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SUMMARY:
Batchelder and Kamin argue the United States must raise new revenue in order to reduce high levels of economic disparity, finance much-needed new services and investments, and address the nation’s long-term fiscal needs. They present a range of options that would raise tax revenue and increase the progressivity of the federal tax system. Policymakers can pursue a combination of incremental changes to increase revenues through the current tax system along with new tax structures to generate new revenue.

Both incremental reform and new tax structures require policymakers to acknowledge that the wealthiest Americans earn income and accrue wealth in fundamentally different ways than the rest of the country. A greater composition of income is derived from capital gains, dividends, and income flowing through business entities. Further, the actual share of income that those at the top derive from capital gains and business income may be substantially higher because individuals can defer paying tax, such as through unrealized gains on capital, or even eliminate the tax on it entirely, such as through a “step-up” in basis, which allows unrealized assets to pass between generations without being taxed.

 

KEY POINTS:
As shown in the table below, Batchelder and Kamin identify incremental changes to current policy that, taken together, could generate up to $4.9 trillion in new revenues over ten years (2021-2030).

The authors also explore four structural changes that could increase revenues from the wealthy. Their paper features a robust discussion of the pros and cons of each approach, some of which are briefly highlighted below.

1. Increasing top tax rates on labor and other ordinary income. Raising the top tax rates on labor income for wealthy Americans would be well targeted to those who are well-off. However, doing so would not apply to the large share of capital income that comprises a larger proportion of wealthier Americans’ income. It would also increase the incentives for wealthy to recharacterize labor and ordinary income as one of the other lower-taxed categories of income.

2. Introducing a mark-to-market regime in which accrued gains (including unrealized gains) are taxed as they arise at ordinary rates. This approach, which has been proposed by Senator Ron Wyden (D-OR) and 2020 presidential candidate and Senator Elizabeth Warren (D-MA), would raise a large amount of revenue and would broaden the tax base to raise more revenue from capital income. However, there are significant administrative and compliance hurdles involved in taxing all assets on an accrued basis. Moreover, the tax would be less precisely targeted to the wealthy compared to a wealth tax.

3. Instituting a wealth tax on high-net-worth individuals. A wealth tax would raise a large amount of money almost exclusively from wealthy Americans by imposing an annual tax on assets held by wealthy individuals over certain wealth thresholds (e.g. assets over $50 million). Relative to raising ordinary rates on the wealthy or imposing a Financial Transactions Tax, it would lessen deferral and lock-in incentives. However, a wealth tax would impose a greater effective burden on the “normal” return to capital and less on rents. It would also encounter administrative and compliance hurdles, albeit less so relative to an accrual tax. In the U.S., a wealth tax could also be struck down as unconstitutional on the basis that it is a direct tax.

4. Creating a financial transactions tax (FTT). An FTT would be a tax applied to the sale of financial assets. Unlike a tax on capital gains, it is imposed on the full value of the asset at the time of sale and is restricted to financial assets. Such an approach avoids the valuation challenges of accrual and wealth taxes and avoids constitutional risk since there is well-established legal precedence to taxing transactions (e.g. sales taxes). An FTT could affect the trading volume to the extent that it would reduce liquidity, increase market volatility, and inhibit price discovery. Designing an FTT would also entail several serious challenges related to preserving liquidity, preventing price surges on certain products due to cascading effects, and addressing key avoidance techniques.

 

AUTHOR RECOMMENDATIONS:
The authors conclude that all four structural changes merit serious consideration and that several of the approaches would be complementary to one another. In practice, however, the relative strengths of each of these policies will depend to a large extent on how each is designed after it has made its way through the legislative and regulatory process.

