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.  

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.

Corporations as Citizens: A Right to Make Political Donations?

In Citizens United, the U.S. Supreme Court held that corporations and unions “should have the same right as individuals to pay for election ads and other electioneering,” according to The Wall Street Journal. Not addressed in the court’s decision was whether corporations and unions also have “the same right as individuals to donate money directly to candidates for Congress or the White House.”

After the ruling, the U.S. Court of Appeals for the 8^th Circuit upheld the ban on direct donations, “saying the [U.S.] Supreme Court recognized Congress could enact such restrictions as a way of deterring corruption.” Given that corporations and unions can contribute to political campaigns through "independent" groups that air commercials favoring certain candidates, one might wonder whether the restriction on direct donations is of any importance whatsoever. Moreover, one might wonder whether any potential restriction could even channel the influence of powerful corporations in Congress and over regulatory agencies (even their own!). That is, the underlying problem is that the large concentrations of wealth and property in corporate form may be inconsistent with democracy. 

Even the ban on direct donations has been challenged. Specifically, Federal Judge James Cacheris of the Eastern District of Virginia ruled on May 27, 2011 that corporations and unions can donate directly to political candidates. In his decision, he wrote, “Citizens United held that there is no distinction between an individual and a corporation with respect to political speech. Thus if an individual can make direct contributions within [campaign-finance] limits, a corporation cannot be banned from donating the same thing.” At the time, federal law limited an individual’s donations to a particular candidate at $2,500 per election. Corporations could donate $5,000 per election to candidates through political action committees, which are funded by voluntary donations from employees.

Cacheris is on solid ground concerning drawing out the logic in Citizens United. Even so, it is the premise of that case that is vulnerable to critique. To claim that there is no distinction between an individual and a corporation (or union) with respect to political speech is to commit a category mistake regarding citizen and free association thereof. In spite of the faddish “corporate citizenship” slogan, a group of citizens is not itself a citizen. To claim otherwise is to engage in anthropomorphism. In other words, having a right to freely associate with other citizens does not give the ensuing group itself the rights of citizenship; only citizens, which are human beings, can have the rights of citizenship.

As retired Justice John Paul Steven pointed out in suggesting that the U.S. Supreme Court would need to clarify its reasoning in Citizens United, "it will be necessary to explain why the First Amendment provides greater protection to the campaign speech of some non-voters [i.e., domestic corporations] than to that of other non-voters [i.e., foreigners who were barred at the time from making campaign contributions]." In referring to corporations as non-voters, Stevens is saying that they are not citizens, and thus the rights of free speech, petitioning the government, and making political contributions do not apply. Relatedly, from the “legal person” judicial doctrine, which limits stockholders’ own liability, has come the spurious notion that money is somehow speech (another category mistake). With certain collective legal persons being deemed citizens, the right to free speech at the corporate level translates into spending money. In short, we as a society seem blind to some rather blatant category mistakes, and this lack of awareness just happens to be in the interest of the large corporations and banks. I'm reminded of the "church lady" who was a character on Saturday Night Live. "Well, isn't THAT convenient!" she used to say rather sarcastically to any given guest on her "talk show." 

It is perhaps beyond coincidence that in a society and polity wherein large corporations are powerful, they have been deemed not only legal persons, but citizens as well—and with the rights of free speech, petition, and campaign contribution. I suspect that beyond the sheer power exists a pro-business ideology in the society, which enables this double-counting of citizens who associate in corporations and unions. A manager, for instance, can exercise rights of citizenship not only individually, but also in directing an organization (association) in its public affairs department.

Rather than worry about whether relaxing particular restrictions might enable corruption, we might examine whether our fallacies (i.e., category mistakes) are both a result and facilitator of it. Our parents and grandparents willfully created an organizational world, such that organizations could gain such assumed legitimacy that they have been able to become citizens having much more wherewithal than the human kind. Merely to write “the human kind” demonstrates how warped the default has become. One might wonder if it is still possible to wind back the line to contain the absurdity from becoming the accepted logic.

