Corporations and Political Debate: Taxation & Regulation

Under U.S. law, the corporation is a legal person, whose wealth can constitute political speech protected by the first Amendment. It is no matter that the corporation is an artifice constructed by the state for economic purposes: to concentrate wealth in order to produce goods or provide services. That such an entity would lobby and spend money (or “speak”) for political purposes may from this standpoint seem strange, or out of place. To be sure, political influence can indeed help the bottom economic line, but is a corporation a political actor if the purpose is economic? 
Large corporations arguably tend to have a strong arm in Congress,  but if that arm is so strong that it dictates the law, even literally, then entities that are part of society are de facto standing as government for the whole. For some parts of something to control the whole is problematic because those parts will naturally put their own particular interests above those of the whole (e.g., society, or the people). 
Even a dominant role in setting the terms of the debate in the public media during a political campaign can sway or tilt the whole to favor the part. If sustained long enough, pro-business values can become salient in a society's culture. That deregulation could have come out as a major winner in the 2010 election following the financial crisis in 2008 is mind-boggling, and yet the scores of new Republican representatives in the U.S. House had precisely deregulation as one of their main objectives. That unregulated financial derivatives based on risky mortgages had almost brought the economy down two years before was strangely forgotten. The debate was not on whether banks that are too big to fail should be broken up. Instead, the public got to talk about whether the existing regulation on businesses in general should be discarded in favor of economic growth. Such is the power of self-interested money in setting the terms of debate at the societal level.
Accordingly, debate on whether the corporate statutory tax rate of 35% should be lowered never bothered with the inconvenient truth that the weighted effective corporate tax rate (taxes as a share of profits) was 27.1% in the U.S. in 2012, hence below the 27.7% average rate of O.E.C.D. members. The weighted average marginal tax rate on corporations in the U.S. was only 20.2 percent.[1] A U.S. Treasury Department report concluded that 82 percent of the corporate tax was borne by capital, while 18 percent was borne by labor. Either American society was tilted in favor of the interests of capital or the electorate was duped into the false narrative that raising the corporate rate would hurt labor. 
General Electric, the sixth largest corporation in the U.S., had profits of $14.2 billion in 2010 and yet the mammoth company did not have to pay any corporate income tax. Even so, the political mantra that large American corporations pay too much income tax resonates in the political culture. Moreover, taxes are inherently bad, or even theft. It is as if American society has had a blind spot concerning the nature of and need for public goods like roads and airports. The competitive market, excellent in allocating goods and services, so eclipses the value of even esteemed public goods. 
In short, where the corporate advertising and lobbying dollars have already had such a significant influence in shaping the values people hold dear, the very society can tilt in favor of its business sector such that its advantages become invisible to large segments of the electorate. The corporate realm lives under democracy's radar, and thus conveniently beyond the reach of real accountability. 

1. Bruce Bartlett, “Some Big Corporations Don’t Pay Taxes,Either,” The New York Times, September 18, 2012.  

26 Billionaires = 3.8 Billion People

In 2018, 26 billionaires owned the same amount of wealth as the poorest 3.8 billion people, worldwide, according to a study by Oxfam, an anti-poverty non-profit organization. In 2017, the number of billionaires was 43, so the trajectory of wealth distribution was one of continued concentration.[1] Since the 2008 financial crisis, the number of billionaires doubled by 2019 whereas the poorest half of the world saw its wealth decline by 11 percent. The trajectory being clear, the questions can be said to be why? and  how will it turn out?  In this essay, I briefly attend to the first question by highlighting the intensifying contributions of enabling systems.

The Oxfam report points to enabling tax systems whereby the very rich along with corporations were paying lower taxes than they had in decades while 3.4 billion people were living on less than $5.5 a day. To say the tax regimes were unfair would be the conclusion of an ethical argument, whereas the report’s strongest point is simply that the structure of the regimes was contributing to the increasing disparity of global wealth. For example, the 2017 tax cut in the U.S. benefitted primarily the wealthiest 1 percent even though it was sold to the American people as a tax break for the middle class.