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SUMMARY:
Recent wealth tax proposals put forward by Democratic presidential candidates Senator Elizabeth Warren and Senator Bernie Sanders would impose an annual tax on the net worth of the wealthiest Americans. The proposed wealth tax rates are in the range of 2 to 8 percent per year. Although those tax rates might appear low, they are equivalent to high income tax rates because they are levied on an annual basis on a stock of wealth. Several European countries adopted wealth taxes, but many later repealed them due to administrative and compliance challenges, disappointing revenue yields, and emigration.

Viard argues that a wealth tax in the U.S. would pose administrative and constitutional challenges. As an economic matter, such a tax would decrease savings and investment, thereby lowering the capital stock, making workers less productive, and slowing wage growth. The potential revenue that would be gained is unclear. To the extent that policymakers wish to increase the progressivity of the tax code, many reforms could be made to the existing tax system, including eliminating provisions in the current tax code that allow unrealized capital gains to escape taxation.

 

KEY POINTS:
Interpreting Wealth Tax Rates
Although wealth tax rates of 6% or 8% may appear to be low, that appearance is deceiving because the tax is levied annually. A useful way to interpret wealth tax rates is to translate them into equivalent income tax rates. For a taxpayer holding a long-term bond with a fixed interest rate of 3% per year, a 6% per year wealth tax is equivalent to a 200% income tax because the tax equals 200% of the taxpayer’s interest income. Similarly, an 8% per year wealth tax is equivalent to a 267% income tax.

Progressivity and Wealth Concentration
The distribution of wealth in the U.S. is widely believed to have become more concentrated in recent decades. Recent estimates suggest the top 1% of households own between 31 to 42% of wealth in the U.S. Both proposals would apply to a relatively small number of households: the Warren wealth tax would apply to 75,000 households while the Sanders wealth tax would apply to 180,000 households. The taxes would therefore be highly progressive, falling on households with high ability to pay.

Many supporters of wealth taxation argue that the reduction of wealth concentration is inherently beneficial or that wealth concentration places too much political power in the hands of a small group. Viard argues that these normative statements do not provide a convincing rationale for wealth taxation.

Treatment of Wealth Under the Income Tax
Increasing the progressivity of income taxes may only go so far in increasing the tax burden of the wealthy because much of the income that accrues to the wealthy is generated through the appreciation of capital assets. The income tax system generally does not impose tax on a capital gain until it is realized through the sale of an asset. That tax deferral reduces the owner’s tax burden because a dollar paid tomorrow is worth less than a dollar paid today.

Moreover, if the owner dies without selling the asset, nobody ever pays income tax on the unrealized gain that accrued during the owner’s lifetime. Under the income tax system’s basis step-up provision, the owner’s heirs are treated as if they purchased the asset at its market value on the date of the owner’s death, so they are taxed (if they ever sell the asset) only on any gains that accrued after the owner’s death. A wealth tax would overcome the limitations of an income tax by directly taxing the asset’s value.

Saving and Investment
A wealth tax is intended to reduce the wealth accumulation of the taxed households and would almost certainly do so. A reduction in the households’ wealth accumulation is, by definition, a reduction in their saving. Because the government is unlikely to save all of the revenue raised by the tax, total national savings would likely be reduced. The reduction in national saving would be financed by a reduction in investment in factories, equipment, and other capital in the United States, by capital inflows from abroad, or by a combination of both. Less investment in the country would lead to a smaller capital stock, making workers less productive and lowering their wages over time. Workers would then ultimately bear a small part of the burden of the wealth tax.

Breadth of Tax Base
Warren and Sanders propose a broad wealth tax base, which would be the most economically efficient approach. International experience suggests, however, that it would be difficult to adopt a wealth tax with a broad base. The wealth tax base would likely be eroded through exemptions, which the wealthy could lobby Congress to enact. The exemptions would directly reduce wealth tax revenue. They would also encourage taxpayers to inefficiently shift their holdings from taxed assets to exempt assets, further reducing the revenue yield.

