No More than Double: Can a Single Rule Tame Capitalism?

Lorenzo Esposito and Giuseppe Mastromatteo

Economics Working Paper Archive from Levy Economics Institute

Abstract: Capitalism's defining feature--profit maximization without limits--drives instability, inequality, and environmental degradation. Traditional policies such as taxation and regulation have failed to curb this dynamic because they do not alter firms' core incentives. This paper proposes a simple yet structural solution: a "maximum allowed profitability" (MAP) rule that caps a firm's return on equity at twice the median ROE of its peers. Profits exceeding this threshold would be fully taxed, creating a hard limit on excessive profit-seeking and reducing systemic risk. Using ORBIS data for major European economies (2002-2021), we show that profitability distribution is stable, making MAP feasible and easy to implement. Unlike conventional fiscal or monetary tools, MAP directly addresses the prisoner's dilemma inherent in capitalism, fostering a more balanced economic system. While global coordination is essential, MAP could complement initiatives like the OECD global minimum tax, reshaping incentives toward sustainable growth.

Keywords: profit maximization; income inequality; fiscal policy (search for similar items in EconPapers)
JEL-codes: E60 E61 E62 (search for similar items in EconPapers)
Date: 2025-12
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