Taxation of Enterprises

Taxation of Enterprises as One of 17 Principles of Regional Economic Order Under the Maxims Democracy and Market Economy.

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Besteuerung von Unternehmen

Table of Contents

  1. Overview
  2. Preliminary Remarks
  3. The Socio-Ecological, Structure-Forming Taxation of Enterprises
    3.1 Each Reference Enterprise is Defined by Four Quantitative Criteria
    3.2 On the Individual Criteria
    3.3 Additional Tax Incentives are Provided
    3.4 Note on Structure-Forming Taxation
    3.5 The Unconditional Integration of the Internet


regionaleordnung01In view of the threatening extent of the devastations caused by the neoliberal economic doctrine, the turning towards compatible economic principles becomes almost existential. But only when these principles are combined to form a model of sustainable regional and global economic order, can the urgently needed economic policy measures be derived.

All 6 global principles are summarized in the article Principles of Global Economic Order in the form of questions. The supplementary 17 regional principles are listed in the article Prinzipien regionaler Wirtschaftsordnung, also as questions.

In the context given here, the term »regional« refers to largely homogeneous entities, currently primarily nation states and supranational political and economic areas (unions), that meet all the requirements for political sovereignty and economic autonomy and are therefore in a position to form a viable foundation for the prosperous coalescence of the world. Hereafter, these entities are mostly referred to as economic areas.

The European Union (EU) and, in particular, the euro zone existing within the EU, can serve as a cautionary example here. Both are supranational entities that have emerged from the political and economic self-interest of powerful players, and whose inhomogeneity and centralism have since unfolded great destructive potential (as a supplement see the article Demokratie und europäische Integration).

Preliminary Remarks

In the course of the historical economic development in Europe and the USA democracy and market economy have emerged as useful and reliable Maximes of Economic Order. Both maxims have, however, been distorted by the neoliberal indoctrination since the 1990s to such an extent that the »natural principles« inherent in them are hardly perceived by the citizens any more. It is therefore essential to return to these principles and to combine them into a model of a sustainable regional and global economic order. See also the article Market and Market Economy.

In contrast to the centralistic structures produced by modern Neoliberalism, the model presented here is based on decentralized structures, or, better still: on subsidiary structures. Only if the citizens in as many countries as possible are recognizing democracy and market economy in their interaction again as convincing maxims, can a culture of political co-determination and economic self-determination return to society, politics and the economy and work towards social and ecological justice. Embedded in subsidiary structures, the citizens bear full responsibility for their actions and well-being, so that they are always brought to shape the conditions in their immediate environment in exchange with each other and at the same time create the preconditions and the foundation for global exchange.

Social and ecological justice, by the way, arise from a multitude of economic mechanisms: For example, the terms Efficiency and Productivity as well as specialization, which are wrongly defined in the neoliberal context, are redefined in the sense of social justice and ecological sustainability and are no longer subject to the arbitrariness of »liberalized« (unregulated) markets, but to economic policy control. The market thus regains the freedom it deserves, which enables it under meaningful and uniform framework conditions, rules and standards to allocate economic resources efficiently and equitably like no other mechanism.

Thus, the price is able to perform its original function again as the central information medium and control element of market transactions of individual economic players, because under the conditions of social and ecological justice and productivity it reflects all internal and external costs. By allowing the players to be guided by truthful prices resulting from the interplay of supply and demand, economic resources move – as if steered by an »invisible hand« – to where they provide the greatest benefit to individuals and, at the same time, to society as a whole. As a supplement see the article Economic Pricing.

Subsidiary structures ensure that prosperity and welfare are no longer at the mercy of the imponderables of a worldwide production quantity achieved under oligarchic rule and high capital concentration, but result automatically from the domestic production structure. The production structure alone is decisive for local and regional economic diversity and consequently for the level of employment, the performance-related equal distribution in society and the preservation of natural resources.

Unlike domestic competition, international competition can not, by its very nature, be granted the freedoms of regulated domestic markets. It must rather be based on bilateral trade agreements given the completely different traditions, standards and resources in the world. In these agreements the exchange rate must be set as the crucial trading link, supplemented by autonomous tariffs and trade quotas to balance out the differences and to grant trade profits to both sides. The primary objective of these agreements must be to ensure that imported products with their characteristics and prices are integrated into domestic competition in the most stimulating but harmless way possible.

The separation into regional and global order thus results quite naturally from the principle difference between domestic and foreign trade. Besides, this explains why there can be no superordinate, all-dominant, self-regulating and self-stabilizing world economic order in a desirably diverse and democratic world. For more details see the article Future-Proof Foreign Trade.

Among politically sovereign and economically autonomous nation-states and economic areas, the global order is reduced to agreements of norms of conduct, especially regarding norms of international trade and cooperation. By applying these norms, economic subsidiarity can be extended beyond national borders and find its perfection at the global level in the form of projects of global interest and scale.