Administration, Avoidance, and Evasion
Under an annual wealth tax, the fair market values of all assets and liabilities would need to be determined each year for all households with wealth that is potentially above the exemption amount. Although bank accounts and publicly traded financial assets would be straightforward to value, assets that are not publicly traded, such as land, houses, privately held businesses, artwork, and furniture, would be more difficult to value. Taxpayers could conservatively value or flatly undervalue assets. Taxpayers might also illegally conceal assets. Taxpayers might shift their holdings toward assets that are easier to undervalue or conceal, including foreign assets.

Revenue Yield
Estimates of the potential revenue raised from a wealth tax vary widely, depending on the assumptions made about evasion and avoidance activity, and the breadth of the tax base.

Constitutional Questions
A wealth tax would face challenges under the constitutional requirement that all “direct” federal taxes, other than income taxes, be apportioned among the states based on population. Apportionment would be unattractive because it would require lower tax rates in states with higher per-capita wealth in order to equalize per-capita tax liabilities across states.  Constitutional scholars disagree about whether a wealth tax is a direct tax that would have to be apportioned. Even if the apportionment requirement applied, it might be possible to sidestep it by modifying some features of the tax.

 

AUTHOR RECOMMENDATIONS:
In view of the difficulties that wealth taxes would face, it would be more prudent to pursue any desired increase in the taxation of affluent households through income tax changes, including changes to the taxation of capital gains. The basis step-up rule could be replaced by a basis carry-over rule, so that when heirs (or their heirs, and so on) sell an asset, they would pay income tax on all of the gains that have accrued since the asset was originally purchased, virtually guaranteeing that gains would eventually be taxed. A more dramatic step would be to adopt mark-to-market taxation for publicly traded assets, under which gains would be taxed each year as they accrued, even if the assets had not been sold. Gains on non-publicly-traded assets could be taxed when they were sold or when the owner died, with an interest charge to offset the advantages of the tax deferral. Gains could be taxed at ordinary income tax rates rather than the current preferential rates because the lock-in effect would be largely removed.

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SUMMARY:
There is growing concern that current US transfer and social welfare programs are ill-equipped to address widening income inequality, stagnant income growth, declining economic mobility, and the negative impact of automation. This has led to a renewed debate over the merits of a Universal Basic Income (UBI) program and its capacity to address these pressing issues.

Kearney and Mogstad argue that, in practice, a UBI would be an extremely expensive, inefficiently targeted, and potentially harmful policy that would solve none of the economic challenges it purports to address. First, a UBI that provided $10,000 a year to every American adult would cost more than half of the current annual federal budget. To fund such a program would require the crowd out of existing programs and potential investments. Second, since a UBI is not inherently designed to redistribute resources to the most needy individuals, moving from our current system to a UBI would redistribute resources away from those who are most likely to benefit from income support programs. And third, since a UBI lacks a direct mechanism to help workers learn new skills or broadly support the development of human capital in the U.S., it does not offer a long-term solution to the challenge of weakened employment prospects.

Kearney and Mogstad do not favor a UBI, but they do recommend improved and expanded government programs to expand economic opportunity and address income inequality. Specifically, they favor increased government funding for targeted investments that support families and workers, including early-childhood education, skills training, subsidized daycare and housing, and other initiatives.

 

KEY POINTS:

