I Don’t Think Corporate Taxes Are Too Low

Ok, just a quickie about taxes with two more startling graphs.  Another proposal that’s making the rounds in Washington is to cut the corporate income tax rate.  This proposal is originally coming from the Republicans, but it looks like Obama has drunk the kool-aid too.  The argument goes that corporations in the U.S. are taxed too much and that’s why corporations don’t invest in the U.S. and therefore don’t grow jobs here.  The “evidence” cited is the fact that the U.S. statutory income tax rate for corporations (at least any with substantial income) is 35%, one of the two highest in the developed, industrialized world.

But it’s a deceptive piece of evidence because what matters is what corporations actually pay, not the statutory rate.  As I’ve noted before, U.S. corporations, particularly multinationals pay little in income tax.  GE, especially,is a welfare queen that pays no taxes despite taking huge contracts from the government. So what’s the trend been for corporate taxes as part of our GDP? The CBPP obliges with a graph:

Um, that doesn’t look to me like a severely burdensome corporate tax rate.  In fact, back in the 1950’s and 1960’s, back when corporate managements were focused on making products and opening markets instead of focused on spreadsheet tricks to gimmick-up this quarter’s earnings, the corporate tax rate was higher.

Corporations Not Entitled to Privacy

The Supreme Court of the U.S. has finally put a limit on the “person-ness” of a corporation.  Apparently a corporation still has unlimited free speech rights since it is “person” according to the court, but it doesn’t yet have a right to privacy.  Volokh Conspiracy explains:

Yesterday, in FCC v. AT&T, the Supreme Court unanimously rejected AT&T’s claim that records related to an FCC investigation of AT&T should be exempt from disclosure under the Freedom of Information Act because such disclosure would violate AT&T’s “personal privacy.” Specifically, AT&T sought to invoke the FOIA exemption for law enforcement records the disclosure of which “could reasonably be expected to constitute an unwarranted invasion of personal privacy.”

Key to AT&T’s argument was that if a corporation is a legal “person,” then it should have personal privacy rights. The Supreme Court did not buy it. The opinion by Chief Justice Roberts is short and sweet. It concludes:

We reject the argument that because “person” is defined for purposes of FOIA to include a corporation, the phrase “personal privacy” in Exemption 7(C) reaches corporations as well. The protection in FOIA against disclosure of law enforcement information on the ground that it would constitute an unwarranted invasion of personal privacy does not extend to corporations. We trust that AT&T will not take it personally.


Majority Still Wants Less Corporate Influence

Gallup Organization released a study showing Americans, by a large majority, want less corporate influence in the U.S.  Unfortunately they aren’t getting it.  Corporate influence is at an all time high. See Fox, Hen House, Economic Advisors and Nice to Advise the King for examples.  The last Congressional election was the most expensive so far, thanks to the Supreme Court decision allowing corporations to spend freely on electoral campaigns. From Gallup (graphs at the link):

The large majority of Americans (62%) want major corporations to have less influence in the United States. While this is down from a peak of 68% in 2008, it remains well above the 52% recorded in 2001. Relatively few Americans would prefer to see corporations gain influence, but the 12% recorded this year is the highest to date.

2001-2011 Trend: Preferences for Corporate Influence in the U.S.

The new data come from a Jan. 7-9 Gallup poll. The same survey found 67% of Americans dissatisfied with the size and influence of major corporations in the country today, the highest level since Gallup first asked this question in 2001. Of seven aspects of the United States rated in the poll, Americans are the least satisfied with corporate influence.

2001-2011 Trend: Satisfaction With Size and Influence of Major Corporations in America Today

Republicans are often seen as champions of corporate power — favoring lower corporate tax rates, battling efforts to strengthen labor unions, and advocating less government regulation of business. That is borne out to some degree in the finding that Republicans are more than twice as likely as Democrats, 36% vs. 16%, to say major corporations should maintain the same level of influence in the country, while, by 73% to 49%, Democrats are much more likely to favor less corporate influence. However, relatively few Republicans, 13% — little different from the 10% of Democrats — believe major corporations should have more influence in the country.

The groups of Americans most likely to favor expanded corporate influence are, perhaps, those least likely to be associated with corporate America: young adults, adults living in low-income households, and those with no college education. This could reflect the lower levels of attention these groups have paid in recent years to controversies involving corporate America, including the Wall Street financial bailout and, prior to that, Enron and other business scandals.

via In U.S., Majority Still Wants Less Corporate Influence.

The Way to Maximize Corporate Profits is not to try to Maximize Profits

From Naked Capitalism (Yves Smith) (emphases are mine):

the blind pursuit of “maximizing shareholder value” is not all it is cracked up to be:

The recent productivity report received much attention. But I did not see anyone point out that the spread between nonfarm corporate prices and unit labor cost was 5.25%, the widest spread on record.

This spread is the single most important variable driving corporate profit margins and implies that you should expect major positive earnings surprises.

Yves here. Translation: employers are continuing to squeeze down on workers to improve their margins. And the US has been pursuing that strategy for some time, of shifting the composition of GDP growth away from increases in worker incomes (via hiring and/or paying them more) to increases in corporate profits. The shift was dramatic in the last supposed expansion; it was called a “jobless recovery” for good reason. In every previous postwar growth period, the labor share of GDP growth was never less than 55% and had averaged not much less than 60%. In the pre-crisis expansion, it plunged to 29%.

Before some readers contend that this pattern is inherent to the “maximizing shareholder value,” let’s start with one consideration: strategies that focus on that goal actually do less well than ones that pursue broader aims. John Kay notes in a 2004 Financial Times article (sadly, no longer available on line):

Paradoxical as it sounds, goals are more likely to be achieved when pursued indirectly. So the most profitable companies are not the most profit -oriented, and the happiest people are not those who make happiness their main aim. The name of this idea? Obliquity….