With domestic and cross-border subsidiarity the doctrinal practice of transferring economic powers from lower to higher levels (especially nonstate) is overcome, of which neoliberal protagonists claim it would bring about »more appropriate« and »more efficient« decisions. Along with overcoming this practice, the justification is removed for a World Trade Organization, which is entrusted by its current 164 member states as the guardian of the Grail of global cut-throat competition based on dumping prices in lead currency (i.e. US dollar or euro). This is an unprecedented event in economic history, especially because the condition for membership is the (voluntary) renunciation of national economic autonomy.

It should be noted that the demarcation of the specific functions of the various economic levels, i.e. the subsidiary structure of autonomous nation-states and economic areas both domestically and beyond their borders, is absolutely crucial for the future viability of economically autonomous entities and for the global economy as a whole:

Functioning regionality is a prerequisite for sustainable globality. Globality is the complement of functional regionality.

In what follows, is the plea for the socio-ecological, structure-forming taxation of enterprises as one of 17 principles of regional economic order:

3. The Socio-Ecological, Structure-Forming Taxation of Enterprises

SubsidiaritySchumPNG08In concrete terms, economic subsidiarity is achieved by annually defining a virtual reference enterprise for each industry, which describes the smallest technologically viable operation and its highest possible productivity. For sectors in which traditional and modern, handicraft and industrial production methods exist independently of each other, a separate reference enterprise is defined for each technology. Because different technologies naturally lead to reference enterprises of different sizes, the basis is created to exercise independent economic policy control over each reference enterprise by means of progessive taxation. The intra-industry differentiation in size and consequently in taxation ensures diverse coexistence and vertical competition between small, mostly labour-intensive and large, mostly capital-intensive enterprises.

As it says in the illustration, the underlying process of economic policy management is called dynamic subsidiarization.

3.1 Each Reference Enterprise is Defined by Four Quantitative Criteria

SubsidiaritySchumPNG10Enterprises that meet the quantitative criteria specified by the reference enterprise of their industry or that fall below them are subject to the lowest tax burden or, if required by economic policy, are even temporarily subsidized. Enterprises that exceed the quantitative criteria are retroactively subject to higher taxes according to the annual assessment of external costs actually caused by the excess, i.e. in analogy to the impact on social productivity (the labour market) and ecological productivity (the use of resources). The logic of this steering taxation is based on the experience that, by striving for higher business productivity, enterprises are tempted to achieve it through socially and ecologically harmful economies of scale by geographically concentrating economic capital and economic power. The external costs of business productivity gains thus achieved – that do in fact reduce the overall macroeconomic productivity – must be offset by precisely calculated taxes to make them sufficiently unattractive so that external costs remain within a tolerable range on average for the economy as a whole, or better still, are completely omitted to steer the enterprises and the economy towards actual positive social and environmental productivity.

On the Individual Criteria

The first two, the ecological criteria in the above figure, define maximum sizes for land, resource and energy consumption as well as for emissions and waste such, that the impacts can just about be tolerated in view of the economic importance of the respective industry and the economic level at which the industry operates and in line with the level of technological development. Experience shows that ecological impacts can be kept within the narrowest limits – both from the perspective of administration and technology – with small enterprises and correspondingly small maximum sizes of resources used – preferably of local and regional origin – and with direct responsibility of all parties involved on-site, for example under local self-government. In other words, small enterprises resulting from dynamic subsidiarization, in conjunction with decentralized political responsibility and control, generate the lowest ecological costs and the highest ecological productivity. This experience is an essential motivation for dynamic subsidiarization and also for focussing technological research and development on decentralized application.

The last two criteria, aimed at social productivity, determine the maximum number of employees and the maximum weekly working hours. The maximum number of employees results from the respective technology-related production conditions to which a reference enterprise is subject. At first glance, it may seem absurd with respect to full employment to define an upper reference value for the number of employees at all. However, this is necessary because the higher-ranking multiplicity and diversity of enterprises achieved through subsidiarization and the resulting employment effect far outweigh the possible inflation of personnel in individual enterprises. In other words, since subsidiarization takes place dynamically through taxation, enterprises that exceed the number of employees specified in their reference enterprise will sooner or later be forced to sell parts of their business (what I call »cell-division«) due to the increasing tax burden. Thus, the employment effect of »cell-divisions« can not be diminished by centralization, instead, the positive effect of decentralizing labour demand and jobs is constantly repeated.

The last criterion, the maximum weekly working hours, is calculated from market demand and the respective industry-specific labour productivity, which generally rises continuously as a result of productive progress. Both labour productivity and market demand serve to keep the number of employees in the industry constant and labour demand and labour supply in equilibrium, so as not to create unemployment. It should be noted that the calculation of weekly working hours, which is initially carried out for the purpose of control and taxation, is reserved for final decision by the social partners.