Accordingly, the monied interests, such as billionaires and large corporations, being able to manipulate voters via “their” representatives is another part of the answer. It could even be said that as governments—even democracies—become increasingly influenced by the wealthy, these de facto plutocracies also explain why the trajectory toward increasing economic inequality has occurred. In a plutocracy, the close legislative fights are between different corporate segments, which have spent roughly the same on campaign contributions and lobbying, whereas the no-contest battles are between a beguiled public and an industry or the business sector itself. Hence, the Obama Administration refused to prosecute those who engaged in fraud in the sub-prime mortgage business that came to a head in the financial crisis of 2008. Once sufficiently concentrated, wealth can manipulate and even rule even a de jure democratic government. So even though economic inequalities between people, such as effort at school and at work, can explain some economic inequality, the concentrating itself can take on a life of its own, with government-laid tracks to ease the way toward greater concentration. Perhaps the underlying mentality or value-system is that more is never enough, to invoke the film, Wall Street.

In short, there is human nature, which naturally develops social systems (including economic and political). The latter can gain a traction that can intensify the effects of human nature and individual differences between individuals. The part of the whole that is invested in those effects has the wherewithal and motivation to eclipse the good of the whole by distorting or manipulating the systems in ways that disproportionately benefit that part while the welfare of the other parts are not considered. Those other parts must put up with rigged, or tilted, systems as if the northern hemisphere in the winter season. Meanwhile, the part that benefits disproportionately from the tilt has no intent to use its power to redesign the system so that the Sun is directly above any part of the Earth for at least part of the year. Of course, the ice would melt so we would have that catastrophe to worry about, but where wealth is highly concentrated, the powers have little incentive to deal with rising oceans (and climate change) anyway because the 26 billionaires would have to pay disproportionately to fix the problem. The people without air-conditioning would suffer disproportionately should the wealthiest preempt governments from getting the money needed to obviate the problem. So the underlying culprits may not only be greed, but also a lack of consideration for others, Both can be stitched into political and economic systems, and even social systems whose values and norms are enabling.

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[1] Laura Paddison, “26 Billionaires Own the Same Wealth as the Poorest 3.8 Billion People,” The Huffington Post, January 20, 2019.

A Critique of the Corporate Legal Persons Doctrine: The Case of Corporate Taxation

In his commentary in The Wall Street Journal in 2010, Michael Boskin went over the disadvantages in levying an income tax on corporations. Within his argument, he observes, “Of course, the corporation is a legal entity; only people pay taxes.”[1]  In so doing, he transcended, if only for a moment, his own approach that was oriented simply to giving the pros and cons of corporate taxation.  His observation is significant, and it gives us a launching pad of sorts by which we can approach the corporate income tax as a itself as a concept, rather than simply assessing its utility. In short, corporate taxation is an oxymoron if only humans pay tax. In fact, we can conclude from Boskin's remark that the doctrine that corporations are legal persons has been incorrectly construed. 

Treating a “legal entity” as if it were a tax-payer is unnatural, and thus gives rise to the double taxation problem.  It is interesting that Boskin uses the word “entity,” which is not the same as “person.”  That is, to argue that corporations should not be taxed directly, he implies that the legal-person doctrine is not valid (i.e., only humans rightly pay taxes). 

I contend that Boskin was correct in referring to corporations as legal entities as distinct from humans in terms of taxation. I submit that he did not go far enough, for it is possible to narrow the legal-person doctrine to mean only that stockholders' personal assets are protected in the event that a corporation has accrued so much in liabilities that they cannot be paid off on time by the corporation. In this case, the term "legal person" should be changed as it would be a misnomer and thus liable to be confused. 

In fact, to treat or consider a corporation as a person in any sense is anthropomorphistic.  Put another way, an association of human beings does not constitute in itself a person in any sense. To presume otherwise is to make a category mistake between a legal concept and a human being.  This error is evident, for example, when someone says, “GM says X.”  Only human beings can talk, so it would be better to say that GM's management issued a statement. 