Sources:

Brody Mullins and Brent Kendall, “Court Lets Corporations Give to Candidates,” The Wall Street Journal, May 28-29, 2011, p. A4.

Mike Sacks, "Citizens United Attacks from Justice Stevens Continue," The Huffington Post, May 30, 2012. 

Corporate Legal Personhood in the Kiobel Case

In Kiobel v. Royal Dutch Petroleum, the U.S. Supreme Court waded into the murky waters of corporate legal personhood, at least potentially, in hearing oral arguments in late February 2012. The issue in the case is whether corporations can be held liable to the extent that they are complicit in a foreign government’s human rights abuses. Legal personhood would say that they could be. This would represent an obligation that goes with legal personhood. The question is whether the justices who conferred in the Citizens United decision the right of corporations, based on their legal personhood, to make unlimited political donations would also be willing to view obligations as “part and parcel” with such personhood. If not, then legal persons, unlike human persons, would have the benefits of personhood without any of the obligations—an oxymoron to corporations to be sure. In other words, such an asymmetry would render the legal personhood doctrine itself as akin to a one-sided coin—which cannot exist, let alone stand.

As in any legal analysis, it is best to include a bit on the particular case itself. “In Kiobel, about a dozen Nigerians contend that Shell Oil's parent company aided and abetted their government in its torture and extrajudicial killing of environmental and human rights protesters resisting Shell's operations in Nigeria in the 1990s. . . . The plaintiffs brought their suit under a law, commonly called the Alien Tort Statute, passed by the first Congress in 1789 to allow foreign nationals to bring civil suits in federal courts ‘for a tort only, committed in violation of the law of nations or a treaty of the United States.’”[1] The law is silent on whether corporations can be sued under the law. Because of this silence, the U.S. Supreme Court can decide the case on the basis of whether corporations are legal persons, and, if so, whether obligations go with such personhood.

For its part, the U.S. Government submitted a brief stating in part, “Corporations have been subject to suit for centuries, and the concept of corporate liability is a well-settled part of our 'legal culture.'"[2] In other words, corporate personhood entails obligations, one of which is to refrain from contributing to human rights abuses abroad. On the other side, corporations and their allies have been submitting briefs arguing that they should not be subject to the law. It is only natural to want benefits without obligations. Corporate power could indeed enable “legal persons” to shamelessly enjoy the benefits without being subject to any of the obligations—even as such “persons” extoll their “corporate citizenship” for public relations purposes. That is to say, the U.S. Supreme Court could maintain the legal person doctrine for corporate contributions and essentially ignore it in refusing to include corporations as the “persons” subject to the Alien Torts Statute.

Indeed, in oral arguments, the high court seemed split five to four, with the conservative majority looking to exempt corporations even as it had cited their personhood in granting them the right of “wealth as free speech” in political contributions. Justice Kennedy, for example, said that “the case turns in large part” on the point that “international law does not recognize corporate liability.”[3] However, U.S. law is not limited to what is recognized in international law. In fact, the U.S. does not even recognize the International Criminal Court. Chief Justice Roberts and Justices Alito and Scalia expressed hostility toward the Alien Tort Statute itself. Alito noted that the lawsuit had been brought by foreign plaintiffs against a foreign defendant for acts that took place in a foreign country. “What business does a case like that have in the courts of the United States?” Justice Ginsburg noted that the U.S. Supreme Court had already allowed such cases to be brought under the Alien Tort Statute. She reminded the Court that the question was whether only individual defendants or also corporate defendants are liable—not whether the law itself is constitutional. Alito’s ploy at subterfuge—subtly attempted by pivoting on “the issue”—had been rendered transparent by the veteran justice. Unfortunately, however, the doctrine of legal personhood itself was not given center stage in the oral arguments.

