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Monday, November 04, 2013

Big Power Corrupts Bigly

In 2010, General Electric (NYSE:GE) had revenues of $149 billion.  That's larger than the gross domestic product of all but about one-quarter of the countries on earth.  General Electric may also be the most diverse company in the world, involved in everything from jet engines to coffee makers, power plants to sealants, finance to lighting, and General Electric's "economy" is more diverse than the economy of many nations and most governments. They have over 300,000 employees working all over the world.  General Electric is currently number 6 on the list of Fortune 500 companies.  They are almost a nation unto themselves.

In 2010, GE had profits of $14,200,000,000, of which $5,100,000,000 was earned in the United States, yet GE paid no U.S. taxes:
...low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies. 
Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.
Other huge companies are also using hordes of lawyers and lobbyists to collude with the government to avoid taxes and let others bear the burden of funding the government:
While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well. Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less. [...] 
Such strategies ... have pushed down the corporate share of the nation’s tax receipts — from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.
And Big Government, including Obama, is definitely a willing player in the collusion:
Obama ... has designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes. 
“He understands what it takes for America to compete in the global economy,” Mr. Obama said of Mr. Immelt, on his appointment in January, after touring a G.E. factory in upstate New York that makes turbines and generators for sale around the world. 
A review of company filings and Congressional records shows that one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.
I don't mean to pick on GE.  While they've been the most successful at the tax avoidance game, Big Money (Wall Street), Big Pharma, Big Oil, Big Military, etc. all have been quite successful at collaborating with Big Government to fleece the rest of the country via favorable tax and regulatory treatment for these important election campaign donors.  The Bigs fund the elections of the politicians and bureaucrats and the government largess is the return payment for that funding.

The solution is quite simple.  First, eliminate the corporate income tax completely, especially since it only represents 6.6 percent of all federal revenue anyway.  This will immediately eliminate all the current collusion and corruption.  This should actually be moderately easy to get through Congress, if not right now, then eventually.

Second, institute a revenue tax (NOT income tax), on all revenues over some amount, say $10 billion, with no loopholes, and increasing rates as revenues increase beyond $10 billion.  If economies of scale still favor the company even with the revenue tax, fine.  If not, the shareholders will force a breakup of the company because the new pieces will then be more profitable in aggregate because each piece will be smaller and able to avoid the tax on revenue.  This would help reduce the number of Bigs and their inherently corrupt relationship with Big Government.

Limiting the number of large and powerful companies would be a good thing since, to paraphrase Lord Acton, power corrupts and big power corrupts bigly.

16 comments:

Hey Skipper said...

First, eliminate the corporate income tax completely, especially since it only represents 6.6 percent of all federal revenue anyway.

Never mind that it is a transparent lie which allows Congress to hide spending behind prices.

Bret said...

Yes, the tax incidence of the corporate income tax falls somewhere between partly and mostly on consumers (i.e. the corporation simply acts as a tax collector from consumers via higher prices).

However, given that the revenues raised by the corporate income tax is so small, my current thinking is that the tax incidence effect is secondary. Supporting hordes of lawyers and lobbyists just isn't worth it for 6%.

Clovis e Adri said...

Bret,

I've got the feeling this post could have been written by Harry :-)


What I would like to understand is: if the Liberarian economic model you usually favor strive for the least taxes possible, shouldn't be a good thing that those companies are paying very low taxes?

Annoying Old Guy said...

No, it would be a good thing if they were paying very low taxes because the taxes were low. What we have here is, effectively, a black market in tax law. It's not libertarian to say "those regulations are OK because everyone sneaks around them". The libertarian view, which Bret makes, is that if it's not effective and creates large compliance costs along with corruption, you should eliminate it.

Clovis e Adri said...

AOG,

By the way you say it, looks like an aesthetic (or moral) argument. In terms of observables - of money and market efficiency - does it make a difference if you pay low taxes using tricks or using the law itself? Isn't the market *always* more efficient, in your economic model, if the tax is low no matter how?

Bret said...

Clovis,

My social-political-economic motivations are moderately consistent in striving for individual freedom and especially minimizing corruption from large and powerful organizations that impinge on that freedom.

The U.S. government is really, really big so I end up writing mostly about that. That a number of corporations are big would be very secondary, except where they collude with the really, really big government.

Corruption is far worse than taxes, in my opinion, for freedom and probably economic value creation as well.

Annoying Old Guy said...

Clovis;

No. As I've written before, excessive regulation is just as bad (if not worse) than high taxes.

To elaborate, refer to what Bret wrote in the preceding comment.

Clovis e Adri said...

Bret & AOG,

---
Corruption is far worse than taxes, in my opinion, for freedom and probably economic value creation as well.
---
The other day, when you explained to me your Lobbying system in the US, you did not call it corruption. It is legalized, after all.

