You must pay the price if you wish to secure the blessings.
—President Andrew Jackson
It costs money to run a government, and the more you want the government to do, the more it usually costs. One point to consider is how much do we want our government to do? Another is, who should pay for it?
Tax policy is how government funds its services and also one way it fulfills the will of the people who elect it by providing tax incentives or disincentives for particular types of behaviors. Consider how home mortgage interest deductibility has fueled home buying, for example.
As we have seen, starting well before Santa Clara, some companies have worked hard to get out of paying for anything, including taxes. Some even spent years resisting paying taxes on land the government had given them for free; they then worked the issue to a ludicrous extent. The Santa Clara case involved going to the Supreme Court to fight a tax of one-tenth of 1 percent.
You and I could never afford to do such a thing, but economies of scale mean that for huge property owners such efforts can have very big paybacks. Motivated to pursue the subject, with the means to do so, and in the absence of regulations preventing it, they do the obvious thing, as Adam Smith predicted anyone would: they act in their own self-interest.
The result has been an additional inequity that could not possibly have been intended by the framers of the Fourteenth Amendment. After Santa Clara (and subsequent cases continuing well into the twentieth century), increased corporate access to lawmakers has resulted in a shift in the tax burden that rivals the shift in risk from corporate to individual shoulders. In this chapter we cover four aspects of this issue:
- A shift in income-tax burden from corporations to workers
- A shift in property-tax burden from corporations to residents
- The use of federal tax breaks and subsidies to help large corporations
- The use of tax breaks at state and regional levels to lure businesses
There is an appropriate concern about not overtaxing corporations; to do so could endanger the survival of business. But as you will see, this particular pendulum has swung very far away from that risk. To the contrary, the additional shift in tax burden being proposed today is financially crushing individuals who can least afford it.
The Start of Income Taxes
The main purpose of a business corporation is as an instrument for the accumulation of wealth, and it has worked well in that respect. In the Robber Baron Era of the late 1800s and the early 1900s, wealth was being concentrated at an amazing rate among the owners of the trusts. If you’ve ever had a chance to visit Newport, Rhode Island, to see the mansions of the rich from those days, you know how much wealth there was. For example, The Breakers is the seventy-room Italian Renaissance–style villa of Cornelius Vanderbilt II, president and chairman of the New York Central Railroad. The Elms is the French- style chateau of Edward Julius Berwind, who made his millions providing coal to the railroads.1
And these were their summer homes—cottages, as they called them. In New York City, Vanderbilt’s “real” home filled the length of a city block along Fifth Avenue from 57th to 58th Street. Illustrating that the Newport house was truly just a cottage, the Victorian mansion in New York City had 137 rooms. “I have been insane on the subject of moneymaking all my life,” he told the New York Daily Tribune.2
The working poor, however, who at that time constituted the vast majority of people in America and Europe, were truly poor: a middle class was largely unknown, outside of self-sufficient farming communities. At the turn of the century, more than half a worker’s wage went to cover rent—often in slum tenements—and the remainder barely covered food and clothing. Children worked to supplement the family income because, as Annie S. Daniel documented in 1905, four-year-old boys “can sew on buttons and pull basting threads” and a girl “from 8 to 12 can finish trousers as well as her mother.”3 The Supreme Court declared a minimum wage unconstitutional and illegal, and it wasn’t unusual for people to work fourteen-hour days, with two half-hour meal breaks, six days a week for $1 a day.4 As is always the case in situations of poverty, infant mortality in these communities was high.
Nobody filed income-tax returns because nobody paid income taxes. From the founding of the republic, all the costs of the federal government were paid by taxes on imported goods and on alcohol and tobacco. The taxes on imported goods served the beneficial effect of making domestically produced goods cheaper, which stimulated business in America. But financing government entirely by duties and what were in effect sales taxes (as they were usually passed on to the consumer) also had the effect of virtually all the tax falling on those people who spend all of their paychecks on goods (the working poor), with people who simply saved or invested their earnings paying very little tax. In 1913, during the Progressive Movement, a constitutional amendment initiated the federal income tax, which allowed spreading the cost of government over a much wider base—not just what was spent but what was earned. Thus, the wealthy could no longer pocket almost all of their income. They shared the burden, which laid the foundation for the middle class.
