The Two Economies
(warning: salty language will be used at the end of this column)
During this election cycle there’s been a lot of talk about what bad shape the economy is in. Most of what they are referring to is the high unemployment rate. It’s not historically high – that happened during the Great Depression when levels topped 25% of the work force looking for jobs. But at a little less than 8%, it is still pretty uncomfortable. There are other statistics that indicate that the problem might be worse than that because that only measures the number of people who are actively looking for work. A segment of the population has lost hope and is no longer looking. Of course, some of those who are no longer looking are people who have retired and some are going back to school, etc. But by no stretch of the imagination am I going to suggest that times are good.
However, they aren’t bad for everyone.
profits have been setting records every quarter since the winter of 2009.
Corporate cash on hand has topped more than $2 trillion, a record both in total
dollars and dollars adjusted for inflation.
To put this into some perspective, during the Great Depression, there
were two years in which corporate profits were actually zero, and from 1929 to
1940, the total amount of corporate profits in the
reason this has happened was because large corporations and multinationals have
been taking advantage of the tax code.
They use armies of tax attorneys to file returns thousands of pages long
to exploit a wide variety of deductions that aren’t available to smaller
businesses. GE’s tax division, which
numbers close to a thousand attorneys, made news in 2010 when they filed their
famous 24,000 page return to net a $3 billion refund after earning more than
$14 billion. One deduction exploit that
has garnered a lot of media attention is the creation of jobs overseas instead
of here. Corporations cite high labor
costs in the
“Another maneuver by Microsoft deserves attention:
its transfer pricing agreement with a subsidiary in
“On January 1, 1997, the
Treasury Department implemented the so-called “check-the-box” regulations,
which allow a business enterprise to declare what type of legal entity it
wanted to be considered for federal tax purposes by simply checking a box.
This opened the floodgates for the
Microsoft engaged in another exploit when it shifted income offshore (even when some of their offshore offices have zero employees, like its Bermuda subsidiary) and then loaned a portion of that cash back to the domestic business to comply with letter of the law tax rules that allow short-term loans. Hewlett Packard took it a step further and paid domestic operating costs from their foreign subsidiary accounts. Essentially, what they are actually doing as far as the IRS is concerned is turning income into a debt on paper. They can then deduct the interest on the loan they pay themselves from the total income. So even though they make the same amount of money, on paper they are making it look considerably less when it comes time to pay the taxes on it. How many small businesses can do that? The more important question is why aren’t our legislators doing more to change that? The US Treasury estimates it lost more than $80 billion in tax revenue over the last three years from Microsoft, Google and Apple alone due to these exploits. $80 billion.
Very similar to the picture of the top individual earners paying a lower tax rate than the vast majority of middle income earners, the top earning corporations are enjoying profit margins that small companies can only dream about. Interestingly enough the global economy is slowing and the opportunities for foreign expansion slowing along with it. Those corporate profits are beginning to slow as well. Still, corporate profits will still top a trillion dollars this quarter.
The result of these exploits it that a number of Fortune 500 corporations (26 in 2011) are paying their CEOs more money than they pay in taxes on billions in profit. In addition, many are lobbying for a tax holiday where they would have to pay no taxes for a full year, which would cost the government more than a trillion dollars in tax revenue. George W. Bush gave them a tax holiday in 2004 in an effort to jump start a sluggish post-9/11 economy and the economy responded with an unimpressed yawn.
The great discussion this election is what to do about this. Those that claim that the problem is too much government spending often say that increasing taxes in a time like this would be disastrous. And that might be true if everyone was struggling. But any reasonable reading of the financial news over the last two years indicates that some are not enduring any hardship whatsoever, especially when it comes to paying taxes. Despite record revenues, the total amount that corporations actually pay into the system is down from 30% of all federal revenues 50 years ago to 6.6% today, despite personal income taxes being the lowest they've been since the 1950s. One would expect with personal income taxes being so low that corporate taxes would make up a greater portion of the federal revenue. In fact, the opposite is true.
Look, I'm all for equal opportunity in this country. But
equal opportunity is not what we have. Corporations aren't going to leave
For those who argue labor
costs are too high here, consider this: when Henry Ford introduced the first
Model Ts in October of 1908, there were only 144 miles of paved road in the
Despite corporate profits growing like crazy since late 2009 and robust bonuses awarded for stock performance for their decision-makers, Wall Street firms cut more than 75,000 jobs in 2011, and between Bank of America, Nokia and Hewlett Packard alone those three firms will shed another 67,000 by themselves this year. Now Wall Street has the temerity to complain there’s no more land to cultivate, no more room to cut costs other than through lower taxes. And that’s the great disconnect. Corporations had a chance to create jobs when they were raking in record profits (remember trickle down theory?) but instead they decided to pad their own wallets. If they don’t help anyone but themselves when times are good, what evidence is there that they know how to help anyone but themselves when times are tough?
President Obama needs to take a page out of Pulp Fiction, look directly into the camera during a televised address and tell the CEOs something like, ““Normally, your asses would be dead as fucking fried chicken, but you happen to pull this shit while I'm in a transitional period so I don't wanna kill you, I wanna help you. But I can't give you this economy, it don't belong to me; it belongs to all the American people. Besides, I've been through too much shit this term over this economy to hand it over to your dumb asses. There's a passage I got memorized. Ezekiel 25:17. ‘The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. Blessed is he who, in the name of charity and good will, shepherds the weak through the valley of the darkness, for he is truly his brother's keeper and the finder of lost children. And I will strike down upon thee with great vengeance and furious anger those who attempt to poison and destroy My brothers. And you will know I am the Lord when I lay My vengeance upon you.’ Now... I been sayin' that shit for years. And if you ever heard it, that meant your ass. I never gave much thought to what it meant. I just thought it was some cold-blooded shit to say to a motherfucker before I popped a cap in his ass. But I’ve seen some shit these last three years that made me think twice. See, now I'm thinking: maybe it means you're the evil men. And I'm the righteous man. And Mr. Tax-Hike-On-The-Wealthy here... he's the shepherd protecting my righteous ass in the valley of darkness. Or it could mean you're the righteous men and I'm the shepherd and it's the world that's evil and selfish. And I'd like that. But that shit ain't the truth. The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.“
That may seem a little harsh, but I am reminded of another Jules Winfield quote from Pulp Fiction: “If my answers frighten you then you should cease asking scary questions.“