What do corporations get in return for their political contributions? Plenty. An agriculture policy professor argues that unlimited corporate money in politics hurts America’s working families.
Burger King is in talks to buy Canadian coffee and doughnut chain Tim Horton. In Wall-Street Banker lingo, this deal will be a “tax inversion,” moving Burger King’s headquarters from the U.S. to Canada
Tax inversions are on the rise because they allow the parent company to escape or reduce U.S. corporate income taxes. That is a Whopper of a Deal for Burger King but not for U.S. government coffers.
The tax inversion is just one example of the many economic policies and tax laws that favor corporations over individuals. These policies help corporations squeeze out more profits at the expense of the middle class, shift the tax burden to working families and hinder government’s ability to provide basic services to the nation. It’s a bad deal for both rural and urban communities.
Why would Congress go along with a plan like this? Simply put, because corporations pay them to. Businesses donate billions of dollars to political campaigns because the benefit cost ratio is considerably greater than 1.
What do they get for their “investment”? Plenty.
Tax inversions have been happening since the late 1800’s but are much more common in recent years, with almost 50 companies inverting in the past decade. Congress considered legislation in 2004 to stop inversions, but the watered down law they passed left a gaping loophole that allowed U.S. corporations to become a foreign corporation, if they merged with a foreign partner, even a much smaller foreign partner.
Under current law, inverted companies must still pay U.S. taxes on profits they earn in the U.S. Of course, there are many ways corporations can and do hide profits.
Corporate executives refer to ways of hiding profits in words like “stripping” and “hopscotching,” but to most of us this is plain old “cheating.” Cheating reduces tax revenue to the government, which eventually means cuts in government services or raising taxes on most of us.
Hoarding of profits offshore is big business for U.S. corporations. It has been estimated that U.S. corporations have $2.1 trillion socked away in offshore accounts and in foreign businesses. That number has a lot of zeroes. It amounts to more than $17,000 per U.S. household that U.S. corporations have squirreled away offshore.
According to a recent study, just 20 of the corporations—including household names like GE, Microsoft, Apple, IBM, Coca-Cola and Goldman Sachs—hold half of this total. Not surprisingly, these same companies are the largest political donors and have the largest herd of lobbyists. Ever.
Both political parties continue to complain about tax inversions and corporate cheating but have offered nothing but rhetoric.
Cheating on taxes goes well beyond corporate personhoods. Wealthier households also hide income and wealth offshore. Economist Gabriel Zucman estimates “around 8% of the global wealth is in tax havens, three-quarters of which goes unrecorded.”
Although tax inversions have captured recent news, there is another kind of money inversion that is even more insidious than tax inversions. This is the “income inversion” that comes from growing corporate economic and political power being used to squeeze money and purchasing power out of most households.
The middle class, in particular, is caught in a vise of falling real income and higher consumer prices. Some of the squeezing in the vise is caused by corporate vice, or greed.
Proof of an income inversion is in the numbers. The chart below shows U.S. corporate before-tax profits and taxes expressed in current dollars. Corporate profits have increased a whopping four-fold since 1980, from about $500 billion to over $2 trillion last year. (The dramatic increase in profits is not due to corporations accounting for a greater share of business compared to non-corporate business, as the gross value added by corporate businesses has declined from about 60% to about 56% during the same time period.)
While before-tax corporate profits increased dramatically, the actual average tax rate on these profits has decreased from about 40% in 1980 to 27% in 2013. Over $1.5 trillion dollars in after-tax profits remained in the coffers of U.S. corporations.
Many of these corporations are attempting to escape or reduce taxes by exploiting legislatively created loopholes like Burger King’s planned tax inversion.
Keep in mind that profit data in the above chart do not include money hidden away in foreign tax havens and foreign corporate subsidiaries.
Corporations, their executives and stockholders have done very well, with recent profits exceeding those leading up to the banking debacle in 2008. Where did the huge increase in corporate profits come from? Mostly out of our pockets.
People, except for super rich, have not done well. The chart below shows median U.S. household income in constant dollars. The dips in household income are associated with recessions and associated increases in unemployment. The dip that started in 2000 was caused when the dot.com bubble burst, and the 2008 fall was caused by the failure of banks too big to fail.
Since 2008, median household income has fallen by about $4,500 per year, and has not recovered as in previous dips. Contrast the continued fall in household income since 2008 with the $725 billion increase in corporate profit over the same period, which amounts to about $5,900/year for 112.5 million households. Had this money ended up in households and not corporate coffers, household income would be on the general upward trend apparent in the above chart. Moreover, putting this money in pockets of the 99% would stimulate the economy, likely much more that all the attempts to use monetary and fiscal policy to stimulate the economy.
Rapidly growing corporate profits at the expense of most households is one manifestation of use of corporate “buying” power and offshoring jobs to push down workers wages. This effect is manifested in a wage-productivity gap.
Mainstream (real) economic theory establishes that wages and pay should generally follow productivity. This has not happened since the 1970s; the widening gap between productivity and median household income is shown in chart below.
Abuse of corporate economic and political power is a major reason for the growing wedge between labor productivity and household income for most people. The gap will continue to grow, until a balance of power is returned to markets.
Numerous academic studies show that Wal-Mart and other dominant employers have used their power to push employee wages and benefits down. When a dominant firm pushes wages and benefits down, other business must follow suit to remain cost-competitive. Wages and benefits spiral down. This downward spiral must be reversed.
The “gushing up” of money especially disadvantages rural areas, as dollars that once flowed to the rural and agricultural communities are now siphoned off to international financial centers, resulting in an accelerated downward spiral of local businesses.
Tax loopholes allow corporate “personhoods” and wealthy individuals to escape taxes, thereby increasing their wealth and widening the income and wealth gap.
Net worth of the bottom 60% of U.S. households has decreased in the past ten years, while the wealthy households have seen net worth increase, as shown in the chart below.
Middle-Class America is disappearing as income and wealth continue to decline for most households. Socioeconomic reasons for this are admittedly complex, but a dominant reason is the growing economic and political power of corporations.
Well over a century ago, the U.S. Supreme Court ruled, and has repeatedly reaffirmed, that corporations have the same rights as people, a legal status often called corporate personhood. Giving corporations the same rights as citizens defies common sense, but more importantly, is partly responsible for their dominant economic and political power.
Building on corporate personhood, the Supreme Court’s Citizens United opinion in 2010 allowed corporations, because they are “people,” to make unlimited political contributions. Their reasoning, if you want to call it that, was that the First Amendment to the Constitution guarantees free speech to all Americans, including “personhoods” that the Supreme Court previously created.
To an old country boy, the Supreme Court’s opinions just don’t add up! If the individuals who control corporations–executives and stockholders–are American citizens, they already have free speech rights as individuals. Why should they have their free speech rights doubled?
More importantly, why should U.S. corporations that are controlled by people who are NOT American citizens have the same rights as the rest of us?
The first step in returning America to a representative democracy is to overturn the Supreme Court’s decisions that allow corporations to spend unlimited amounts to influence elections.
Congress and state legislatures have the authority to take money out of politics. In fact, on Monday night, the Senate advanced a bill to overturn Citizens United.
But don’t be fooled by the Senators 79-18 vote. The vote only means that Congress will debate the issue. Many political sources predict that the bill will eventually fail. Amending the Constitution requires a two-thirds vote of both the Senate and the House, and ratification by three-fourths of the states.
Obviously, citizens who think overturning Citizens United is a good idea need to tell their legislators, state and federal. Because you know corporations, including the ones controlled by foreigners, will.
C. Robert Taylor is Alfa Eminent Scholar and Professor in the College of Agriculture at Auburn University.