• The general premise of a UBI is to provide individuals with an unconditional income guarantee from the government regardless of personal circumstances or family income.
• A UBI is distinct from a NIT, or negative income tax, which would provide variable subsidies based on an individual’s current earnings to guarantee a minimum income level.
• Proponents of UBI offer a variety of motivations and arguments in support. Most proponents contend that the program could address rising income equality by offering a guaranteed level of income to all individuals. Some view UBI as an ideal tool insulate households from the impacts of globalization and technological innovation, including job loss. Others contend that a UBI would be more efficient than the existing complicated set of current transfer programs targeting different populations or types of need.
• Kearney and Mogstad argue that by purposefully spreading payments across the widest possible base – including (in many UBI proposals) middle- and upper-income individuals — the economically vulnerable would receive less support. As compared to existing programs, a UBI would transfer less to the elderly, disabled, and families with children and more to higher income able-bodied individuals. Even if UBI payments were phased out and capped for earners above a certain income, the program would still end up giving able-bodied working-age adults subsidies regardless of relative need.
• UBI’s are designed to not account for the elements of life that make families more or less in need of government support – such as having a child with a serious illness or a work-limiting disability oneself – and as such, would result in a highly inefficient allocation of resources.
• The authors argue that a UBI does nothing to address the root causes of declining employment and wages. Whereas a targeted wage subsidy would encourage work and increase take-home pay, a UBI would discourage labor supply and offers no direct assistance to less educated individuals grappling with the impact of automation.

 

AUTHOR RECOMMENDATIONS:

• The federal government should pursue a pro-work, pro-skills strategy of income support that includes wage subsidies to low-wage workers, as well as providing cash and near-cash benefits targeted to the neediest individuals and households with barriers to work.
• Wage subsidies like the Earned Income Tax Credit, which raise household income and are an effective tool to encourage labor force participation, should potentially be expanded.
• Policymakers should work to improve existing cash and near-cash programs to make them administratively less cumbersome. While there are legitimate criticisms of such programs, many existing programs are appropriately targeted to households in need of economic assistance, which in turn reduces the likelihood of wasteful spending.
• Direct more resources towards subsidized childcare and daycare, institutions of learning and training, and other programs that help people invest in their own human capital and advance they employment opportunities.

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SUMMARY:
Policymakers and political candidates are expressing renewed interest in expanding the role of government in increasing access to and affordability of health care for all Americans. The most prominent proposal, Medicare For All, is supported in some form and under varying definitions by the majority of 2020 Democratic presidential candidates, and would create a single-payer healthcare system funded by the U.S. federal government.

Garthwaite argues that the current public debate about Medicare For All fails to take into account the likely consequences that such a large change to the health-care system would bring about. For example, if such a system adopted the existing Medicare price schedule, the average quality of health services would likely decline. A single-payer system would, by definition, make the U.S. government a monopsonist in the health-care labor market, allowing it the option to exert downward pressure on wages which could impact the availability of healthcare services and the supply of labor. In the market for prescription drugs, a U.S. single-payer could exert its buying power to lower drug prices but doing so would likely reduce innovation in that sector and reduce access to treatments.

Garthwaite also discusses alternative policy reforms that could promote affordability and access in the current U.S. health-care system, centered around introducing more competition to healthcare markets and making Medicare more efficient.

 

KEY POINTS:

• High health-care costs remain a barrier to universal coverage, with roughly 10% of Americans still uninsured. Medicare For All would reduce costs by reducing administrative costs and expanding price regulation.
• Medicare For All would only successfully reduce drug prices if it reduced treatment options for enrollees. Monopsony power exists when a buyer has the option of “walking away” from a negotiation – Medicare Part B, which is required to buy nearly all drugs needed by enrollees, does not have this option.
• Medicare For All would likely remove incentives for hospitals to invest in improving the quality of their care. Currently, a significant driver of a hospital’s incentive to invest in better care is driven by the competition motive – consumers will go to the hospital with the best care, allowing that hospital to negotiate a better deal with insurers. Medicare, on the other hand, pays hospitals based on an estimate of the costs of the average hospital. Replacing the competition motive would therefore lead to substantial decreases in quality of care.
• 60% of US health care spending goes to labor costs. Any meaningful effort to reduce costs would likely rely on reducing health workers’ wages, which would impact the supply of workers in health-care industry.
• The establishment of price ceilings for drugs would reduce prices for treatments that currently exist while removing the incentive for pharmaceutical manufacturers to invest in researching new treatments. Pharmaceutical markets are global, and manufacturers often undergo the massive upfront investment required to research a new drug because of expected returns from US sales. Because the United States accounts for a larger share of the global market, its pricing decisions have far more influence on the pace of development of future products.