By 1922 tariffs on tobacco and alcohol represented only 8 and 9 percent of federal government tax revenue respectively, whereas income taxes on wealthy individuals produced 13 percent of government revenue and taxes on corporations paid 19 percent of the cost of running the governments that authorized their existence.5 This sharing has been increasingly reversed in recent years, however.
- Corporate taxes as a share of the nation’s tax revenues plunged from 28 percent in 1956 to only 11.8 percent in 1996 and to below 10 percent in the early 2000s.6
- In the past three decades, after-tax income of the middle class, which had been rising, has collapsed to inflation-adjusted 1969 levels, and, according to statistics compiled by the AFL-CIO, “average hourly wage of production and nonsupervisory workers in the U.S. economy was $12.77 last year—down 9 percent compared with 1973.”7 The share of all property taxes paid by corporations has dropped from 45 percent in 1957 to 16 percent in 1995 (more recent figures are hard to find, as most states have changed their accounting rules to not break out corporate from personal tax payments, in response to lobbying pressures from corporations).8
- During the first year of the Reagan administration’s “tax reforms,” General Electric actually received a tax refund—an omen of things to come.9
- Austin Chronicle columnist Jim Hightower pointed out, “Forty-one of America’s largest corporations earned $25.8 billion in profits between 1996 and 1999, yet not only did they avoid paying their fair share of taxes—they got $3.2 billion in rebate checks from taxpayers. Among these tax dodgers are such brand-names as Chevron, PepsiCo, Pfizer, J. P. Morgan, Saks, Goodyear, Ryder, Enron, Colgate-Palmolive, MCI, Weyerhaeuser, GM, and Northrop Grumman.”10
- By setting up almost nine hundred subsidiaries in tax havens such as the Cayman Islands and through exploiting the tax-deductibility of stock options given to senior executives, Enron Corporation was able to pay no federal taxes in four of the five years prior to its implosion in 2002. As the Washington Post pointed out, in 2000 the corporation was successful in converting a $112 million potential tax bill into a $278 mil- lion tax refund.11
- According to the U.S. General Accounting Office (GAO), almost one- third of all “large” corporations (assets of at least a quarter-billion dollars) in the United States paid no income tax whatsoever between 1989 and 1995, and more than 60 percent of such companies paid less than $1 million in taxes. By 2005, according to the GAO, more than two- thirds of American corporations, accounting for more than $2.5 trillion in revenue, paid no corporate income taxes whatsoever (the same was true of 28 percent of foreign-owned corporations).12
- Looking at all U.S. corporations, the GAO concluded, “In each year between 1989 and 1995, a majority of corporations, both foreign- and U.S.-controlled, paid no U.S. income tax.” The situation since then has only deteriorated.13
A similar shift has occurred within the human domain, with the wealthy carrying less of the burden than the middle class. The decline in corporate income taxes has been paralleled by a decline in the income taxes paid by the CEOs and the senior executives of those corporations.
- The wealthiest 1 percent of Americans paid $46,726 less in taxes in 1996 than they would have paid had there been no changes in the tax laws since 1977. But among those earning less than $80,000, those “tax reductions” were worth an average of only $115.14
- In the 1980s the Reagan administration pushed through several mas- sive tax cuts for millionaires and billionaires, including the Economic Recovery Tax Act, which, added to a Johnson-era tax cut, slashed the income tax for America’s top 1 percent of families by more than 50 percent.15
- The George W. Bush administration drove the top income bracket’s taxes even lower—from a high averaging around 80 percent between 1935 and 1986 to a current low of 33 percent. Those wealthy families who “earn” their livings by waiting for dividend or interest checks to arrive in the mail from their investments pay a maximum 15 percent income tax.16
This may not be financially healthy, even for the wealthy. The following figures for the period leading up to the crash of 1929 are startlingly similar to those above:
- The 1926 tax cut reduced income taxes for millionaires from 60 percent to 20 percent just three years after the minimum wage was repealed in 1923.
