The Ryan Budget and Territorial Taxation

Have you looked at Paul Ryan’s budget?  Among its many proposals benefiting the ubber-rich at the expense of the poor, it calls for a shift away from our system of taxation based upon worldwide income.  In doing so, the plan would exempt from U.S. taxation foreign profits earned by multinational corporations.  This aspect of the proposal is little understood and has received almost no press coverage, but it speaks volumes about the lengths conservatives will go to enrich the 1%. 

Today, when a U.S. citizen earns interest on investments held in a foreign bank or trust, he’s required to report the income to the IRS, subjecting it to U.S. taxation.  The same is true for corporate profits booked by overseas subsidiaries.  However, tax lawyers and accountants have found sophisticated ways that the rich use to shield income and avoid such liabilities.  This is crucial to note and the subject of an earlier blog I wrote.  If you’re unfamiliar with the issue of transfer pricing, go to this link.  It will be worth your time. 

The problem with Ryan’s proposed shift to a territorial system of taxation goes beyond a loss of revenue, which would be substantial.  (The Tax Policy Center estimates that his plan will result in a $4.6 trillion shortfall in revenue by 2022--$10 trillion if the Bush tax cuts are retained as Ryan proposes).  In my mind, the more significant problem is that it will result in regulatory arbitrage.  What do I mean by that?  Have you ever noticed how many U.S. businesses incorporate in states (Delaware, for example) outside their places of operation?  They often do that in order to take advantage of a less intrusive regulatory environment.  AIG, for example, was able to choose its federal regulator and opted for the Office of Thrift Supervision (it had ingeniously purchased a small S&L to give itself the option).  AIG's management knew it would receive little sophisticated supervision as a result, which was part of the truth behind the company's implosion.  The OTS, which was familiar only with the simple business model of thrifts, was completely unprepared to regulate the complexity of AIG's businesses.  In a similar way, if we allow a shift to territorial taxation, it will encourage our multinational corporations to book more income in less intrusive tax havens and move their operations (and probably more jobs) offshore.  They will do it to enrich shareholders at the expense of workers.

The proposal is moronic and must have been written by the Chamber of Commerce, which cares nothing about working class Americans.  The fact that Paul Ryan is pitching it is an indication that he and the other Republicans who support it are bought by moneyed interests and are party to the institutionalized corruption that jeopardizes the health of our nation.  What is painfully clear in all this is that a faction of America's leadership not only wants to reduce corporate income tax rates, but to eliminate it all together.  But conservatives have no middle ground.  Either corporations are people, in which case they must pay their fair share of income tax and help build the roads, schools and other public projects that benefit them, or they are not people and shouldn't be allowed to fund super pacs that give them the ability to buy elections and elected officials.  

Institutionalized Corruption

Here is information made available by the Center for Responsive Politics regarding the connection between political contributions and campaign success.  In each case the numbers reflect the percentage of winning candidates who also raised and spent the most money during their campaigns.

·        In 2004

o   98% of House seats (were won by the candidates spending the most money)

o   88% of Senate seats

·        In 2006

o   94% of House seats

o   73% of Senate seats

·        In 2008

o   93% of House seats

o   86% of Senate seats

·        In 2010

o   85% of House seats

o   83% of Senate seats

The correlation between campaign funding and election success is indisputable—the more money that is raised, the more likely a candidate will be elected.  People like Rush Limbaugh claim this isn’t a problem because money, they say, reflects the popularity of candidates.  However, ever since the 2010 Supreme Court ruling in Citizens United v. Federal Election Commission, money can be sourced from deep corporate pockets that are controlled by a small number of individuals who have interests that run counter to that of mainstream Americans. 

There are so many reasons why this is problematic.  Retired Supreme Court justice John Paul Stevens was—and continues to be—critical of the ruling that gave corporations the same freedom of speech granted to individuals and therefore lifted restrictions on the amount of campaign contributions they can make.  As part of his dissenting opinion he said, “The decision is at war with the views of generations of Americans.”  He has since argued that the ruling could afford protection to acts similar to those of Tokyo Rose and the Watergate burglars. 

However, the bigger problem as I see it is that it violates the premise that a person has a single vote.  When corporations are allowed to fund PACs without restriction, it gives powerful CEOs and Board Chairmen the ability to influence a disproportionately large number of votes in a way that could likely run counter to the interests of their employees.  This can result in what many have called institutionalized corruption.  As Fareed Zakaria has recently said:

Special interests pay politicians vast amounts of cash for their campaigns, and in return they get favorable exemptions or credits in the tax code.  In other countries, this sort of bribery takes place underneath bridges and with cash in brown envelopes.  In America it is institutionalized and legal, but it is the same—cash for politicians in return for favorable treatment from the government.  The U.S. tax system is not simply corrupt; it is corrupt in a deceptive manner that has degraded the entire system of American government.  Congress is able to funnel vast sums of money to its favored funders through the tax code without anyone realizing it. 

Please, Tea Party Christians, realize that what your favorite officials are doing to protect corporations is not only bad for America, but reflects the worst kind of corruption.  In light of the recent CBO report on the growing wealth inequality among us, it’s clear that their actions will only line the pockets of the rich and force the middleclass to pay for corporate mistakes.  It will protect the behavior of the CEO of Whirlpool, who acquired a primary competitor, only to close many of its plants and cancel the pension benefits of the people who’d worked there. 

