Normative Narratives

Transparency Thursday: Robbing Peter to Pay Yourself

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In an earlier Transparency Thursday post, “My Taxes Pay Your Salary”, I highlighted how large corporations often outmaneuver local municipalities when it comes to securing subsidies or tax breaks. The companies use their legal and financial advantages to convince local officials that if they do not receive this money, they will go somewhere else that will offer them a better deal. Elected officials, not wanting to be held responsible for local unemployment, often give large sums of taxpayer money to these corporations. This money is given without any guarantees on the corporation’s side, and without any meaningful assessment of the costs and benefits of giving the money. This system is, in a number of ways, broken.

But at least these companies pay their fair share right? The take money in the forms of subsidies and tax breaks, but they at least pay into the system they take from right? Of course companies, for the most part, have to pay taxes. According to the Congressional Budget Office, the U.S. received $181 billion dollars in federal corporate tax revenue in 2011. The problem; it spent an equal amount on federal corporate “tax expenditures”.

Now admittedly, this does not address the main issue here, which occurs at the state and local level. States and municipalities do not have their own corporate taxation revenue. Instead, they tax land, property, sales, and personal incomes, but not corporate profits, which are taxed by the federal government only. (These taxes add, on average, about 5% to corporate tax rates, and vary depending on state and local law). Of course there is a qualification to be made here;  the Federal government subsidizes state and local spending, so some federal corporate taxes do indirectly benefit state and municipal governments as well. However, when it is all said and done, it seems that states and municipalities often pay out much more than they receive from having the corporations in their areas. When you consider it is impossible to determine whether the company would’ve created jobs with or without the subsidies/expenditures, it becomes even more difficult to determine who is truly benefiting from taxpayer money.

It is even more alarming, if not unsurprising, that corporations dodge even their most basic tax requirements. “Only 6.6% of Uncle Sam’s tax revenue comes from corporations (down from 30% in the 1950s).” A recent NYT article highlights how tech giants, some of the U.S. most profitable and recognizable companies, often move their profits to tax shelters to avoid paying their fair share. It has been well documented that after exemptions, GE pays no corporate taxes and actually receives billions in federal subsidies, despite posting billion dollar profit margins.

“Although technology is now one of the nation’s largest and most highly valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard & Poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& P. companies’, according to a New York Times analysis.

This is indeed an instance of robbing Peter to pay Paul, if you name happens to be Paul. Corporations manage to avoid the majority of their tax burden, and often extract money from cash strapped municipalities that would otherwise go to critical government programs. This money has little to do with needs based financing or creating jobs. It should not be surprising that corporate profits have far surpassed their pre-recession peaks, while effective corporate tax rates remain much lower than the statutory rates agreed upon in U.S law (not to mention high unemployment rates and the systematic underpaying of employees below their level of productivity).

It should also not be surprising that many business leaders are also members of groups such as “Fix the Debt”. These groups talk about cutting entitlement programs as the major focus of deficit reduction. However, many of the same people arguing to “fix the debt” are part of the debt problem; not paying their fair share and extracting every dollar of government benefits they can possibly find. There are much easier ways to “fix the debt”, ways that won’t increase poverty rates, crime rates, and human suffering.

 

Federal Revenues by Source

President Obama, as part of his 2012 campaign, called for higher taxes as an act of “new economic patriotism”.  It is time corporations, who should represent American values, answer the call and put long-run sustainability ahead of short-term profits. Not hiring workers, paying workers blow their productivity, taking more than you need and not giving what you are legally supposed to give is not a recipe for a healthy economy.  Corporations are responsible from a socially conscious point of view, but the government (Federal, State and Local) is even more responsible;  putting corporate interests ahead of the interests of those people it is elected to represent is.

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3 thoughts on “Transparency Thursday: Robbing Peter to Pay Yourself

  1. Social responsibility for corporations is a concept that exists only in academia. In the real world corps only exist to maximize stockholders profits. So yes the government is responsible for letting them slide. But outsourcing is a very real problem facing the American workforce and tax breaks for corps is the governments carrot to get them to stay. There is an increasing pool if cheap yet sophisticated labor around the world. It’s not just manufacturing being outsourced anymore – now it’s legal and scientific work as well. Tough issue

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  2. There are two key concepts that I would like to focus on with respect to your response. It is certainly true that outsourcing is a real issue that faces developed countries.