- America’s top 1 percent of families reaped a 75 percent increase in after- tax income during the 1920s.
- From 1920 to 1929, corporate profits rose 62 percent and dividends rose 65 percent.17
What Happens When Corporate Insiders Run the Government
In May 2001 the idea of taxation without representation came full circle when a government leader proposed that we shift all tax burdens back onto the people, lowering the corporate income tax to zero. Paul H. O’Neill is a multimil- lionaire who has been a top executive at Alcoa and International Paper, two of the world’s largest multinational corporations. When I was writing the first edition of this book, O’Neill was secretary of the U.S. Treasury, appointed by the Bush administration and approved by the Senate.
In May 2001 O’Neill suggested that corporations should be totally exempt from all income tax. He said that the roughly 10 percent of federal funds they currently pay in corporate income taxes to provide for and administer our commons is too much; corporations should be just as tax-exempt as churches and synagogues.
Also see Thom Hartmann's latest video, "The Daily Take: Tired of the freeloaders in the US economy?":
O’Neill also called for the abolition of Social Security, Medicaid, and Medicare for working people because, he told a reporter for London’s Finan- cial Times, “Able-bodied adults should save enough on a regular basis so that they can provide for their own retirement, and, for that matter, health and medical needs.” In O’Neill’s opinion, corporations should pay no taxes and individuals should pay all costs of the federal government while also saving to pay for their retirement and all of their own medical costs.18
Yes, He Really Said It
While O’Neill’s proposal was widely reported in England’s business press, the media of the United States chose to ignore it, with the single exception of the suburban New York tabloid Newsday. When Newsday columnist Paul Vitello called the Treasury Department, he reported the following conversation:
Vitello: “The secretary didn’t really mean to say that no matter how old, no person who has paid into the Social Security system all his or her life would be entitled to benefits until he or she is physically no longer able to work? He didn’t really mean to say that ExxonMobil and Time Warner should be treated as we treat the church—as tax exempt?”
Treasury Department Spokesman: “Yes, that is our position. The quotes were all accurate.”19
Checking Vitello’s work (and somewhat incredulous myself), I called O’Neill’s Washington, D.C., office on June 20, 2001.20 I was eventually connected to a friendly and helpful woman at the Public Liaison Office. She con- firmed that, yes, that’s what the secretary said. She added, “We were surprised we didn’t hear anything back about this [from the American media]. We were waiting for it, but nothing came.”
