion, by linking annual societal budget to the incremental expansion of equity base17in the nominal market, readily obtains an optimum size of the Government as that budget size that holds NS Bond prices at face value in the secondary market – implying demand for conversion of NS Bonds to Equity in the secondary market is matched by the Government’s issue of NS Bonds. A relaxation of the condition, obtained by relaxing the vintage of traded Bonds to any year within the political term of the Government18, would dilute any such assertion.
Conformity with a Keynesian Stimulus
Now, consider a scenario in which a political-government elected post lobbying and ‘democratic’ elections, placates its patrons with a Keynesian fiscal intervention-stimulus. The intervention-stimulus, sought by the less-efficient, less-sustainable, (open-cycle)sections of Business, enlarges the Government’s fiscal budget to stimulate sectoral activity, kick starts the Equity market, but, predictably, shrinks SESH Bond NAV. The expanded budget induces a steep rise in NS Bond prices which rise to reflect the expanded fiscal demands of the stimulus, and anticipated SESH underperformance. Simultaneously, Corporates choose to hold back IPOs(?) that might accompany the stimulus, lest they be saddled with significantly larger Bond payouts associated with a full-fledged, SESH-unsustainable Bull.
Possessed of an ‘FMP Equity Short Hedge key’, and a ‘Bullion Equity Long Hedge19’ - strategic keys issued by the two constituencies externally to their operations - the SESH Bond Administrator combines the two into a Short-ZS-Long Hedge in the Equity market. Whereas the former is placed to trigger equity-buying opportunities for Private FMPs from exacerbating volatility on the downside, the latter permits the Bond Administrator to skim Equity gains over a longer period in return for a variable share of those winnings, a share of which feeds SESH Bonds, funds its activities and increments its NAV. In return, the SESH Bond Administrator forwards non-PV keys (‘Public FV-OC-Pareto Appreciation’ keys, or ‘Public OE-ZS-Bakey PV Volatility’ keys) to the Equity markets either through a special class of ‘Privilege Bonds’, or through the Bond’s FV Gold Collateral20, thus ‘sponsoring’ equity market appreciation, or tolerating its volatility. The design permits a coordinated strategy between FMPs, Bullion and SESH Bonds, that is mutually beneficial, and which feeds, volatilizes, and cuts Equity markets – the elimination of Corporate tax and SESH Public Non-PV keys feeding Equities, the Short-ZS-Long Hedge obtaining Volatility for FMPs, and the Winnings garnering funds for SESH Bond activities, thus and potentially inflating Bullion Gold only to the extent SESH resolutions are inefficient, or delayed. Concomitantly, those Corporates with an alpha return in the Equity market would choose to enlarge their market share by expanding their equity bases. Such firms would exhaust their primary purchases of NS Bonds from the Government, even as they bid up the traded price of such bonds in the secondary NS Bond market against prospective IPOs to accumulate them incrementally toward the issue of a new tranche of Equities. The design permits the Government to sustainably stimulate the economy, assured of concomitant market-supported, and market-supporting SESH enhancements, and an equitable, efficient re-organization of nominal capital.
A Bull’s Eye Outcome!
The design, though reliant on an independently-administered SESH Bond, obtains a pareto middle-ground in which the Government administers the nation’s economy, and the SSA social securityand subsidies, while Businesses, freed of a profit-proportional Corporate tax trade NS Bonds to enhance the efficiency of expansion of the nominal paradigm of which they are members. Itconcomitantly reforms Corporate taxation, proposes an alternate, market-based, rent-uncorrelated instrumentfor the Government to raise its revenues, even as it offers a pareto and efficient mechanism for the operation of Businesses and Nominal Capital markets to attain their respective objectives. The proposed 2-stage Primary-Secondary NS Bond-IPO dual-market enhances the efficiency of capital formation and allocation in the market. The proposal shrinks the real and nominal inefficiencies associated with taxation of Real-immeserizing Nominal activity21while reducing Corporate hold on Government programs obtained through lobbying and political negotiations around taxes and the annual budget-fiscal bill. Simultaneously, the Government, assured of revenues, and freed of SESH responsibilities, would be less susceptible to regulatory- and fiscal-capture, and be free to allocate resources in accordance with its political perspective. The independent, and public operation of a SESH Bond obtains comprehensive internalization of nominal externalities by long-optimization around its multi-tiered formulaic NAV, and attenuates political and corporate interventions to subvert it, thus averting regulatory capture. Further, the bundled grant of 100% Convertibility contingent upon the offer of an ‘Employment FV’ attenuates the social capture that the nominal paradigm forces upon households and the society22. Together, the above strategies obtain concomitant, FV-conducive, pareto SESH, economic and financial outcomes that obtain gains in both real equity, and nominal efficiency. The simultaneous attenuation of regulatory-, social-, and fiscal capture from the implementation of the proposed strategy enhances the efficiency of governance as well, and permits a larger society for it.
Caveats
A grandiose scheme that envisages, in the limit, the potential elimination of Corporate taxes will necessary create a tsunami of a disturbance in various accounting, economic, legal, environmental and financial circles. Adopting the proposal could imperil a myriad Government and Business agreements, multi-lateral international (environmental) agreements, even tax-associated careers and software businesses. It’d be imprudent to suggest a hasty, unplanned adoption of the proposal. Rather, the proposal would undergo scrutiny for its design, feasibility and outcomes, be re-cast on a larger scale and with greater detail, and considered toward adoption post a transition period shouldthe benefits of moving to the proposed system outweigh the disruption it might cause.