In my view, rather than focus on the relationship between U.S. and international law, the justices should have used the oral arguments in Kiobel to decide in a definitive way whether “personhood” extends to corporations. Given the Court’s Citizen’s United decision, which allows corporate “persons” to give unlimited amounts to political action committees, a decision on Kiobel could have “laid down the law” not only on “abstract” legal personhood, but also more specifically on whether both benefits and obligations go along with personhood in a legal system based on laws. If corporations are able to cherry-pick legal opinions through inconsistent conservative justices in the majority—the Court itself reflecting a more general partisanship rather than the coherency that law itself must have—then we are no longer a people based on law rather than the power of the most powerful of our institutions. In other words, corporations may indeed be able to get away with all of the benefits of personhood without any of the obligations, with the cost being “passed on” in terms of the viability of the United States themselves.

1. Mike Sacks, “Corporate Immunity Looks Likely: Supreme Court Seems Ready to Side with Shell in Human Rights Suit,” The Huffington Post, February 28, 2012; Mike Sacks, “Corporate Personhood Case Forces Supreme Court to Hack New Path,” Huffington Post, February 27, 2012. 
2. Ibid.
3. Ibid.

Reining in Corporate Pay: Europe as a Model of Fairness for America

Corporate compensation—executive pay in particular—represents a “clear market failure,” so said Vince Cable, the business secretary in the E.U. state of Britain.[1] While suspected, the sheer explicitness, or blatant manner, of this verdict is itself noteworthy. Moreover, it stands as an opportunity for the E.U. to surpass the U.S. on economic fairness, which is a type of justice (see John Rawls). That is to say, Europe had an opportunity at the time of Cable’s statement to set the E.U. on a trajectory that would make the unfairness in the American system more transparent.

The business secretary, a Liberal Democrat in a coalition government with the Conservative Party, told the British House of Commons in January 2012 that business and investors “recognize that there is a disconnect between top pay and company performance and that something must be done.”[2] In New York at the time, the disconnect was generally taken as a fact of life, given the power of the managerial elite in corporate capitalism (as well as American legislatures). As if attempting to pop this stygian balloon filled with the noxious air of denial, Vince Cable continued, “We cannot continue to see chief executives’ pay rising at 13 percent a year while the performance of companies on the stock exchange languishes well behind . . . (a)nd we can’t accept top pay rising at five times the rate of average workers’ pay as it did [in 2010].”[3] The unfairness, in other words, is at the expense of not just the corporation’s owners, but also the (other) employees—executives being employees too.

It could be argued that the 13% annual increases in executive pay are a function of an increasing proportion of company stock options in the compensation. If the profits are languishing, the theory goes, the value of the options should be zero (i.e., unexecuted). However, what if the next group of executives, or even the economy over all, “performs” such that the options held by the previous executives then become valuable? Moreover, what do options cost non-management stockholders in terms of dilution? I suspect that options are “an easy way out” relative to cash compensation. The question is thus whether the practice can be reined in.

Under Vincent Cable’s proposals, shareholder votes on executive pay would be binding. Seventy-five percent, rather than a mere majority, would be needed for approval. I have never understood why the American states limit such votes to “non-binding,” as if the business judgment rule trumps property rights on compensation. Given that CEOs typically control their boards, whose job it is to oversee the executives for the stockholders, treating the property owners of the corporate wealth as if they were a focus group or a meaningless straw poll in Iowa seems misguided at best—and supportive of an institutional conflict of interest centered on the executives. To be sure, the suggestion made by Chuka Umunna, Vincent Cable’s counterpart in the Labour Party, to have employees as part of executive compensation committees also incurs a conflict of interest—one centered on the employees who have an interest in wanting “payback” for the decades of unfair compensation.[4] Conflicts of interest can work both ways—inflating and deflating deserved compensation.

