11. Market Share Tax

Businesses should pay a progressive tax based on their market share (new sales only, not existing products or services in circulation) so that as their market share increases, the rate of this tax increases. The market share of each business would be determined for every political jurisdiction in which that business operates or to which it sells (city, county, state, national, and perhaps even international). Due to different markets having significantly different characteristics such as the number of suppliers and consumers, types of products sold, and other market particulars, it is reasonable that each market should have slightly different progressive market share tax rate schedules. A company that sells one or a few products or services can determine its market share within a political jurisdiction by dividing the number of products it sold in that jurisdiction by the total number of same or similar products sold by all other suppliers in that same jurisdiction. For companies that sell a wide variety of similar products, market share would be determined by grouping their sales into categories and dividing the number of products they sold within each category by the total number of products sold by all other suppliers within the same category. The government, in cooperation with the market participants, would be responsible for defining such categories and would also be responsible for compiling the final sales figures for all market participants for each product or category of products for all relevant political jurisdictions to use in determining their market share.

To prevent this tax from becoming a burden and aggravation to clearly small businesses that do not significantly threaten market stability, all companies who comprise less than 15% of the market share should not be required to pay any of this market share tax.

Constructing the Tax

The rule of thumb should be that a larger number of providers would lower the market share threshold for triggering this specific type of tax. The table below describes the tax rate structure for markets with different numbers of suppliers.

Market Share Tax Rate Proposal

Number of Suppliers Proportional Market Share Allowable Market Share –
Market Share Tax triggered at these rates
Difference between Proportional and
Allowable Market Share Rates
Before Tax is Triggered
1 100% 100% N/A – No Tax
2 50% 85% 35%
3 33.3% 60% 26.7%
4 25% 40% 15%
5 20% 30% 10%
6 16.6% 25% 8.4%
7 14.3% 22% 7.7%
8 12.5% 20% 7.5%
9 11.1% 18% 6.6%
10 or more 10% or less 15% 5% or more (theoretically up to 15%)

 

We will use the airline industry to show how such a tax may be implemented. Airlines, like many companies, often use cross-subsidies to enhance their position in markets where others may have the natural advantage. The amount of such a market share tax could vary widely but should always be determined after factoring in all relevant variables, namely the number of producers/suppliers in the specific market and the degree of market share attained by each supplier.

The actual tax amount would be determined by multiplying the degree (in percentage points) that a company exceeds its allowable market share on a specific route by the total revenues that company generates on that route. For example, if a total of three airlines offer 20 daily flights between two cities, and airline #1 has 14 of those flights, that would constitute a 70% market share (let’s assume that each plane has the same number of seats). Let’s say airline #2 has 4 daily flights and airline #3 has 2 flights. Under the rules of this proposal, airline #1’s 14 daily flights would constitute a market share of 70%, thus triggering this tax. Thus, the airline exceeded this limit by 2 flights (equivalent to 10% of the market). Assuming that each flight grosses that airline $10,000, a total of $140,000 would constitute its daily revenues. The actual dollar amount of this market share tax would then be determined by multiplying the $140,000 total revenues generated by participation in the market in which it exceeded it allowable limit, by 10% (equivalent to the excess participation rate in the market). Therefore, this airline’s market share tax would be $14,000 per day. The airline could avoid this tax by reducing its flights to a maximum of 12 per day in this market.

Purpose For This Market Share Tax

The purpose of this tax is to help ensure stability, fairness, competitiveness, and opportunity within markets, mainly by making it more difficult for any one or a few companies to control the vast majority of the market. This tax is also designed to help ensure that if the top market supplier is suddenly eliminated from the market due to some crisis such as a strike, bankruptcy, destruction of production facilities, or other occurrence, there would be enough excess production or service capacity among all the rest of the market suppliers to help the market weather the crisis without society suffering significant product or service shortages and without precipitating acute price volatility or sending destructive price shocks throughout the market or wider economy. Market share dominating suppliers could also potentially cause havoc by making certain business decisions such as drastically increasing prices, lowering production levels or lowering the quality of production. By progressively taxing businesses that increasingly dominate market share (thus increasing their operating costs), they would be discouraged from ever attaining such large sizes that would inherently result in the creation of potentially unfavorable or even disastrous market conditions.

In some industries, especially electronics and computing, an additional benefit of such a market share tax may be to encourage market participants to engage in greater cooperation to design standards that would benefit the industry (and society) as a whole since it would be harder for any single company to gain and maintain such a large market share to make it profitable for it to maintain its own proprietary standards and/or infrastructures.


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