Furthermore, an organization cannot be a moral agent. Only the persons in an organization, not the latter itself, have human brains. Only these can entertain the thought denoted by should. Even from merely descriptive thoughts should cannot come, according to David Hume's naturalistic fallacy. Additionally, to make an ethical decision requires cognition that a human brain rather than organizations in themselves have. In fact, organization itself is merely an abstraction. You can not point to GM down the street, for GM is not just its headquarters' building or one of its plants. 

Therefore, applying person to an organization can be deemed a category mistake--one that has been enabled by a societal blind-spot. 

On business ethics in organizations, see Skip Worden, Cases of Unethical Business: A Malignant Mentality of Mendacity, available at Amazon.

1. Michael Boskin, "Time to Junk the Corporate Tax," The Wall Street Journal, May 6, 2010.

Tax Avoidance at GE: On Corporate Income Taxation

In spite of $14.2 billion in global operating profit ($5.1 billion on U.S. operations) in 2010, GE paid no corporate income tax to the U.S. Treasury that year thanks to offsetting prior losses by GE Capital (i.e., bad loans).  In spite of that unit having received TARP funds from U.S. taxpayers, the corporation was able to avoid paying any income tax. This seems like Rousseau's social contract run amuck: corporate welfere in exchange for nada.  Such a modus operendi is in line with the corporate mission: to economize in the sense of maximizing (or satisficing) what is taken in while minimizing what must go out.  In other words, a corporation aims to turn itself from a productive, lean throughput to a concentration of capital in its own right.

In terms of U.S. corporate income taxation, the extent of resources that corporations devote to minimizing what they owe the U.S. Treasury is money that could be better spent, or invested, in productive enterprise. For example, G.E. files returns in 250 jurisdictions and has a staff of 975 working in the corporation's tax department. Even if those people pay for themselves and more by reducing the company's tax liability, the company could eliminate that entire department and orient its global operations in terms of efficiency rather than taxation were income tax applied only to individuals.  The legal person "doctrine" aside, corporations are not citizens; rather, they are groups of citizens. 

Robert Samuelson suggests that the top corporate income tax rate be reduced from 35%, which is one of the highest in the world. He argues that the 15% rate in individual income taxation on dividends and capital gains should be increased.[1] The effect would be regressive, for the top one percent receive two-thirds of all the capital gains and dividends. At the very least, the 15% is relatively low in the individual income tax system and most of the taxpayers subject to the tax could afford a higher rate.

Samuelson does not go far enough, for even with a lower top corporate rate companies would retain their tax departments and steer profit into countries with low tax rates (for there would still be differentials between countries). Theoretically, it does not make sense to tax both corporate income and dividends.  Furthermore, corporate income taxation treats companies as end-points rather than as throughputs. The implications of taxing individuals rather than corporations are staggering not only for more efficient productive investment, but also for attracting foreign direct investment to the U.S. In addition, public accounting firms could eliminate their tax departments and focus all of their attention on auditing--an endeavor made all the more important on account of the misleading financials on Wall Street leading up to the financial crisis of 2008.  Rather than getting headaches over the intracacies of tax rules, public accountants could devote more attention to whether it is enough to follow GAAP in giving an unqualified opinion.

In short, taxation ought not to have so much gravity in orienting corporate America.  Instead, business would do much better in focusing more on building better mousetraps. Individuals who benefit financially from the productive enterprise would be taxed, perhaps even without all the deductions that enable them to avoid being taxed. Imagine a tax-returnless system of individual income taxation involving a fixed low rate applied like a fee on any income taken in, whether from wages, salary, dividends or capital gains. Ironically, by simplifying taxation, more of it could be collected even as businesses are left to do business.

1. Robert Samuelson, "The Real GE Scandal," Newsweek, April 11, 2011, p. 21.