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I presume that if a company misuses its dominant position, it should be ultimately reflected in unusually high profits. That suggests that a progressive tax could decrease the incentive to charge customers higher prices purely because of a dominant market position.

So does progressive tax work as an effective instrument at regulating market dominance?

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    $\begingroup$ Are not progressive tax and competition policy entirely orthogonal? I don't see the connection. You can have one, or the other, or both, or none. They tackle different issues. $\endgroup$
    – luchonacho
    Sep 29, 2017 at 21:04
  • $\begingroup$ Certainly. Inequality is a highly multidimensional issue, affected indirectly by virtually everything. But that does not mean that they have to be dependent on each other. Anti-trust and related policies are primarily aimed at fostering competition, not at reducing inequality (although many have called for such objective too, e.g. Stiglitz), just as central banks are primarily oriented towards low and stable inflation (+ high employment in the US). Their actions do have consequences on inequality for sure (e.g. QE), but as an economist I don't remember said, one target, one instrument. $\endgroup$
    – luchonacho
    Sep 29, 2017 at 21:35
  • $\begingroup$ In any case, you would like to see less competition (why would someone, besides an incumbent in a monopolistic form, want that?), which will increase inequality, compensated with more progressive taxation? May I ask why? $\endgroup$
    – luchonacho
    Sep 29, 2017 at 21:37
  • $\begingroup$ I don't understand how the economic benefit of a progressive tax is "debatable". $\endgroup$
    – Hot Licks
    Sep 30, 2017 at 1:16
  • $\begingroup$ @luchonacho This regulation would aim against fusing conglomeraters but I see this (more intense cooperation between the large bussinesses) could be a large pitfall. But it certainly would create a better environment for the newly starting bussinesses. $\endgroup$
    – Probably
    Sep 30, 2017 at 7:24

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Progressive income taxes on individuals is not very likely to have any real impact on market power, but progressive income taxes on corporations can certainly have this effect. The key idea is that in many industries (for example, the financial industry), there are geniune economies of scale: having a big balance sheet allows an investment bank to take advantage of various synergies, meet demand from customers at lower costs and therefore at lower prices. This means that there is a natural pressure towards concentration in the financial industry. High levels of concentration, however, allow firms to price out their competitors from the market due to their size and the aforementioned scale effects, and can lead to a scenario of oligopoly.

The government can try to deal with this problem by introducing negative incentives for corporations to get bigger. This can be in the form of an explicit limit on the size of corporate balance sheets rel to GDP, as advocated by Stiglitz, or it can be in the form of income taxes, or capital requirements, which are "progressive" in the sense that they impose higher marginal costs on larger and more complex firms over smaller ones. Such a measure can offset the natural incentive towards aggregation in the financial industry, for example. This is already done to some extent by Dodd-Frank (perhaps unintentionally) in the US, which raised capital requirements for SIFIs (which are well-integrated financial institutions with large balance sheets). The adverse effect is that by doing this, a country can effectively price its financial institutions out of international markets.

In turn, a policy which reduces market power can have positive effects on the income distribution, as it would lead to lower prices and higher wages. The problem is to find the right balance between the benefits (lower costs) and costs (market power) of concentration in the marketplace.

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I find that most treatment of monopolies is not very well thought through. The cases where monopolies happen and what their actual effects are is not straightforward. Its not clear that natural monopolies are really a problem that we can solve with tools we have. Most monopolies are created by government regulations. These kinds of monopolies can't be solved by taxes because the powers keeping those monopolies in place will adjust to continue to protect them.

While as Ege said, progressive taxes don't usually apply to businesses. But if one was instituted, this would give an incentive for a natural private monopoly to perhaps reduce in size in such a way that allows for competition. However the tax would have to be high enough, and the problem is that monopolies are already setting the price higher than efficient for the market. Higher taxes would push that price even higher.

If this tax were done to all businesses regardless of whether or not they're considered monopolies, it would surely be a harmful policy. However, even if only monopolies were taxed in this way, it doesn't seem at all clear that the additional competition it would be able to create would be worth the cost.

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