Unequal Tax Breaks
In the early 1990s, Paul Hawken, author of The Ecology of Commerce, found data indicating that the nation’s corporations were net consumers, rather than producers, of tax monies. Several recent books on corporate welfare point to similar trends and conclusions, although hard data are difficult to come by because the necessary statistics are spread across literally thousands of sepa- rate local, state, and federal government agencies and their reports. “It was almost certainly the case, when I did my initial research in 1992,” Hawken told me, “that the nation’s corporations took more out of the economy in tax dollars than they pay in.”21
Around the same time as Secretary O’Neill’s modest proposal, a major aerospace corporation illustrated how much power it has in the economy. It announced that it would relocate its corporate headquarters from Seattle and then played the offers of three cities against one another. By the time the decision was announced on May 10, 2001, the New York Times announced that the winning destination had “promised tax breaks and incentives that could total $60 million over 20 years” to seal the deal.22
This is far from rare. According to a 1996 report from the Cato Institute, businesses in America receive direct tax subsidies of more than $75 billion annually.23 That equates to every household in America paying a $750 annual subsidy to corporations, according to author and former faculty member of the Harvard Graduate School of Business Dr. David C. Korten.24
The way that this happens clearly illustrates the consequences of unrestrained “freedom of expression” in the halls of a government that was designed to serve the public good. In a situation that is reminiscent of the chartermongering era, companies can once again be aggressive in getting local governments to offer tax breaks that are never offered for humans. All of the following have the effect of cash taken out of human pockets and put into corporate ones:
- In Louisiana a multinational chemical company was given a $15 million tax break.25
- In Ohio $2.1 billion worth of business property was taken off the tax rolls, leaving public schools struggling to find resources because they depend most on the now-eviscerated property-tax revenues.*
- New York State companies had, from just 1991 to 1992, “earned” $242 million in tax credits and held $938 million in “unused” tax credits they could “use” in future years.26
- Alabama offered $153 million to a German automobile company to build a factory there, an amount equal to about $200,000 per job created.27
- Illinois gave a national retail chain $240 million in land and tax breaks to keep it from moving out of state.28
- The state of Indiana borrowed millions from its citizens by a bond issue and gave that money as an “upfront cash subsidy,” along with other grants and tax breaks that totaled $451 million, to an airline to build a maintenance facility.29
- Pennsylvania gave a Norwegian transnational corporation $235 million in economic incentives to build a shipyard, an amount that cost the state, according to Time magazine, $323,000 per job.30
- New York City gave tax breaks of $235 million, $98 million, and $97 million to three corporations to keep them from moving to New Jersey, and $25 million to a media corporation to keep it in town. (Few of these breaks created any new jobs anywhere.) Says the New York Times, “Since Mr. Giuliani took office in 1994, he has provided 34 com- panies with tax breaks and other incentives totaling $666.7 million.”31
- Kentucky gave nearly $140 million to two steel manufacturers—more than $350,000 per job created.32
- In Louisiana over a ten-year period, just the top ten corporations get- ting breaks (there were others) received $836 million to “create jobs.” Time magazine did the math and found that the cost to the state’s taxpayers per job created among those ten ranged from $900,000 to $29 million.33
- The state of Michigan created the Michigan Economic Growth Author- ity (MEGA), which as of 1999 had awarded over $900 million in tax breaks and grants to corporations, costing Michigan taxpayers, accord- ing to the Mackinac Center for Public Policy, $40,000 per job created or moved from other states into Michigan.34
In almost every case, benefits to one community were subtracted from another. “No new jobs are created in the process” of most of these sorts of tax breaks, according to former U.S. Secretary of Labor Robert B. Reich, quoted in the New York Times. “They’re merely moved around. Meanwhile, the public spends a fortune subsidizing these companies. But there’s no way that mayors or governors can withstand the heat once a major company announces it is thinking about leaving.”35
Senator Bernie Sanders (I-VT) suggested a simple solution on my radio show in 2008: “Just pass a law denying federal highway matching funds to any state that participates” in these efforts by corporations to play one state off against another. Great idea, but because our federal legislature is now so completely owned by corporate interests, it’ll never pass.
And the list of tax legislation corrupted by corporate influence over leg- islators could easily go on for pages and extends from the local to the national. Indeed, entire books and Web sites are devoted to “corporate welfare.”
On November 6, 2001, the Barre-Montpelier Times Argus ran a syndi- cated article from the Knight Ridder News Service by Micah L. Sifry about proposals put before Congress within days and weeks of the September 11 ter- rorist attacks. The title speaks for itself: “At a Time of Sacrifice, Corporations Are Picking Our Pockets.”36 After the attacks, corporations began lobbying hard for a Bush administration proposal to repeal retroactively the alternative minimum tax passed in 1986. The result:
- $250 million for Enron
- $572 million for Chevron Texaco Inc.
