Related to the earlier objection of cascading, is the objection that a tax like BTT would also be an incentive to vertical integration – by removing the intermediate payments, supply chains can avoid / minimize tax incidence. This would indeed happen if the savings of tax compensate the potential loss that may happen due to lack of specialization. Let us look at what Professor Feige has to say on this aspect:[1]

As long as the gains from specialization of trade are larger than the low APT tax rate, the APT will produce very little incentive for vertical integration … Vertical integration will however only occur when the gains from tax avoidance are greater than the gains from specialization. As a practical matter, it is doubtful that the APT tax will result in substantial vertical integration since in most cases gains from specialization are likely to be large relative to the size of the APT tax…

As we can see the key determining factor is the rate of BTT. Prof. Cintra based on the results from the simulation as well as his knowledge and experience responds to this objection of promoting vertical integration, in the following manner:[2]

·The incentive for vertical integration in production is intensified as the turnover rate increases. If we consider the Single Tax system’s low marginal rate, it is improbable that this integration process would go beyond what can be predicted by reasons strictly related to economies of scale and other types of externalities.  Verticalization beyond what would be justified in a neutral economic environment implies costs, against which the tax savings would have to be compared.

·Furthermore, our simulations show that distortions in relative prices caused by the Single Tax are lower than those present in the current system, as was shown before. Actually, the decision to vertically integrate hinges preponderantly on technological reasons, such as gains of specialization and scale, compared to which the weight of the Single Tax should not be very significant.

 


[1] Page 27, Taxation for the 21ST Century: the automated payment transaction (APT) tax, October 2000, Edgar L. Feige

[2] Page 72-75, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009