The real reason for public finance crisis
If you want to know why we have budget deficits all over, look no
further than the roaring success of corporate tax avoidance
NOTHING BETTER SHOWS corporate control over the government than
Washington's basic response to the current economic crisis. First, we
had "the rescue", then "the recovery". Trillions in public money
flowed to the biggest US banks, insurance companies, etc. That
"bailed" them out (is it just me or is there a suggestion of
criminality in that phrase?), while we waited for benefits to "trickle
down" to the rest of us.
As usual, the "trickle-down" part has not happened. Large corporations
and their investors kept the government's money for themselves; their
profits and stock market "recovered" nicely. We get unemployment,
home-foreclosures, job benefit cuts and growing job insecurity. As the
crisis hits states and cities, politicians avoid raising corporate
taxes in favour of cutting government services and jobs – witness
Might government bias favouring corporations be deserved, a reward for
taxes they pay? No: corporations – especially the larger ones – have
avoided taxes as effectively as they have controlled government
expenditures to benefit them.
Compare income taxes received by the federal government from
individuals and from corporations (their profits are treated as their
income), based on statistics from the Office of Management and the
Budget in the White House, and the trend is clear. During the Great
Depression, federal income tax receipts from individuals and
corporations were roughly equal. During the second world war, income
tax receipts from corporations were 50% greater than from individuals.
The national crises of depression and war produced successful popular
demands for corporations to contribute significant portions of federal
US corporations resented that arrangement, and after the war, they
changed it. Corporate profits financed politicians' campaigns and
lobbies to make sure that income tax receipts from individuals rose
faster than those from corporations and that tax cuts were larger for
corporations than for individuals. By the 1980s, individual income
taxes regularly yielded four times more than taxes on corporations'
Since the second world war, corporations have shifted much of the
federal tax burden from themselves to the public – and especially onto
the middle-income members of the public. No wonder a tax "revolt"
developed, yet it did not push to stop or reverse that shift.
Corporations had focused public anger elsewhere, against government
expenditures as "wasteful" and against public employees as
Organisations such as Chambers of Commerce and corporations' academic
and political allies together shaped the public debate. They did not
want it to be about who does and does not pay the taxes. Instead, they
steered the "tax revolt" against taxes in general (on businesses and
individuals alike). The corporations' efforts saved them far more in
reduced taxes than the costs of their political contributions,
lobbyists' fees and public relations campaigns.
At the same time, corporations also lobbied successfully for many
loopholes in the tax laws. The official federal tax rate on profits is
now around 35% for large corporations, which theoretically have to pay
additional state taxes on their profits and local taxes on their
property (land, buildings, business inventories, etc). Those official
and theoretical tax obligations have been used to support
conservatives' claims that corporations pay half or more of their
profits to federal, state and local levels of government combined.
However, because of loopholes, the truth is very different. The actual
tax payments of corporations, and especially large corporations, are
far lower than their official, theoretical obligations.
The most comprehensive recent study of what larger corporations
actually pay by three academic accountants – professors at Duke, MIT
and the University of North Carolina – gets at that truth. It examined
a large sample of corporations. Their average turned out to be a rate
of total taxation (federal, state and local combined) below 30 %. The
"We find a significant fraction of firms that appear to be able to
successfully avoid large portions of the corporate income tax over
sustained periods of time. Using a 10-year measure of tax avoidance,
546 firms, comprising 26.3% of our sample, are able to maintain a cash
effective tax rate of 20% or less. The mean firm has a 10-year cash
effective tax rate of approximately 29.6%."
General Electric (GE) deserves special mention. The New York Times
reported that its total tax payment amounted to 14.3% over the last
five years. Citizens for Tax Justice corrected that down to 3.4%, as
the profits tax it paid in the US. Thus, GE paid a far lower tax rate
on its income than most Americans paid on theirs. In 2009, GE received
a huge $140bn bailout guarantee of its debt from Washington. By
choosing GE's chief executive, Jeffrey R Immelt, to head his economic
advisory panel, President Obama effectively rewarded the corporate
programme: give us more and tax us less.
Corporations repeated at the state and local levels what they
accomplished federally. According to the US Census Bureau,
corporations paid taxes on their profits to states and localities
totalling $24.7bn in 1988, while individuals then paid income taxes of
$90bn. However, by 2009, while corporate tax payments had roughly
doubled (to $49.1bn), individual income taxes had more than tripled
If corporations paid taxes proportionate to the benefits they get from
government and in fair proportion to what individuals pay, most US
citizens would finally get the tax relief they so desperately seek.