- $671 million for General Electric
- $184 million for American Airlines
- $833 million for General Motors
- $608 million for TXU Corporation
- $241 million for Phillips Petroleum Company
- $600 million for DaimlerChrysler Corporation
- $1.424 billion for IBM37
The consumer advocacy group Common Cause estimated that there may be a relationship between the $4.6 million given by ten of America’s largest corporations to the Democrats, the $10-plus million they gave the Republicans, and the $6.305 billion in tax rebates just those ten corporations would receive as result of the “economic stimulus package” lobbyists were promoting after the September 11 tragedy.38
With or without such legislation, 7 of America’s 82 largest corporations paid “less than zero” in federal income taxes in 1998 (they got rebates instead), and 44 of the 82 didn’t pay the standard federal corporate income tax rate of 35 percent.39
The Trend Goes International
Trends of business influencing government are becoming more uniform worldwide. In a famous recent case, a coalition of Deutsche Bank, Dresdner Bank, Allianz, Daimler-Benz, BMW, and the German energy group RWE all threatened to leave Germany if they didn’t get tax breaks and subsidies from the government. (In the past twenty years, corporate profits in Germany had gone up more than 90 percent and corporate tax revenues had actually fallen by half, but this wasn’t enough.) Finance Minister Oskar Lafontaine tried to fight them, but in the end he himself was crushed. When he quit his job over the issue in 1999, Lafontaine said, “The heart isn’t traded on the stock market yet.”
As the Washington Post pointed out on March 15, 1999, Lafontaine’s experience “shows the limits of any single politician, or any single country, to stem the tide of global capitalism.”40
The next voice from the German government, Chancellor Gerhard Schroder’s top aide, Bobo Hombach, apparently got the message and said, “Things will be different now. We have to move in a different direction.” The companies got their money and stayed in Germany: human taxpayers and family-owned businesses will make up the difference.
Often, however, corporations don’t have to make threats to get their cash from the government: they make “investments.”
In the late 1980s and early 1990s, the tobacco companies donated more than $30 million to various politicians and their parties. In 1997 Trent Lott (Senate) and Newt Gingrich (House of Representatives) inserted a single and mostly unnoticed forty-six-word sentence into that year’s massive tax law. The sentence granted the tobacco industry a $50 billion tax break and was passed with bipartisan support. Yes, billion with a b.41
As Charles Lewis documented in his book The Buying of the President, a large national bank gave the Democratic National Committee a $3.5 million line of credit at an attractive interest rate two weeks after Democrats helped push through the 1994 Fair Trade in Financial Services Act, which netted that same bank $50 million a year in savings.42
The final irony is that while all of this fiscal benefit has accrued to companies through their personhood privileges and while they shift the tax burden to humans, they continue to claim exemptions from liability. Additionally, because the structure and the culture of corporations is driven to maximize quarterly profits, otherwise well-intentioned people working in company boardrooms find themselves pushed to make decisions that may not be in the best interest of the long term, of the commons, or even of the company’s employees.
In a Democracy...
In a democracy the citizens—the voters—would decide these issues without pressure or influence from corporate or other special interest groups.
3. Annie S. Daniel, “The Wreck of the American Home: How Wearing Apparel Is Fash- ioned in Tenements” Charities 14, no. 1 (April 1905): 624–29.
4. http://www.aflcio.org (ca. 2001).
6. John Irons, “Corporate Tax Declines and U.S. Inequality” EPI.org, April 9, 2008, http:// www.epi.org/economic_snapshots/entry/webfeatures_snapshots_20080409.
7. http://www.aflcio.org (ca. 2001).
8. David C. Korten, When Corporations Rule the World (West Harford, CT: Kumarian Press, 2001).
10. The Institute on Taxation and Economic Policy 2001 report at http://www.auschron.com.
11. Richard Cohen, “Enron: No Taxes,” Washington Post, January 22, 2002.
12. From a 2008 study by the GAO, “Comparison of the Reported Tax Liabilities of Foreign- and U.S.-controlled Corporations, 1998–2005,” http://www.gao.gov/new .items/d08957.pdf.