1 In the particular case of firms operating in natural resources, there are many pertinent issues beyond the corporate tax, that center around the development of natural resource endowments whose optimal exploitation is reposed with the government formed of elected representatives of the people. These concern, to name a few, the timing of exploration and development, the public or private nature of the resource-exploiting firm, environmental standards while in operation, and financial guarantees to resolve end-of-life externalities and obligations.
2 that support a dividend-yield section of the capital market
3 The EO Subsidy PV obtains when the Bonds are redeemed optionally, not by the issuer, but as a last resort, by the Social Security Administrator for its imbued FV keys that could be monetized in its various market and non-market investments.
4 Armament Efficiency FV refers the Efficiency FV imbued in all technologies adopted by the Armament constituency (and the IPR protected by the nation’s defenses). Armament FV is typically transferred to Equity Capital (toward a CC Economy).
5 As revealed in data on projected employment in pre-IPO submissions. Such issue of contingent FV is justified in the context of what an IPO implies – a permanent and real-immeserizing scission from the society to permit which the SEC/SEBI would seek a just social return (in the form of an Employment FV, or, other equivalents).
6 Bonds, strictly speaking, are variable-term interest-bearing instruments with an optional coupon, that are traded against their yield and default expectations. The NS Bonds broached here, are more in the form of no-coupon, no-interest ‘Real Notes’ that can nonetheless be traded like other debt securities. These Real Notes differ from conventional Sovereign bonds in the absence of a Coupon rate, and in their imbued ‘real’ keys; its issuer does not redeem the instrument because he does not ‘borrow’ in the conventional sense – the Bond proceeds representing the social cost of nominal existence - and has offered an equal payoff in FV for the PV proceeds by permitting trading, convertibility, and external redemption in the instrument. Indeed, these Real notes need not be redeemed, they could be eventually converted either as incremental issue of equity at listed business, or as fresh equity in IPOs. The imbued keys suggest that the Bond seeks a democratic, equitable, pareto, and efficient socio-economy.
7 By way of rights issues
8 There is an implicit presumption of the irreversibility of SESHNAV gains. Significant dilutions to NS Bond capital with incremental issues could, however, shrink SESH Bond NAV artificially. Such possibilities would occur should the Government choose to offer NS Bonds at a discount.
9 Economic Value Added, EVA, is a potential measure that abstracts externalities engendered at an earlier stages of production. Firm Capitalization is another publicly-available measure upon which to calibrate Bond purchases. However, Firm Capitalization suffers from widely-different growth expectations imbued in to the stock price, for which reason, one instead prefers ‘Revenue‘. The projected average PE of, and EPS growth imbued in Corporate Equities would, however, invite the cognizance of the SESH Bond Administrator for the environmental implications of those growth expectations.
10 SESH Bonds could be constituted of ‘Sov. Real Sustainability Cause-Nominal OC-RoW OB OpCy OE’ monies. The implication is that the Political Government would participate in SESH Cause Bond as a Cause Entity, the CC Business execute its programs as an OC, while the SSA (and RoW OpCy Business) would constitute the OB-OE.
11 Note the label ‘internal’ and ‘external’ is subjective, and may be flexibly re-interpreted as appropriate to the context.
12 An enlargement of the MRKTPEG multiple implies Equity prices have incremented beyond the baseline appropriate to the adaptive expectation around the firm’s earnings growth; a high MRKTPEG represents opportunities to enlarge the equity base of the firm and expand its market share.
13The design is particularly compatible with the ‘Green shoe option’, exercised by IPO issuers, who may exploit discounts in the secondary market to load up on NS Bonds convertible to incremental IPO equity.
14The scale of aggregate NS Bonds receipts relative the demand for fresh issue of equities would find its influence in (1a) where it’d determine the coefficients of the expression.
15 The government could, conceivably, hold the proceeds from issue of NS Bond (Real Notes) and apply them to Government Spending in a different year within its political term.
16 and an indication of the size of the society it supports in lieu of permitting firms to operate within
17 Defined as the sum of aggregate of equity issued through IPOs, and value of incremental issue of equity at listed, traded firms in a particular year.
18 The declining tenure of NS Bonds issued across years by a Political Government with a specific term, implies, that there might be a political term effect in the IPO market wherein the untraded NS bonds from the entire political term might be bought away at term end at a discount, and converted over to equity in a large term-end IPO.
19 With, respectively, a ‘Private OE-ZS-Bakey Volatility PV’ and a ‘Private Pareto-OC-FV Appreciate’ - the former permitting Privates to execute ‘Entry-Invest’ in the lagged opposite of the ‘Exit-Switch-Arbitrage’ by the Public SESH Bond.
20 For details on how Cause Bonds would be conceptualized and administered, see ‘A Bonded River Basin? The Cauvery Colavery: A River Basin Cause Bond !’ at gprao64.blogspot.com.
22 The SSA, issuer of the contingent ‘Employment FV’, could optionally and at variable discount to face value, buyback NS Bonds albeit toward a ‘ZS PV Redux FV’ that obtains NS Bond holders their discounted PV, and the SSA a ‘Bond/IPO Bakey Bull FV’ – one that it could monetize against Corporate wrongs in to a ‘Bakey Bear 2’.
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