The National Debt, Tax Farming And Patent Monopolies – Analysis


It increasingly looks like the Fed and the Biden administration have nailed the notoriously difficult soft landing, with inflation rapidly falling towards the Fed’s 2.0 percent target and the unemployment rate still under 4.0 percent. All the signs are that the economy will continue to grow and create jobs at a healthy pace in 2024 and that inflation will remain moderate for the foreseeable future.

With near-term economic prospects looking pretty damn good, we can be sure that the deficit hawks will soon be coming out of the woodwork. We can count on being regaled with talk of unprecedented levels of debt and deficits. We will hear of the need for cutting Social Security and Medicare, or cries for the creation of another deficit commission, which is the backdoor way of cutting Social Security and Medicare.

Since we all know what’s coming, we should arm ourselves with knowledge of tax farming. You’re probably wondering what tax farming is, and what it has to do with our current debt and deficit situation. In an odd way, it can tell us a great deal about how we should think about our deficits and especially our debt.

Tax farming was the practice of selling off the right to collect a specific tax. It was a common practice in pre-revolutionary France and in many other countries in prior centuries. The idea was that the government set a tax, say a customs duty on the goods that came through a specific port, and then sold off the right to collect the tax to a specific person. This gave the government an immediate infusion of cash, although it meant that it did not have access to the future revenue from the tax.

We actually still have similar practices. For example, back in 2008, Chicao’s then mayor, Richard M. Daley, sold off the right to collect revenue from city parking meters for the next 75 years for $1.16 billion. This gave Daley money to pay the bills in 2008 but cut off a stream of revenue to the city for the next seven and a half decades.

What is neat about the practice of tax farming is that the loss of revenue does not appear as debt on the ledgers. Obviously, if we are doing long-term projections of the city’s finances we would have to take account of the lost revenue stream, but the money the city got for selling the right to collect revenue from parking meters does not appear as a loan and add to the city’s debt. Nor do the payments going to the parking meter company count as an expenditure by the city, as would be the case with interest on a loan, so they do not directly add to the deficit from that side.

If we were looking at the city of Chicago’s budget the way we typically look at the federal budget, selling off the revenue from the parking meters was an absolutely brilliant move. The city effectively got a $1.16 billion loan without adding to its debt. That means the people yelling about an exploding debt or rising debt to GDP ratios would have nothing to say on this one. The debt did not rise.

Similarly, we don’t have to pay interest on this loan. That means when we are complaining about the rising interest burden, and how interest is becoming the largest item in the federal budget, we’re good with the parking meter deal. There are no interest payments here.

From Parking Meters to Government-Granted Patent Monopolies

I trust that even economists can understand how selling off the revenue from parking meters was effectively a loan to the city, but we managed to keep it off the books so that it doesn’t give deficit hawks anything to complain about. It turns out that government-granted patent and copyright monopolies are largely the same story.

At the most basic level, a patent monopoly or its cousin, copyright monopoly, is a way that the government pays people to do things. In the case of a patent monopoly, we are paying people to innovate. We tell them if they develop a new product or process, the government will give them a monopoly for a period of time, so that they can charge much more than the free market price. With copyrights, we are paying them to do creative work, like write a book, sing a song, or make a movie, or develop software. (Due to changes in the law in the 1990s, software is eligible for both patent and copyright protection.)

In this sense, these monopolies are different from the parking meter revenue sale, but in a way that should get the deficit hawks even more concerned. The parking meter revenue sale did not involve any direct economic activity, except for the relatively small number of people involved in negotiating the deal and transferring the money. It did not add $1.16 billion to GDP in 2008.

By contrast, patent and copyright monopolies actually do directly stimulate economic activity. We are giving out these monopolies precisely because we want people to spend time and money innovating and doing creative work. They do add to GDP.

This should matter a great deal to people worried about deficits. Remember, the problem with a large deficit is that it creates too much demand in the economy. The economy can’t produce enough to meet the demand being created by the deficit. This means that either we get inflation, or the Fed has to raise interest rates to reduce demand.

If government-granted patent and copyright monopolies are boosting demand, that should make us every bit as concerned as if the government was boosting demand with a large deficit. Incredibly, the deficit hawks literally never say a word about the demand created as a result of patent and copyright monopolies.

Patent and Copyright Monopolies and Government Debt

The value of these government-granted monopolies also doesn’t appear on the books as part of the government-debt. This means, incredibly, that we could double the length of all patent and copyright monopolies (even retroactively to ones already granted, as we have done repeatedly with copyrights) and not add a dollar to the government debt.

The payments that result from these monopolies are similar to the payments made to the parking meter company or the tax farmers. They are effectively taxes imposed on the population, although they are not collected by the government.

And these taxes can be very large. In the case of prescription and non-prescription drugs alone, these implicit taxes likely cost us close to $500 billion a year, as we pay over $600 billion for drugs that would likely cost less than $100 billion if sold in a free market. That comes to over $4,000 a year for an average family. If we add in the higher costs for medical equipment, computers, software and a range of other items, we are almost certainly looking at implicit taxes of well over $1 trillion a year. In other words, real money.

If we think of how these implicit taxes affect the economy, it is similar to how the parking meter payments affect the economy of the city of Chicago. They amount to money pulled out of people’s pockets. That makes them less well off directly and also less able to bear the burden of other taxes.

In the case of prescription drugs, there is the additional issue that a large share of the patent rents are actually paid by the government. Roughly a third of drug spending directly comes from the federal government through Medicare, Medicaid and other government programs. Another 15 percent is paid by state and local governments.

This makes the deficit hawks’ decision to ignore patent and copyright monopolies all the more absurd. If the government borrowed another $120 billion a year to replace the patent supported research done by the pharmaceutical industry, they would all be yelling and screaming about the big increase in the deficit. (This would be in addition to the more than $50 billion in annual research spending already supported by the National Institutes of Health and other government agencies.) But they would completely ignore the future savings from being able to buy drugs at the free market price rather than the patent-protected price. That may make sense in Washington, but not for anyone who actually cares about the future of the economy.

Government-Granted Patent and Copyright Monopolies Are Part of the Debt, or You’re Not Serious

The basic story here is that we have to recognize that granting patent and copyright monopolies are a way that the government pays for things. They are an alternative to direct spending. We have to recognize their economic impact if we want to do serious accounting of debts and deficits. The fact that their impact is almost universally ignored speaks to the seriousness of the current debate.

This first appeared on Dean Baker’s Beat the Press blog.  

Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

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