14. http://www.aflcio.org (ca. 2001).
15. William Ahern, Tax Foundation, “Comparing the Kennedy, Reagan and Bush Tax Cuts,” http://www.taxfoundation.org/news/show/323.html.
17. All figures taken from Paul A. Gusmorino III, “Main Causes of the Great Depression,” Gusmorino World, May 13, 1996, http://www.gusmorino.com/pag3/greatdepression/ index.html.
18. “Political Dynamite Fails to Explode: Extreme Proposals of Treasury’s O’Neill Mostly Unreported,” FAIR.org, June 13, 2001, http://www.fair.org/activism/o%27neill.html.
19. Paul Vitello, Newsday, May 24, 2001. See also note 18.
20. The phone number for the Public Liaison Office of the secretary of the Treasury is
21. Hawken and I had this conversation when he was working on his article “Natural Capitalism” for Mother Jones magazine (published in the March/April 1997 issue). The article was later expanded to a book of the same name; see http://www.natcap.org.
22. David Barboza, “Chicago, Offering Big Incentives, Will Be Boeing’s New Home,” New York Times, May 11, 2001, http://www.nytimes.com/2001/05/11/business/chicago- offering-big-incentives-will-be-boeing-s-new-home.html?pagewanted=1.
23. Stephen Moore and Dean Stansel, “How Corporate Welfare Won,” Cato Institute, 1996.
24. David C. Korten, The Post-corporate World (San Francisco: Berrett-Koehler, 1999).
25. Borden Chemicals, noted by Noreena Hertz, PhD, in The Silent Takeover (London: Heinemann, 2001).
26. New York Times, September 21, 1995.
27. Donald L. Barlett and James B. Steele, “Corporate Welfare,” Time, November 9, 1998,
31. Charles V. Bagli, “Companies Get Second Helping of Tax Breaks,” New York Times, October 17, 1997, http://www.nytimes.com/1997/10/17/nyregion/companies-get-second -helping-of-tax-breaks.html?pagewanted=1.
32. Greg LeRoy, “No More Candy Store: States and Cities Making Job Subsidies Account- able” (Washington, DC: Good Jobs First, 1994), http://www.goodjobsfirst.org/pdf/ nmcs.pdf.
34. Joseph G. Lehman, “MEGA Program Shifts Jobs to Where They Are Needed Least,”
Mackinac.org, April 7, 1999, http://www.mackinac.org/1669.
35. See note 31 above.
36. Micah L. Sifry, “At a Time of Sacrifice, Corporations Are Picking Our Pockets,” Knight Ridder News Service, November 5, 2001, http://www.progressive.org/media_1731.
37. “Political Donors Profiteering in the Name of Economic Stimulus: Stimulus Legisla- tion Is Lobbying Opportunity of a Lifetime, Says Common Cause,” news release, Octo- ber 25, 2001.
39. Sarah Anderson and John Cavanagh, “Top 200: The Rise of Corporate Global Power,” The Institute for Policy Studies, December 4, 2000, http://www.corpwatch.org/article .php?id=377; http://s3.amazonaws.com/corpwatch.org/downloads/top200.pdf.
40. Editorial, “Another Casualty of the Left,” Washington Post, March 15, 1999.
41. Julian Borger, “For Sale: The Race for the White House,” Guardian, January 7, 2000.
42. Charles Lewis, The Buying of the President (New York: Avon Books, 2000).
*Noreena Hertz notes in The Silent Takeover (London: Heinemann, 2001) that, “beneficiaries of Ohio’s ‘corporate welfare’ included Spiegel, Wal-Mart, and Consolidated Stores Corporation, all of which were absolved from property taxes....As one school treasurer put it, ‘Kids get hurt and stockholders get rich.’”