 

AUTHOR RECOMMENDATIONS:
There are various means by which competition can be introduced to healthcare markets to bring down costs without sacrificing quality of care.

• There are multiple avenues available to introduce competition to healthcare markets. These include granting generics manufacturers full access to samples of brand-name drugs once the patent protection period has ended. In markets that are too small for more than one competitor, a request-for-proposal (RFP) process should be implemented, with manufacturers charging a fixed percentage above manufacturing costs.
• Medicare can and should be reformed to introduce competition and eliminate perverse incentives. Medicare Part B, for example, should use vendors to negotiate drug prices, rather than paying doctors a fixed margin above the price of the drug they prescribe. The reinsurance program of Medicare Part D, meanwhile, should be reformed so that private insurance companies – and not Medicare – are responsible for covering the majority of “catastrophic coverage” treatments. Such reforms, among others, would likely increase incentives to negotiate prices, increase competitive pressures, and decrease health care costs.

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SUMMARY:
US productivity growth—the engine of long-run wage growth—has been lackluster for the past decade. Meanwhile, US public investment in research and development (R&D), is near historic lows. Although private sector R&D investment has increased over time private sector funding is insufficient to bring about desired gains in productivity growth and wages.

Van Reenen argues the U.S. should pursue a robust innovation policy composed of tax credits, direct subsidies, and human capital investments, which have been shown to spur innovation and wage growth. He proposes combining these approaches into a 10-year $1 trillion Grand Innovation Challenge, which would reinvigorate R&D investment, promote American technological leadership, and advance policy goals of inclusive growth. Van Reenen also recommends against policies that give preferential tax treatment for corporate revenues derived from patents (patent boxes), lower individual income taxes, and support trade protectionism, which are strategies that have thus far failed to promote innovation.

 

KEY POINTS:

• Across the public sector in the U.S., federal spending on R&D has fallen from 2% to 0.7% of economic output. This is counterproductive in the long-run, since public R&D investment substantially raises productivity growth and wages.
• Heightened productivity growth can actually exacerbate inequality if innovation initiatives and more technological change only increase demand for highly skilled workers. This highlights the need for government to have complementary policies to ensure that the fruits of higher growth are shared equitably.
• There is a strong case for public investment in basic research and development. R&D initiatives often generate significantly more social, macroeconomic, and environmental benefits for the public than just direct financial benefits to the investor. A high percentage of government R&D often goes to universities, research grants, and basic R&D, which has been proven to have a positive casual effect on innovation outcomes.
• The preferential treatment of corporate revenues derived from patents, or patent boxes, often fails to impact the quantity or location of R&D spending and innovation. Another strategy – lowering individual tax rates – is likely to be ineffective in materially increasing the number of U.S. inventors. There is also no clear correlation to heightened innovation and trade protectionism; if anything, reducing global competition reduces the incentive to innovate.

 

AUTHOR RECOMMENDATIONS:
Van Reenen argues that there are three broad classes of policies — tax incentives, direct government grants, and investments in skilled human capital — where large-scale investment would generate significant productivity and growth benefits. As evidenced by initiatives like DARPA, which helped successfully develop the internet, bundling these types of programs into a broader, mission-driven industrial policy could prove to be especially potent innovation strategy. The following policy recommendations generate a mix of short-term and long-run benefits.

