Why Ownership Graphs Matter

This is a post about the surprising absence of policy in politics and the complexity of seemingly straightforward policy.

As the 2018 midterms came and went, there was a lot of talk about tax, corporations, and visions for a more prosperous society. I think the most interesting policy discussions aren’t actually about policy as much as the rhetoric, coalition-building, and choice of landmark-issue: one debate that caught my eye was over SF Proposition C. Perhaps the most salient point made by supporters of the tax was that it only affects the biggest billionaire-owned businesses in the city. Normal people won’t get taxed.

Implementation (gross receipts instead of something like net income?) and assumptions (what does everyone’s responsibility mean?) aside, the idea that taxes on big businesses actually tax wealthy people is surprisingly unclear.

Let’s assume that we want to tax rich people who own large companies. A quick Google search shows that Marc Benioff only owns 4% of Salesforce. So only $0.04 of every tax dollar is taken from the pocket of Marc. Where does the rest go?

Huge chunks of publicly traded companies are owned by asset managers like BlackRock, Vanguard, and StateStreet. In fact, the “Big 3” are the largest shareholder in almost 90% of S&P 500 corporations. And that’s only looking at a few firms: going back to the Salesforce example, 83% of Salesforce is owned by some sort of institution! So most of the tax burden falls on asset managers.

Next, one might argue that by taxing institutional investors, you’re taxing a different set of rich people which is fine… Except that the asset managers usually make money by charging a small percentage of AUM. The actual gains or losses are passed on to individuals, pension funds, endowment funds, 401(k)s and anyone else letting institutions manage their money. Keep tracing that back and you end up taxing individuals.

This is almost vacuously true for any tax, I’m merely observing that this concept doesn’t make its way into policy discussion.

So then who are those individuals? What’s particularly interesting is where they’re located: big businesses that fall under Prop C are mostly owned by people outside of SF. The city is effectively taxing people who live elsewhere! This would actually be very clever if it were intentional.

I wish I knew more about the precedent this sets and how lawmakers think about this. It would be absurd to impose a sales tax for someone in another city, example.

If anything, then, it should be the other way around: tax small local businesses-owners, and not big external business-owners. They’re the ones that actually live in SF. It’s hard to continue down this rabbit hole without regressing into some sort of unsupported speculation on tax policy. To be clear: I don’t actually think we should only tax small local businesses. The point is that even simple policy ideas have counterintuitive real-world effects.

Imagine that we had a complete ownership graph of whoever owned a big business. What could you do with that? Might you tax only the individuals in SF who own a share of a Vanguard index fund that owns a share of [insert big SF business]? Are there other creative governance or tax structures you could invent?

Is the complexity of such a graph a feature or a bug? (E.g. does it hedge financial risk or dangerously pool risk in a way we don’t understand?)

This puts aside the practical issue of how you could actually build such a graph. Would mandating the publication of relevant info prevent good things from happening such as the hostile takeover of poorly managed companies? How far can you get with info you could gather as a private party? Does BlackRock have interesting internal research based on their client data?

If you have ideas on any of the above, shoot me a tweet, email, or text! There are certainly more unique and interesting ideas related to ownership graphs.