As far as I can see, those companies are exploring loopholes and making their lobby within the Law - hence, it is not corruption again.

They are enjoying the advantadges that your Courts, Congress and Executive branch provide in legal ways. So, effectively, this is just a system that allows, legally, lower taxes for bigger companies.

You do have very, very big companies for a long time now. And I wouldn't know to precise if today the US is "more corrupt" than before, maybe (or even probably) it is not.

So, it looks like you do have a system that has provided, and still does, much economic value creation being the way it is. Or am I mistaken?

Bret said...

Clovis wrote: "...you did not call it corruption..."

Things don't need to be illegal to be corrupt, for example, "corruption of principle" is a common phrase. Perhaps "graft" or "pork" would be better words though.

Congress can pretty much make anything legal these days. Sometimes SCOTUS reins them in a bit, but usually not. Therefore, just because it's legal doesn't mean that it should be legal and/or that it's not corrupt.

At any rate, even if you'd prefer to not assign any words that have a negative connotation to it, I'd prefer that the Bigs not work together to fleece the masses, legal or not, corrupt or not.

Clovis wrote: "And I wouldn't know to precise if today the US is "more corrupt" than before, maybe (or even probably) it is not."

The legions of lobbyists and lawyers has grown hugely in my lifetime, so that type of whatever-you'd-like-to-call-it is much, much more pervasive now than ever before.

Some other forms of corruption are probably less, I'm not sure which forms those would be though.

Clovis wrote: "So, it looks like you do have a system that has provided, and still does, much economic value creation being the way it is."

Ummmm, I'm not sure where you're trying to go with this. Are you implying that you think the legions of lobbyists and lawyers add to that value creation? Or that they haven't yet destroyed our ability to produce goods and services so why worry? Or something else?

Clovis e Adri said...

Bret,

---
At any rate, even if you'd prefer to not assign any words that have a negative connotation to it, I'd prefer that the Bigs not work together to fleece the masses, legal or not, corrupt or not.
---
Oh, I have no problem in calling it corruption. Last we spoke, I called it bottled corruption.

---
Ummmm, I'm not sure where you're trying to go with this. Are you implying that you think the legions of lobbyists and lawyers add to that value creation? Or that they haven't yet destroyed our ability to produce goods and services so why worry? Or something else?
---
I am trying to see things through a Libertarian lens.

I mean, I very much agree with your sense of injustice happening here. I surely support any move to make sure those big companies pay their due share of taxes like any other company. But... I am no Libertarian.

In another thread AOG and I had this exchange:

---
[Clovis] Why do you care so much for the govt. induced restriction, and dismiss so easily the one induced by the Beer Company?
[AOG] Consent. The Beer Company doesn't forbid you anything,[...]
---

Well, if I take this to be the right Libertarian position, I can not fault any of those Big Companies - they are not forbiding me anything by paying less taxes through loopholes. It is all acts of consenting adults. Furthermore, to pay less taxes is good for the economy in general (again, as postulated by Libertarianism). So, I do not see how to make my new found Libertarian position compatible with being anti-Big Business' tricks.

Annoying Old Guy said...

No, when the tax laws are changed that is not consenting adults because the other tax payers didn't consent to bear the larger tax burden. You're taking the definition of democracy that is "two wolves and a sheep, voting on dinner".

Bret said...

Or even a wolf, a shepherd, and a sheep voting on dinner. The shepherd and the wolf look much the same to the sheep.

Bret said...

Clovis wrote: "If I take this to be the right Libertarian position, I can not fault any of those Big Companies..."

On several issues, I'm not a very good libertarian. My tax on Big Revenues that I proposed in this post would not be endorsed by many libertarians, for example.

I'm not necessarily "faulting" the companies or the government. I believe the "corrupt" interactions between Big Corporations and Big Government are inherent emergent behaviors of the system and there are strong incentives for enough of the players to cause these interactions.

I believe that a key cause of the "corrupt" interactions is size for two reasons. The first is that a small number of huge players is a much easier target for politicians to coerce. If, for example, there were a hundred times as many financial institutions that were each a hundred times smaller, it would be a LOT more work for a given politician, lobbyist, bureaucrat, political party, etc. to tap into campaign contributions and other largess from the companies. It would also be much harder to tailor legislation to benefit the various companies because they would be in competition with each other.

The second reason is concentrated government legislative power. If government were limited in the types of things it could legislate (as it originally was supposed to be by the constitution), for example if it left most things to the States, then the companies couldn't benefit from lobbying and "enticing" the politicians and bureaucrats to enact legislation that benefits them at the expense of everybody else.

So the solution seems straightforward to me: reduce the size of the Bigs and reduce the size and power of government. I believe that would make a huge amount of the "corruption" evaporate.