• Tax Incentives: R&D tax credits, which can reduce the cost of investment, can boost overall spending. It’s estimated that a 10% fall in the cost of R&D leads to at least a 10% increase in R&D spending in the long run. This suggests that taxpayers get a big bang for their buck on R&D. Patenting, productivity, and jobs all also seem to increase following tax changes.
• Direct Government Grants: Public R&D spending, when administered properly, can also encourage influence private firms to allocate more funds to R&D than they otherwise would. The National Institutes of Health, military R&D spending, and the Small Business Innovation Research program are all strong examples of initiatives where public funds have crowded in additional corporate investment.
• Investments In Skilled Human Capital: By increasing the supply of quantity and quality of inventors, which in turn reduces the “cost” of R&D workers, can increase the directly or indirectly increase the volume of innovation. There are a wide range of policy tools that could be employed to increase human capital. This includes everything from more investments in STEM education, increases in skilled immigration, and reducing barriers to academic success in disadvantaged communities.

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SUMMARY:
The U.S. budget trajectory is in uncharted territory. The country faces a structural deficit, accrued the largest increase in debt on record during the current economic recovery, and is expected to surpass its WWII-era debt-to-GDP record of 106 percent within the next 30 years.

Gale argues that although historically low interest rates reduce the cost of government borrowing, they are not­ a “get out of jail free card.” Rising debt will slowly but surely make it harder to grow the economy, boost living standards, respond to wars or recessions, address social needs, and maintain the nation’s role as a global leader.

Gale argues that policymakers should enact a debt reduction plan that is gradually implemented over the medium- and long-term. This would avoid reducing aggregate demand significantly in the short-term and, if done well, could actually stimulate current consumption and production. Doing so would also stimulate growth in the long-term, provide fiscal insurance against higher interest rates or other adverse outcomes, give businesses and individuals clarity about future policy and time to adjust, and provide policymakers with assurance that they could consider new initiatives within a framework of sustainable fiscal policy. In the short-term, policymakers should increase spending on infrastructure, R&D, children, families, and human capital. He also argues that the federal government should implement consumption- and carbon-based taxes to raise more revenue.

 

KEY FINDINGS:

• The U.S. budget trajectory is in uncharted territory. There has never before been a projected permanent imbalance between spending and taxes.
• If interest rates rise to a more historically consistent level in the next 30 years (while still remaining below the economic growth rate) the national debt will rise from the current 78% to 169% of GDP by 2049, or about 49 percentage points higher than the maximum U.S. debt level reached in World War Two.
• The U.S. faces two intertwined problems: The rising, long-term debt profile and the way we tax and spend. Government spending is too oriented toward consumption relative to investment, the latter broadly defined to include human capital. Moreover, as payments towards health care, social security, and interest liabilities pile up, spending in other areas will fall relative to GDP.
• The economy is more important than the budget. With current low interest rates, low inflation, and concerns about weak growth even amidst remarkably accommodative monetary and fiscal policy, it would be prudent to make any fiscal adjustments gradually.
• Although interest rates are low, the size of the debt will cause interest payments to take up ever-larger shares of the federal budget. Over 100% of new federal spending is expected to go to three areas: social security, health care, and interest payments.

 

AUTHOR RECOMMENDATIONS:

• Policymakers should not try to reduce the short-term deficit. The long-term projection is the problem. Cutting current deficits would likely reduce aggregate demand, a change that monetary policy may be hard-pressed to offset, given low interest rates.
• In the near-term, policymakers should not enact deficit-financed spending for non-investment programs, though they should embrace a broad definition of what constitutes an investment, to include programs that make people more productive by providing childcare, job training, and related items.
• Policymakers should initiate substantial new investment programs in infrastructure and research and development (1% of GDP) and in children, families, and human capital (another 1% of GDP).
• Enacting a consumption tax (value-added tax) whose rates rose gradually over time would stimulate current consumption as customers spent more today to avoid higher future prices. Likewise, introducing a carbon tax with rates that rise over time could stimulate current production, as producers choose to use more fossil fuels now while they are still relatively inexpensive.
• In the long-term, policymakers must enact a debt-reduction plan that is gradually phased in. This will allow time for businesses, investors, and citizens to adjust their plans and would reduce political backlash.