My main point is the following: Were Europe to strengthen investors’ property rights—including disallowing proxies held by managements for such votes on account of the conflict of interest—the fault running through American political economies and civil societies would become more transparent (i.e., more obvious). “We have  been clear that executive pay must always be fair and transparent, and that high pay must be for outstanding, not mediocre, performance,” John Criby of the Confederation of British Industry—a business lobby group—said. “Millions [of pounds] for mediocrity does a disservice to the reputations of hard-working businesses.”[5] Indeed, it does a disservice to the society as a whole—particularly in terms of what it stands for. Can you imagine the U.S. Chamber of Commerce coming up with such a statement? It is a pity, particularly in terms of systemic risk, that a lack of enlightened self-interest in the vested interests on such a “clear market failure” exists in America. For this reason, “Europe as a Model” is not such a bad thing, certain rhetoric (of the usual suspects) to the contrary.

In Vermont and Wisconsin at the time of Vincent Cable’s speech in Britain, movements were underway to amend the respective constitutions (as well as that of the U.S.) to make it clear that corporations are not “legal persons.” I believe it would follow that money is not speech, though the amendments ought to make this explicit, given the tendency of justices to invent legal doctrines and the sway of money in legislative halls. Polls at the time showed 71% of the people across the United States were opposed to the Citizens United (unlimited corporate political contributions) decision of the U.S. Supreme Court two years before (almost to the day). Lest those movements get cocky, their leaders should be aware that huge corporate “war chests” used to buy politicians, commentators, and air time may mean that even such a supermajority’s popular will may not be sufficient. If so, it is unlikely that anything like Vincent Cable’s proposals would see the light of day in America. Accordingly, I have pointed out here the value in merely having an alternative displayed in Europe, even if the benefit is limited to wakening Americans up to the grip of corporate capitalism in American societies.

1, Julia Werdigier, “British Government Works to Rein in Corporate Pay,” The New York Times, January 23, 2012. 

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

The Aristocracy of the Moneyed Corporations

In Citizens United v. FEC on January 21, 2010, the US Supreme Court held by 5 to 4 that because US corporations are legal persons, they can contribute to political campaigns.   The assumption here is that corporations are more than the sum of an aggregate of persons—that is, more than citizens associating.  The corporate entity has rights in itself.  Ginsberg and Sotomeyer questioned in oral arguments whether free speech applies to spending money, and, moreover, whether corporations should be considered legal persons, much less citizens.  After all, they can’t be drafted, or vote.

A corporate is essentially privately owned wealth.  To say that wealth counts as speech seems spurious to me.  In fact, the whole legal person designation seems contrived.  Whereas the Roman republic fell to dictatorship, our republic may well have already fallen to oligarchy or corporatism.   So I agree with Barak Obama that the decision is worrisome.   Sen. Dick Durbin said that the banking lobby owns Congress after that lobby had sunk Durbin’s amendment to allow bankrupcy judges to modify mortgages in foreclosure (the banks want a veto, even if they contributed to the sub-prime mess).

If Goldman Sachs can spend virtually unlimited amounts of money on political campaigns, we can expect to see that bank’s influence over the government expand even beyond what influence it has over its own alums who occupy high policy-making positions in the US Government (e.g., Hank Paulson and Neil Kashkari at Treasury under Bush II).  If our republic is already compromised under the weight of huge concentrations of private capital, the US Supreme Court’s decision may well be enough to sink the republic…ironically in the name of liberty.  But liberty for whom?  Or does “whom” even apply here.

I contend that corporations are not citizens associating for political purposes.  There are indeed non-profit political organizations whose function it is to influence policy.  This is not a business corporation’s function.  Nor is spending money itself political speech.  Any CEO can stand outside his or her building and give a political speech for free.  But which citizens does the CEO represent in his or her association of citizens?  Stockholders?  They don’t approve corporate public affairs spending.  Employees?  They don’t either.  Customers?   We don’t approve what a CEO says just because we have purchased a bar of soap.  The US Supreme Court’s majority might well say that the CEO represents the legal person that is the corporation, but then it is not an association of citizens because associations are not said to be persons (rather, they consist of persons).  Is this too logical?  Too reasoned?  Maybe so. But maybe it shows the duplicity involved in referring to an account of private wealth as a person.  It seems to me that it is rather blatant case of anthropomorphism.  …humans treating our artifacts as having our characteristics.  We must really think we are something.