By Howard Ullman

Howard Ullman

Over the past few years, there has been a good deal of discussion and debate about the nature and extent of antitrust regulation, particularly in connection with “high tech” or online markets.  As just a few recent examples, last fall a subcommittee of the House Judicial Committee issued a report with recommendations entitled “Investigation of Competition in Digital Markets,” and regulators at the enforcement agencies have been discussing the competitive significance of “big data,” online platforms, and vertical integration.  Moreover, Senator Amy Klobuchar, the top Democrat on the Senate Judiciary subcommittee on antitrust, recently introduced a new bill that would amend the Clayton Act to make purportedly anti-competitive mergers more difficult, including by establishing several categories of mergers that would pose an antitrust risk.  The bill would also substantially increase the federal antitrust enforcement agencies’ budgets.  It is fair to say that we are seeing the most robust thinking about or rethinking of antitrust issues in many years.  One of the more interesting recent proposals actually links antitrust and tax law.  Although this column takes no position on that proposal, it is sufficiently novel and interesting to relate the central idea here.

The proposal comes from Paul Romer, a Nobel prize-winning economist at New York University.  He outlined it recently in a talk at the University of Chicago’s Stigler Center for the Study of the Economy and the State.  Professor Romer posits three factors or developments that call for a new approach to regulation.  First, he argues that there has been a recent “phase change” – due to developments in technology, competition in many markets has now become “winner takes all.”

Second, when firms become “asymptotically” large, they can harm efficiency as that term is broadly defined.  And Romer defines it to include not only purchasing power but also the benefits the market as a whole derives from democracy and the rule of law, both for their own sake but also in terms of their instrumental value in protecting systems that enable the markets to run.

Third, and relatedly, Romer argues that market and political power are intrinsically linked.  Large firms can evade regulation, or depending upon the market in which they operate, even more directly affect political discourse.  And so Romer argues that antitrust policy should be modified to take both economic and political liberty into account.

Because Romer has administrability concerns about judicial remedies (he thinks courts, especially appellate courts, are reluctant to impose robust structural relief, and he also thinks that courts find it difficult to distinguish between “lawful” and “unlawful” behavior of very large firms), his proposal is for a “Pigovian” tax – that is, a progressive marginal tax tied to the scale of the regulated firms.  So, for example, the government (and here, Romer means the legislature) could set a tax that starts at 0% but then ramps up to 10% or 20% (or higher if appropriate) based on the firm’s sales or revenues.  The idea is that the tax creates diminishing returns from scale and discourages firms from becoming “too big.” (Any such tax would have to be imposed on firm sales or revenues, rather than profits, because it is essentially impossible to determine where geographically the profits are earned.)

Romer recognizes that legislatures themselves may have difficulty regulating large companies, but he thinks that the legislature is the best-situated of the three branches of government.  He also notes that every state has its own legislature, and that states may be able to function as “democratic laboratories” to impose different taxation systems.

There are, of course, a number of potential responses to Romer’s proposal, many of which he has anticipated or addressed.  For example, one could criticize the proposal as a “tax on success.”  Moreover, it is not at all clear how to establish the tax rates to ensure that they adequately reflect appropriate and pro-competitive economies of scale.  It is also not clear how a proposal limited to one economy (i.e., the United States) could adequately address competitive concerns if companies are not similarly regulated worldwide.  And, in terms of administrability, if firms really are so dominant as to have power within the political system, why would one expect that they would not be able to successfully oppose any taxation proposal?

Again, the point of this discussion is neither to endorse nor to reject Romer’s nascent taxation proposal. Rather, it is to illustrate that after several decades in which antitrust was dominated by “Chicago school” type economic thinking with a narrow focus on efficiency as measured by consumer pricing, we are now seeing a number of new proposals to reframe the discussion, either to take into account other types of efficiencies or to advocate for new regulatory approaches or mechanisms.  The next five or so years will undoubtedly be a very interesting era for antitrust law in the United States.

Howard M. Ullman, Of Counsel in the San Francisco office of Orrick, Herrington & Sutcliffe LLP, focuses his practice on antitrust and distribution law issues.

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