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SUMMARY:
A number of studies in recent years have fueled policymakers’ concerns over rising market concentration and the state of competition in US industry. However, determining the relationship between market concentration and other key economic outcomes­—such as markups, profit rates, labor share, and the state of competition more broadly—is fraught with empirical challenges. The state of evidence is actually much less clear than some popular commentary would suggest.

Rose argues that highly aggregated measures of concentration across industries, which are used in many of the most provocative studies, cannot be used to draw conclusions about concentration dynamics due to a host of methodological challenges. Instead, industry-level studies are necessary to accurately assess causal relationships. These more appropriately modeled studies generally find no direct relationship between changes in concentration measures and changes in market competitiveness or performance. Despite the rise in aggregate concentration measures, Rose argues that all sectors remain well below market structure thresholds in the DOJ and FTC’s enforcement guidelines. Moreover, rising national concentration is not mirrored at more local levels, where measures of concentration have been declining over time. Still, Rose believes there is room for improving competition policy, as many instances of anti-competitive behavior have gone unchecked by the courts and merger enforcement has been weakened over time.

 

KEY POINTS:

• The concentration of revenues among the largest firms within broad industry categories have increased over the past 20 to 40 years. Average markups (the difference between price and marginal cost) appear to have increased over time.
• However, Rose is cautious about the interpretation of these measured trends given their inconsistency with other macroeconomic data. It is also unclear what higher markups imply about the state of competition, as a rise in markups could be the result of more efficient firms lowering their marginal costs. Higher markups could also reflect increased economic rents.
• Measurement of concentration in the labor market is also fraught with ambiguity. Though most studies report a negative correlation between measures of labor market concentration and workers’ wages, they shed little light on the underlying reasons why wages are inversely related to employer concentration.
• Antitrust and merger enforcement has become less vigorous in recent decades. The burden of proof has become higher for plaintiffs across a range of anticompetitive behaviors. Courts also show a greater tolerance of behaviors that were once considered potentially illegal, such as predatory pricing, vertical restraints, and most favored nations clauses. Merger enforcement has become weaker, due in part to an increase the market structure thresholds used by enforcement agencies over time.
• Department of Justice Antitrust resources have also become increasingly strained. Rose argues that the lack of available resources has created a regulatory environment in which problematic anticompetitive conduct is rarely enforced against.

 

AUTHOR RECOMMENDATIONS:

• The U.S. government has likely retreated too far from its role to ensure open, fair, and competitive markets. Rebalancing competition law to invigorate enforcement will require a combination of agency action and legislative intervention.
• Increase the Department of Justice Antitrust Division and the Federal Trade Commission budgets to address the stagnant resources enforcers have had to work with amid an increase in both the number and scale of merger activity.
• Promote a culture of interactions between agency economists and academic researchers to develop new theories and tools for enforcement. Additionally, encourage academic research to educate and validate these new conclusions for enforcers and the courts.
• Embrace new economic models and understandings of competitive dynamics more quickly. Doing so could require taking on cases that incur more litigation risk, but it will likely increase the potential for protecting competition policy.
• The DOJ and FTC should adopt lower concentration thresholds to determine whether a merger challenge should be pursued.
• Consider settling fewer problematic mergers The legal system’s bias towards settlement (as opposed to litigation) often benefits firms, who can leverage asymmetrical information to gain the upper hand in the negotiating process with the DOJ and FTC.
• Update guidelines for vertical mergers. The 1984 Non-Horizontal Merger Guidelines are out of date with current economic understanding of vertical mergers and potential exclusionary behavior, and thus provide little helpful guidance to agency staff or the courts.
• Develop tougher standards against market efficiency defenses. There is little economic evidence to support ex-post efficiency gains from most mergers. Agencies should clarify and toughen the standards how efficiencies are used to defend an otherwise anticompetitive merger.
• Timely progress will require legislation that re-establishes Congressional intent to enforce against a range of anticompetitive behaviors.
• There is ample evidence that regulation as a remedy may be worse than the disease. If regulation is desired as a policy response to unavoidable market power in the digital sector, the most promising direction is likely to be interventions focused on creating interoperability and data portability that facilitate entry and competition.