The frustrating part to me is that I exactly agreed with Occupy Wall Street about the problem. It's our guess at the solution that's directly opposite: mine is to make everything smaller and theirs is to make everything even bigger.

Hey Skipper said...

[AOG:] No, it would be a good thing if they were paying very low taxes because the taxes were low. ... The libertarian view, which Bret makes, is that if it's not effective and creates large compliance costs along with corruption, you should eliminate it.

[Clovis:] By the way you say it, looks like an aesthetic (or moral) argument. In terms of observables - of money and market efficiency - does it make a difference if you pay low taxes using tricks or using the law itself? Isn't the market *always* more efficient, in your economic model, if the tax is low no matter how?

It is far from an aesthetic or moral argument, for two very important reasons.

First, there is the deadweight problem. A gordian tax code, which ours surely is, imposes deadweight spending on the economy. All that money going to tax lawyers and lobbyists raises prices. The cost of the tax is the amount of tax paid, plus every dime devoted to avoiding paying even more. From the companies' point of view, so long as the sum of tax plus avoidance costs is less than the headline tax rate, then it is a good investment.

But from an economics point of view, the actual rate paid is more than 6%. I don't know how much more the effective rate (tax paid + avoidance costs) is than the simplistic cited rate, but every dime of avoidance costs is a deadweight on the economy. Not only does it add to the prices consumers pay, but it is money that is not going to investing in new economic capacity.

Then there is the corporatist angle. Complex corporate tax laws are in the the interest of big companies, since they have the resources to exploit the law, which puts new entrants at a competitive disadvantage.

There are many myths in the US economy. Every year I get a social security statement that tells me how much my employer paid for me. When I read that, my head practically explodes, for it is a lie so flagrant that I must conclude the Social Security administration is either morally corrupt, or possessed of unassailable institutional ignorance.

Just so with corporate taxes. Corporations do not pay them, yet their existence provides a nearly endless trough at which congressional parasites engorge themselves, while big corporations exclude competition.

I don't know what the right tax answer is -- at the moment eliminating corporate taxes and replacing them with a national VAT sounds attractive.

Clovis e Adri said...

H. Skipper;

---
But from an economics point of view, the actual rate paid is more than 6%. I don't know how much more the effective rate (tax paid + avoidance costs) is than the simplistic cited rate, but every dime of avoidance costs is a deadweight on the economy.
---
You are right, but for so big companies as GE, the extra money with avoidance costs is really small compared to what they would be paying otherwise. For example, they may be spending something like 6,01%, and this is still far less than the small companies pay, and still constitute a bonus to the economy if you believe low taxes are *always* good.

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Every year I get a social security statement that tells me how much my employer paid for me. When I read that, my head practically explodes, for it is a lie so flagrant [...]
---
I do not understand what you mean. Is your employer lying on how much it pays you, in order to avoid taxes? Wouldn't that be easy to detect by govt.?


Bret;


---
So the solution seems straightforward to me: reduce the size of the Bigs and reduce the size and power of government. I believe that would make a huge amount of the "corruption" evaporate.
---
I can see your logic, but your solution may be really hard to implement, and may present many hazards too. How to and who defines what is the right size of a company? Don't you think it has the potential to generate absurd situations too? It is somehow the analog of govt. deciding what is the right size of a family, for example, China like.

And nothing guarantees it will work, for after the new companies learn to navigate the system, new behavior may emerge, like many of them effectively uniting under common strategies and enacting a similar dynamics of what we have now.

As companies and capitalism get more and more multinational, national rules and boundaries matter less and less. It is pretty hard to allow for globalized free markets while trying to maintain their control from a local/national perspective. For example, if you place right now a size limit for any of those companies, they will just replace themselves in other country and pay another bunch of lawyers to create the illusion they are complying with the new law.

In truth, even if we allow for big and strong governments - following Occupiers wish - it may be not enough to balance the shift of powers here in the long run. We may be doomed whatever we do :-)

Hey Skipper said...

[Clovis:] I do not understand what you mean [by accusing the gov't of lying on the SS statement]. Is your employer lying on how much it pays you, in order to avoid taxes? Wouldn't that be easy to detect by govt.?

No, the lie is that my employer pays half of my social security taxes.

Bollocks, sheer, bald faced, lying, economically illiterate bollocks.

Due to SS taxes, my wage is 13% less than it would be otherwise. There is no such thing as free.

You are right, but for so big companies as GE, the extra money with avoidance costs is really small compared to what they would be paying otherwise.

It may well be only .01%, but for a company the size of GE, that is still millions expended on a completely unproductive activity.

I think transparent taxes are good. I think there is an ideal size of government where it does the things it is essential for -- inherently collective problems -- and nothing else.

We would be a lot closer to in ideal sized government if corporate taxes were ditched entirely, because they are completely opaque to those who actually pay them.