Obliquity is characteristic of systems that are complex, imperfectly understood, and
change their nature as we engage with them…..

Obliquity is equally relevant to our businesses and our bodies, to the management of our lives and our national economies. We do not maximise shareholder value or the length of our lives, our happiness or the gross national product, for the simple but fundamental reason that we do not know how to and never will. No one will ever be buried with the epitaph “He maximised shareholder value”. Not just because it is a less than inspiring objective, but because even with hindsight there is no way of recognising whether the objective has been achieved.

For most of the 20th century, ICI was Britain’s largest and most successful manufacturing company. In 1987, ICI described its business purpose thus: “ICI aims to be the world’s leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science. “Through achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees, our customers and the communities which we serve and in which we operate.”….

In 1991, Hanson, the predatory UK conglomerate that had successfully acquired and reorganised sluggish British manufacturing businesses such as Ever Ready and Imperial Tobacco, bought a modest stake in ICI. While the threat to the company’s independence did not last long, the effects were galvanising. ICI restructured its operations and floated the pharmaceutical division as a separate business, Zeneca. The rump business of ICI declared a new mission statement: “Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base.”….

ICI made the opposite shift – from a grand vision of the responsible application of chemistry to a narrow concentration on established, successful activities. The aim of bringing benefit to a wide range of stakeholders was replaced by the specific objective of creating shareholder value from narrowly focused operations. The company translated this into an operational strategy by disposing of the company’s interests in bulk chemicals to acquire a niche group of speciality businesses: ICI, once the main supplier of chemical products to one third of the world, was reinvented as a smells company.

The outcome was not successful in any terms, including those of creating shareholder value. The share price peaked in 1998, soon after the new strategy was announced. The decline since then has been relentless. After two successive dividend cuts the company was ejected in early 2003 from the FTSE 100 index, the transition from industrial giant to mid-cap corporation had taken only 12 years…..

Obliquity gives rise to the profit -seeking paradox: the most profitable companies are not the most profit -oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self -defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations….

Collins and Porras….found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

Yves again. Simple-minded profit seeking is not what it is cracked up to be. And worse, squeezing worker wages to not simply preserve, but increase profits, is destructive on an economy-wide level (note the rising gap between wages and prices disproves the canard that the wage pressure is necessary to preserve competitiveness).

US business used to operate with the idea that the returns resulting from productivity gains would be shared by workers and the company; that notion now seems as dead as the dodo. But not allowing workers to participate in improvements in corporate returns blunts overall economic growth. Companies are fattening their current bottom lines at the expense of future top line growth. But in our current climate, this strategy looks just dandy….until government stimulus starts to be withdrawn.

Incorporation as a Cause of the Global Meltdown?

I think Buce has a very good point.  There were many causes of the Global Financial Meltdown (GFM) in 2008 and it’s siamese twin, The Great Worldwide Recession That Won’t Recover (TGWRTWR).  Some causes are superficial and others are more systemic.  Certainly perverse incentives in the banking industry were among them.  This is the stuff of “institutional economics”.  One of the least-talked about changes in the last few decades has been that major Wall Street firms have converted from business partnerships (each of the senior managers is personally liable for the mistakes of the firm as a partner-owner) to corporations.  As a corporation, the shareholder-owner at most loses the actual cash they put in.  If they lose the borrowed money, there’s no consequence for them.  It’s heads-I-win, tails-somebody-else-loses.  Senior managers of these large Wall Street enterprises don’t even put any personal cash into the business since their “ownership” stakes are largely the result of stock options and stock grants they give to themselves as “compensation”.  No wonder they took outrageous risks and behaved irresponsibly.  Let Buce at Underbelly say it:

There is indeed something problematic about the asymmetric heads-I-win, tails-you-lose structure of non-recourse finance.

The trouble is, once you start looking for it, you find “non-recourse” under almost every rock in the capitalist garden. I’m sure Perry would be happy to show you how the same problem underlies the bankruptcy discharge, where the debtor gets to walk away from his just debts. I’ll bet (although I do not know) that he feels the same way about bank insurance, like the free-handed taxpayer guarantees that allowed the mischief-makers to bring down the Savings & Loan industry in the 80s/90s.

But it doesn’t stop there. When I buy a call option on LittleCo stock, I acquire the right to take the stock or throw it away–analytically no different from my right when I buy my home on a nonrecourse mortgage. I have not heard Perry howling for the abolition of the conditional claims market, and I am not holding my breath.

Or consider the corporate limited liability form itself, the greatest social invention, so Bertrand Russell is supposed to have said, of the 19th Century. Restated: the equity stake in a leveraged company is a call option on the assets–you can take or walk away, just as with stock options, just as with the nonrecourse mortgage.

Probably nobody ever understood this better than the bankers. Look at that picture above of Mr. Banker Himself, J.P. Morgan Jr. Why does he look like he is ready to explode? Because it’s his own skin in the game. He was a general partner. If the deals went sour, he stood to lose every penny. No wonder he was a prudent lender. No lwonder he staked so much on personal character.

Sadly, his successors appear at last to have grasped the full implications of his insight. What caused the late meltdown? Of course you can’t bring it down to one cause, but if you had to name just one, I’d say–incorporation of investment banks, the great tectonic shift from unlimited to limited liability.* That’s when the bankers stopped having skin in the game: when they shifted to heads-I-win, tails-you-lose. They bankers didn’t worry about taking lunatic risks because they knew the downside was yours, or rather ours (indeed, any first semester MBA student can show you, the greater your capacity to shift he losses, the greater the inducement to take a risk and the more lunatic the risks you take).