    First, is that subsidizing an industry, either through direct subsidies or tax breaks, ALWAYS disrupts how markets work. Subsidizing an company, without a needs based approach, without an adequate cost-benefit analysis, and without holding companies accountable for the taxpayer money they receive, creates a perverse incentive for companies to try to extract every possible dollar of government funding possible while subsequently reducing their tax bill by through both legal (tax exemptions) and illegal (tax shelters) means. It is up to the government to ensure that companies pay what they are obligated to by law–failure to do so is a failure to protect national security and the sustainability of the economic prosperity of a nation.

    The second point, which relates to the first, is that subsidies need to be NEEDS BASED. There are two compelling arguments for government intervention in markets. One, widely accepted, is protecting infant industries so they can grow and one day compete in open markets–the key to these subsidies is that they are temporary. The other is “economies of agglomeration” (search here at NN or PK’s NYT blog for more info), where a whole community relies on an industry to function and the collapse of once industry would adversely affect many others and subsequently the whole local economy (think the recent U.S. Auto bailout, or less popularly the financial sector bank bailouts). All industries will claim they are part of an agglomerated economy, it is up to the government to decide when agglomerated economies truly need a loan or subsidy to stay survive. These subsidies are needs based and also temporary, and in some cases are simply loans that will one day be paid back (or not a subsidy at all).

    When a subsidy is not needs based, and/or not temporary but systematically signed into law (think GE tax credits or tax exemptions for the oil industry), a problem exists. There is no reason taxpayers should be bankrolling these endeavors, especially when “deficit scolds” are arguing for entitlement / social spending reform to reign in the deficit. In the long run, subsidizing something that does not need a subsidy leaves an uncompetitive industry and a large government bill, and an even larger future subsidy in order to protect “sunk costs”. The best way to deal with these sunk costs is to let uncompetitive industries fail and be replaced by new competitive industries.

    JFK once said, “Ask not what your country can do for you, but what you can do for your country”. We do not need to ask “what we can do for our country” because the answer is simple, pay your fair share of taxes. The system is created by brilliant minds, and in theory it works. When the system is distorted over the long run, you get rising income inequality and lower social mobility, high unemployment, stagnant wages (below the level of worker productivity), and a declining contribution of corporate tax revenue coupled with record corporate profits (as we currently have here in America). More directly, in the short run you get a budget deficit, because everyone wants to take (even if they do not need) and no one wants to pay. Recessions just exacerbate the problem by further depressing government revenue, they simply bring to the surface inefficiencies in a government that can be hidden during times of economic growth.

    Corporations have “had their run of the place [America]”. It is past time that politicians, corporations, and individuals embrace the “economic patriotism” championed by FDR, JFK, G.H.W. Bush, Clinton, Obama, and many others. This requires not only progressive laws, but strict enforcement and real deterrents (through strong punishments) for those who violate these laws. Enforce the laws that make the country work, and watch the country work; do not allow the super-wealthy to continue blackmail the country into doing what is in their best interests. You would be surprised how much of the doomsday theory of higher taxes is a myth; challenge the myth and watch business continue, for the most part as usual.

    (For more insight into the G.O.P. philosophy of cutting taxes and social spending to spur economic activity, search “starve the beast theory”. The theory is as absurd as it sounds, and has been proven time and time again to lead to large deficits and not much else.)

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  3. http://www.nytimes.com/interactive/2012/12/01/us/government-incentives.html

    According to the NYT, states and municipalities pay corporations 80 billion dollars a year in subsidies. When you consider these subsidies (80b) + government tax expenditure (180b) vs. corporate tax revenue (180b), in 2011 it seems that corporations indeed took much more out than they paid into the system (although these figures do not include state and local taxes on corporations, but even if it was equal it would not be right. Corporations are supposed to PAY taxes, not receive rebates / break even; if “corporations are people”, as some like to argue, then they are at least very wealthy people who owe much of their success to their environment).

    Of course employment is important, but corporations are not running charities here; they pay wages to make profits, and are supposed to have some effective tax burden (instead of a seemingly negative tax burden they currently enjoy). Should the government have to pay companies to hire employees? Of course not, but that is in effect what has been happening.

    And it is ultimately up to the government to correct this problem. You cannot really fault private companies for trying to maximize their profits,. You can, however, blame the government for allowing corporations to take more than they need and pay less then they are legally supposed to. This is a failure of a fundamental function of government, and ultimately it is everyday citizens who pay the price.

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