Is that the behavior you want to protect?

Supply-Side Reprise

A friend recently disagreed with a posting of mine regarding supply-side economics.  The gist of his argument was that tax breaks to corporations encourage investment, which in turn creates jobs.  My reply was to say his summary explained the theory behind supply-side economics, but didn’t reflect its empirical results.  Since the Bush tax cuts were put into place, millions of workers have been laid-off and corporations have horded cash—trillions of dollars at last count—rather than invest it in new businesses or expansion.

Follow my logic that explains why this happens.

·   Typically, corporate employees are not significant shareholders of the institutions where they work.  (For example, in the late 90s, Bank of America made a big show of trying to get more of its stock in the hands of employees.  Today, however, its workers only hold about a tenth of 1% of the bank’s shares).

·   Corporations are beholden to shareholders.  Employees, on the other hand, represent labor costs to be managed.

·   Labor is managed in the following way:

o   Corporations hire employees only when it results in efficiency or revenue increases that are greater than the added labor costs.  When it comes to capital investment, corporations require not only a recouping of costs, but the achievement of a return to shareholders’ equity that exceeds an established hurdle rate.

o   Labor is often the target of a corporation’s search for efficiency, with jobs going to automation or offshore labor sources.

·   While it’s true that lowering corporate tax rates can change the projected returns of various investments, in practice, most corporations evaluate investment returns based upon an expected long-term tax rate.  As I mentioned earlier, the Bush tax cuts have done little to encourage corporations to expand or invest in new businesses.  Rather, businesses have horded the cash saved. 

·   The only thing that will get big businesses to expand or invest in new businesses—and thereby create new jobs—is revenue growth. 

·   The way revenue growth is achieved is through greater consumption, which is already 2/3s of our economy and much larger than the other components of GDP: government spending, investment and trade surpluses. 

·   The best way to induce consumption is to put more money into the hands of consumers, which could be accomplished through tax reductions to workers.  Tax breaks for automobile purchases and first-time homebuyers, for example, provided tremendous economic lift in 2010.

·   But that’s demand-side, not supply-side, economics. 

The point is that in any discussion about the nation’s budget, we have to get corporations to pay a fair share.  Some naysayers claim that U.S. corporate tax rates are too high.  That might be true if it weren’t for the fact that after all the loopholes are accounted for, the tax burden of U.S. corporations is one of the lowest in the developed world.  As I’ve said in previous posts, this institutionalized corruption should not be acceptable.  However, we’ve become accustomed to it—as have the politicians who find it profitable to grease corporate hands by exchanging tax and other benefits for campaign contributions. 

The BS Behind Supply-side Economics

Are there people who still believe in the hype of supply-side economics?  If so, they must be living under a rock, because the evidence clearly suggests the theory to be a monumental failure.  Among the early promises of its architects are that economic rewards “trickle down” to middle income and low income workers when corporate interests are supported.  However, contrary to the hype, the economy doesn’t work like the sea in lifting all boats in a rising tide.  The reason it doesn’t should be obvious, but conservative law-makers are either blind to it, or too interested in lining their pockets with corporate money to care.

At first blush the basis for supply-side economics seems reasonable.  Its objective—to reduce the costs of doing business for corporations—is meant to improve corporate profitability and thereby create more jobs for workers.  Consequently, supply-siders seek to reduce income taxes to the rich and corporate interests as a component of the cost of capital. 

If anything, however, the relationship between tax rates and job creation is negatively correlated.  The greatest economic growth in recent history came after tax increases were imposed during the Reagan and Clinton administrations.  In contrast, job growth was anemic subsequent to the Bush-era tax cuts and continues to be unsatisfactory even though the cuts have been extended.  More problematic, however, is that the gulf between the rich and poor has only widened.  While corporate profits have been stellar and cash balances have increased geometrically, these results haven’t translated into a lowered unemployment rate.

The reason supply-side economics doesn’t work is a point you’ll never see printed in the Wall Street Journal.  When corporate tax rates fall, it’s not in the nature of CEOs to use the windfall to improve the situation of workers.  Quite simply, management sees labor as another cost to be reduced.  It is, however, in the nature of corporate managers to do whatever it takes to improve returns to shareholders.  And that, in a nutshell, is the problem with the theory: Decreased tax rates are used to enrich investors in the form of increased dividends and stock price appreciation, but the benefit doesn’t trickle down in a world where layoffs are seen as a good way to increase efficiency and further improve shareholder value.

Supply-side policies are great only if you’re a well-heeled corporation.  Otherwise, they force middle class tax payers to pay for an educational system, national security and infrastructure that corporations benefit from the most.  They create a situation in which GE can book $14 billion in profits and get a tax credit to boot.  More damaging is that corporations and their rich shareholders can parlay the savings into political contributions that insure their brand of politicians are elected.  No wonder there are so many corporate tax loopholes, which Robert Reich refers to as “institutionalized corruption.”

Supply-side economics is a bone-headed theory that doesn’t work—unless, of course, you’re rich.