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SUMMARY:
Measures of market concentration in many U.S. industries have been rising for nearly four decades. Since the early 2000s, these trends have coincided with a falling labor share of income, declining private investment, and rising corporate profit rates and markups (the difference between price and marginal cost). Philippon argues these patterns are unique to the United States; in Europe and Asia, profits, aggregate measures of concentration, and labor share of income have been stable over time. 

Philippon acknowledges that increasing market concentration does not necessarily signal trouble for competitive markets. When producers in competitive markets drive down profit margins and out-compete inefficient rivals, market concentration will rise and will likely correspond to lower prices and higher productivity growth. However, market concentration can also increase when competition is being inhibited by lax antitrust enforcement or incumbent firm’s successful attempts to prevent challengers from entering the market. In this scenario, weakened competition would lead to growing market concentration, which would coincide with lower productivity growth and higher prices.

Philippon asserts that growth in aggregate measures of market concentration since the early 2000s is largely attributable to the weakening of competition. Lower levels of competition, Philippon argues, are directly due to lax antitrust enforcement and barriers to market entry. The likelihood of a market leader losing its superior position has fallen by 15 percentage points since the mid-1990s, lending support to Philippon’s argument that the market power of industry leaders has strengthened over this period.

 

KEY POINTS:

• Airlines and telecoms industries in the U.S. have become less competitive. Markups and concentration have risen in both sectors, and prices remain much higher relative to Europe, where competition policy is more robust. For example, the average monthly cost of fixed broadband was nearly twice as expensive in the U.S. ($68) compared to Europe, where costs ranged from $30 to $40 in most countries.
• Burdensome regulation is harming economic dynamism. As regulation becomes more stringent, firm start-ups in the U.S fall. This trend corresponds with the notion that market leaders are preventing competitors from entering the market.
• Counting only domestic firms in measures of market concentration can be misleading if those firms are exposed to foreign competition. However, after adjusting for trade, industries have still become more concentrated.
• The rise of intangible capital does not explain all of the decline in capital investment since 2000. Investment has been weak across all asset classes and intangible expenditures have increased across all advanced economies. However, profits have only increased in the U.S.

 

AUTHOR RECOMMENDATIONS:

• Reverse anticompetitive regulations at the state and federal level. For example, roll back occupational licensing or making licensing requirements transferable across states.
• Reinvigorate antitrust enforcement to promote competition, especially in the airlines and telecoms sector. Half of American households have only one internet provider option, while the other half have an average of only two. Antitrust enforcement should also block new mergers in this space.
• Across digital platforms, promote interoperability and data portability by allowing the exchange of information across platforms and enabling users to move their data across platforms.

A national debate about the strength and fairness of American capitalism is taking place against a backdrop of vast levels of income and wealth inequality, growing pessimism about the state of economic opportunity and mobility, increased market concentration in many sectors, and a precarious fiscal situation. Restoring the promise of America’s capitalist system will require policies that enable more Americans to succeed in our market-based economy. Designing effective policies requires an accurate diagnosis of what is ailing American capitalism in order to effectively strengthen it. This volume brings to bear perspectives from leading subject matter experts on the diagnosis of and treatment for capitalism’s ailments.

The volume is organized around three broad economic challenges facing the United States today. Section I addresses the widespread concern that increasing market concentration in many sectors is stifling competition and undermining a more dynamic economy. Section II explores the federal government’s unsustainable deficit and debt position and the associated concern that such trajectories imperil the long-run stability and security of the American economy. Section III considers a range of current policy ideas—including a federal wealth tax, “Medicare for All,” and universal basic income—that would dramatically change our economic institutions and policies in order to achieve greater progressivity through taxes and government spending.

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