High taxes create monopolies

The CSSD wants to increase corporate taxes to 21%. This means increasing state budget revenues. However, I will show you here why this tax increase can lead to the creation of monopolies, harm smaller producers and why it dampens economic growth, paradoxically - why the effect of a higher tax may be to reduce state budget revenues.

Opportunity costs

We will start with something that is not related to this issue at first glance. You know what they are opportunity cost?


Let's say you can open your own hot dog shop or work as a cashier in a supermarket. As a self-service cashier, you can earn CZK 10 a month net. As a sausage seller, you can earn CZK 000 per month after deducting rent and taxes. What will you do? You will probably sell sausages. Self-service work is sacrificed opportunity, instead of working as a cashier, you dedicate your time to the work of a sausage seller.

Because of this, your sacrificed opportunity is your expense. So - 11 (sausage seller) - 000 = + 10. We are in the plus of selling sausages, so we will probably sell sausages. It is simple. However - if we sell sausages as a legal entity, we may end up with the sale of sausages. Then we will rather sell in a supermarket.

Monopolies and market competition

We have seen this very clearly in recent decades - many industries are controlled by monopoly companies or cartels. These are mainly energy, transport (rail) and others. Surprisingly, this is a sector where the state usually has a great influence through various regulations.

To begin with, let's say that there is no market position (competition) state, but by processwhich is evolving.

A beautiful illustrative example is energy. Do you think that the current situation, where the whole industry is usually controlled by one monopoly company or a cartel of a few companies, is natural? If so, you think wrong. Let's look at the USA…

Before 1887, there were six power companies in New York, and before 1907, 45 power companies in Chicago had a business license. Likewise, before 1895, Duluth in Minnesota was served by five power companies and Scranton in Pennsylvania before 1906 by four companies.

A certain attempt to monopolize the industry took place in 1888 in Baltimore. Three competing gas companies tried to merge and thus function as one monopolist. Unfortunately, their plans were thwarted by a new competitor - electricity, which, thanks to the inventions of TA Edison and N. Tesla, began to compete with gas in all areas of its use. Since then, gas and electricity companies have faced each other, both with high fixed capital requirements. But no "natural monopoly" ever arose.

The situation on the energy market before the start of regulation was thus such that in the period lasting more than 80 years, at least two companies always competed with each other, while these companies competed very hard with their prices and services offered. The one who benefited most from this situation was natural the customer, which thus had better services at lower prices than in areas with a regulated energy market. At the same time, costs were also usually lower where competition existed than where there was a regulated market.

So how did the regulation of the energy market come about? Samuel Insull was president of the National Electric Light Association (NELA). At first, this association dealt mainly with technical and commercial aspects of electricity, but over time it also switched to political activities. In his lecture in June 1898, Insull called for the creation of a "third way" between socialism and "predatory" competition. According to Insulla, competition increases the risk of doing business in the electricity sector and so companies in this sector are forced to pay higher interest rates on borrowed capital.

At first, S. Insulle's ideas were rejected, but he did not give up. His main interest as head of the Chicago Edison Company was to dominate the Chicago market, which was - as we said above - almost impossible in a system of market competition. In 1907, the first regulatory commissions were established in New York and Wisconsin; in 1915, energy was regulated by 33 US states. The first negatives of regulation began to manifest themselves in the XNUMXs (rising prices, many frauds). How did the situation "solve"? Simply put - regulation was even stronger.

Today, the US energy grid is in a terrible state. Just by the way - a similar development took place in telecommunications or railways.

How does this relate to high taxes? High taxes reduce operating profits. If the state sets high taxes for business, it will limit the possibility of doing business, only those of the largest companies will survive at the moment, but they will not face new competition. These companies will dominate the market, become monopolistic thanks to (among other things) high taxes. The inability to create competition (caused by the state) is then why the public begins to call for regulation of the sector, which, paradoxically, further strengthens the position of the monopolist.

The monopolist then may not work effectively - the company is large, controls the industry and thanks to the state there is no one else who can serve customers monopolists. So the monopolist knows that the state will not let him fall, so he knows that he can go into a "minus", ie not make a profit. A beautiful example is Czech Railways in the last few years. The monopolist becomes a "strategic firm" and as such is guarded by the state, thus increasing its importance. The whole risk (for example in the energy sector) is thus concentrated in one place, which is definitely not good.

Thus, the monopolist does not have to generate a profit, which means that he does not pay taxes, on the contrary, the state very often rehabilitates him, he gives the monopolist huge sums of money. The state is on the whole situation, revenues to the state budget are decreasing and the company is actually lagging behind. There is no one to force her to innovate.

At the same time, the inefficiency of the functioning of the company forms a cover for increasing prices - in the regulated market, therefore, not only the state but also the tracks the customer.

Is raising taxes really the right way?