The two criteria, which are aimed at social productivity, follow the logic that social responsibility, social progress and general participation in economic life, i.e. full employment and fair wages, can be achieved by decentralizing economic cycles, by the associated optimum distribution of production capital, by constructive horizontal competition between a large number of competitors per industry, and by weekly working hours appropriate to industry productivity and market demand. In this sense, the specification of the social criteria – in conjunction with the ecological criteria – creates a strong incentive to repeatedly divide growing companies by spinning off a company part (»cell division«) and thus facilitate start-ups of small enterprises. In case a company falls below the social criteria, this indicates its increased labour productivity and competitiveness, i.e. progress, which is included in the annual redefinition of the industry-specific reference company forcing all competitors to increase their productivity in a socially and environmentally compatible manner as well, and repeatedly propelling the entire industry towards new pioneering acts.

This »cell division« takes place by selling an independently functioning part of a company at a market price or, in the case of a cooperative, outsourcing it. Sellers can either invest their proceeds in the remaining company in qualitative growth, for example to reduce their material and energy consumption, use more environmentally friendly materials and leave less harmful waste behind, or they can declare their proceeds as private income subject to high tax progression. As each natural person is only allowed to acquire one single company, only start-up entrepreneurs can be considered as buyers. This opens up realistic business opportunities for start-ups, which they can improve even further by using government-sponsored loans.

Thus, »cell divisions« provide for a constant organisational renewal of economic structures, for qualitative growth in the form of social and ecological progress, as well as for an optimal equal distribution of production capital ownership.

With progressive taxation of growing companies and private income tax policy is at the service of economic policy, or more precisely at the service of economic structural policy. Subsidiarization initially creates small-scale economic cycles, division-of-labor structures, widespread labour demand, a diverse range of products, direct responsibility for environmental protection and short transport routes.

3.3 Additional Tax Incentives are Provided

  1. for small enterprises to participate in regional and international projects for the development of raw material and energy-efficient as well as environmentally and health-compatible technologies,
  2. for projects to research and further develop organic farming, including animal welfare,
  3. for the acquisition of own copyrights and patents for the purpose of participating in global trade in intellectual property,
  4. for the revival of arts and craft trades and traditional production techniques,
  5. generally for the decentralized application of technologies and processes, and finally, according to environmental protection and decentralization,
  6. for the limitation of long-distance transport through progressive taxation of fossil fuels and – for the limitation of traffic areas and other transport-related costs – through progressive taxation according to distance.

3.4 Note on Structure-Forming Taxation

In the light of the bureaucracy reduction repeatedly demanded under neoliberal conditions, the question could be raised as to whether economic policy control by means of industry-specific reference enterprises would not entail a disproportionately high administrative burden. Such a question would, however, miss the point of sustainability, as it is the primary and most important task of any economic policy to counteract the natural tendency of the players to concentrate power and capital in an unrelenting and targeted manner. The effort required for this public, future-securing task is certainly the most productive and profitable investment an economy can make. Every single public job that fulfils this task is more than justified and pays off in many ways. When assessing public sector value added, it is therefore imperative to strongly warn against neoliberal thought patterns of allegated inefficiency – especially with regard to the ratio of public expenditure and GNP, which is referred to as the public sector share in GNP. To put it even more clearly, it is a neoliberal credo to denigrate any public sector share as a cause of overall economic inefficiency and to demand that it be lowered. See also the article Private and Public Goods.

3.5 The Unconditional Integration of the Internet

The Internet plays a particularly important role in supporting subsidiary structures: on the one hand, it can fulfil its role as a medium for the global exchange of information, economic logistics and trade in intangible products such as intellectual property rights; on the other hand, it can and must be used to automatically channel transactions of trade in tangible goods structurally appropriate. Demanders can, for example, be directed to those suppliers who are geographically closest to them. Suppliers embedded in subsidiary structures are enabled to combine stationary and online trading with uniform pricing. Procurement and warehousing can be transferred to supraregional cooperatives to save costs. For globally operating major suppliers, who first have to adapt to international competition based on comparative relative prices, the opportunity arises to become franchisors and establish a network of decentralized franchisees.

The practical development of subsidiary economic structures under the conditions of the neoliberal globalization as an entry into a post-neoliberal economic order is dealt with in the article
Building Subsidiary Economic Structures.

As a supplement I recommend the articles Economic Subsidiarity, Market and Market Economy, Sustainable Social Welfare and Full Employment.

Note on the COVID-19 Pandemic

The pandemic has noticeably revealed the significant weaknesses of the neoliberal economic system for everyone, above all the shortage of medical, but also other products, caused by disruptions in the absurdly networked value and supply chains across the globe.

The analyses of the neoliberal system as well as the principles and practical procedures based on them for building a sustainable system, which are presented in this compendium, thereby obtain an unexpected topicality. Now is the time to seize the opportunity and build up economic policy pressure to enforce the development of an economic order that is sustainably oriented towards social and ecological welfare.

The following article refers to the targeted arguments contained in the Compendium: COVID-19 and Globalization

Click here for the German-language version: Besteuerung von Unternehmen.

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