Behind Corporate Loopholes: Wealth and Power

A company in the U.S. wants a tax loophole to apply. Starbucks, for example, wanted to be able to use the manufacturing deduction by stretching manufacturing to include the roasting of coffee beans. So in 2004 the company hired Michael Evans, a lobbyist at K&L Gates who had just a year before worked as a top lawyer on the U.S. Senate Finance Committee, which writes tax law. Evans was able to urge his former colleagues in the Senate to expand the definition of manufacturing to include roasting in a clause added to a 243-page tax bill called the American Jobs Creation Act.  As you might imagine, Starbucks was not the only company to get a tax break written into that law. By 2013, the manufacturing deduction had saved Starbucks $88 million that the company would otherwise have had to pay in corporate income tax. In 2012, corporate tax breaks and loopholes added $150 billion in lost revenue for the federal government, increasing the budget deficit by that amount.[1] Three lessons can be gleamed from the hidden corporate loopholes. 

First, the damage done to the U.S. debt by corporate loopholes has been significant. While dwarfed by the debt incurred to finance the Iraq and Afghanistan wars ($2.4 trillion added to the debt by 2013), $150 billion of lost revenue from corporate tax benefits for that period alone is nonetheless significant. 

Second, the “insider influence” itself violates the principles of openness and fairness, which are so esteemed in a democracy. The many points of access to influence legislation can be abused by legislators and lobbyists alike by their stealth dealings, sometimes literally in the middle of the night as a bill is about to be voted on. Ideally, the many points of access refers to the fact that various groups (and citizens) can reach legislators, not that the most powerful interests can abuse their ability to contact lawmakers for private gain (both to the interests and the lawmakers, thanks to political campaign contributions). In fact, for a lobbyist, including a corporate lobbyist, to have disproportionate influence on a bill to make it financially beneficial to the lobbyist's clients can be reckoned as a conflict of interest because even the information supplied is apt to be biased. The many points of access is meant to dilute the influence of the private interests that stand to benefit most from loopholes. 

Third, the contacts that lobbyists have in government from having worked there themselves can play a major role in the loopholes being granted and even in secret. Other self-interested interests cannot check the self-interested influence of the companies or industries that would gain most, so the private benefit gets away with eclipsing the public good. A law prohibiting former legislators and Congressional staffers from lobbying for at least ten years might make a dent in the inordinate insider influence of corporations in Congress. However, the influence of a Speaker of the House such as John Boehner, who became a corporate lobbyist after resigning from Congress, would hardly be diminished in his private influence, and thus earnings. Information that only insiders have sells. 

Like water, pent-up power naturally seeks its way around an obstruction with the objective of reaching an objective. The influence of wealth inexorably finds its way into the halls of power, especially in democracies as they have many points of access. This vulnerability is particularly great in cases in which candidates for public office must raise large sums of money to get elected. Asking the candidates to look the other way when a big donor is knocking at the door runs against human nature; even if laws prevent large donations, power finds its own way in the dark. The power both of candidates/lawmakers and corporations can be so massive that space itself bends toward mutual objectives. Perhaps the question is whether trying to bend space back only slightly is worth the time and energy of passing a law. Although removing the financial need of candidates for campaign funds (e.g., by public funding of advertising) could in theory take out part of the incentives on one side of the equation, corporations could tempt the incentive for private gain in other ways, such as with the promise of a lucrative job afterwards. 

In the end, the threat to the democracy is the inordinate power from the concentration of private wealth as in large corporations. The citizens are hardly focused in their collective use of their power, so the insiders in government tend to be influenced inordinately by the moneyed interest at the expense of the public good, the good of the whole.  

1 Ben Hallman and Chris Kirkham, “As Obama Confronts Corporate Tax Reform, Past Lessons Suggest Lobbyists Will Fight For Loopholes,” The Huffington Post, February 15, 2013.

See Institutional Conflicts of Interest, available at Amazon. Conflicts within the U.S. Government, in business, and between business and government are explored, as well as the very nature of an institutional conflict of interest. 

Auto vs. Oil Industries on Emission Standards: Putting a Part Above the Whole

When a company or an entire industry skips over the good of the whole—the public good—in lobbying for legislation that only reflects the needs or desires of individuals (qua consumers only), the society itself (and even the Earth) is slighted and thus more at risk. For the good of the whole is more than just the cumulative needs and desires of individuals in part because the latter do not take into account the wider effects of their choices. When an individual company or industry takes this point into account and rebuffs favorable legislative proposals because they would do too much damage to society and/or the planet, social responsibility is at hand. Companies or industries that do not are thus irresponsible from the standpoint of the whole, which, through government, is justified in keeping an eye on them (especially in making transparent their efforts to influence legislation and regulation. The American auto and oil industries can be distinguished in this regard.

“When the Trump administration laid out a plan” in 2018 that would have eventually allowed “cars to emit more pollution, automakers, the obvious winners from the proposal, balked. The changes, they said, went too far even for them.”[1] Too far even for the obvious winners—an amazing statement, considering that companies and industries generally try to get as much as they can in terms of deregulation and favorable laws.

Another industry, however, fueled by the efforts of Marathon Petroleum, “was pushing for the changes all along.”[2] The campaign’s main argument “for significantly easing fuel efficiency standards” was “that the United States [was] so awash in oil” that energy conservation need no longer be a worry.[3] This statement blatantly misses the point that the standards that were in place then were also to reduce emissions of CO2 from what they would otherwise have been from entering the Earth’s atmosphere.

Interestingly, the American oil industry must have missed the memo on the continuing increases in the emissions.

In fact, 2017 saw a record amount of emissions added to the atmosphere; the Paris Accord in 2015 was already proving to have been a failure.  Issued in early October, 2018, a “landmark report” from the UN’s Intergovernmental Panel on Climate Change “paints a far more dire picture of the immediate consequences of climate change than previously thought.”[4] The report states that if “greenhouse gas emissions continue at the current rate, the atmosphere will warm up by as much as 2.7 degrees Fahrenheit (1.5 degrees Celsius) above preindustrial levels by 2040, inundating coastlines and intensifying droughts and poverty.”[5] This was the context in which the oil industry was running “a stealth campaign to roll back car emissions standards.”[6]

The industry’s rationale reduced everything to the needs and desires of individual customers with no consideration of the impact on even them, not to mention humanity—including possibly its very survival. “With oil scarcity no longer a concern,” Americans should be given a “choice in vehicles that best fit their needs,” read a draft of a letter that Marathon helped to circulate to members of Congress over the summer. Official correspondence later sent to regulators by more than a dozen lawmakers included phrases or sentences from the industry talking points, and the Trump administration’s proposed rules incorporate similar logic.”[7] Of course, that a “quarter of the world’s oil is used to power cars, and less-thirsty vehicles mean lower gasoline sales” was not missed on either Marathon or its industry as a whole.[8] But the notion of a whole apparently stopped at the industry level; externalities beyond that, even one bearing on the future of mankind, were apparently of no concern.

Marathon Petroleum even “teamed up with the American Legislative Exchange Council, a secret policy group financed by corporations as well as the Koch network, to draft legislation for states supporting the industry’s position. [The] proposed resolution, dated Sept. 18, describes [the then] current fuel-efficiency rules as ‘a relic of a disproven narrative of resource scarcity’ and [urges that ‘unelected bureaucrats’ shouldn’t dictate the cars Americans drive.”[9] The resolution’s language doubtlessly included the council’s talking points, which, in staying on the “resource scarcity” rationale for standards, neglect the obvious link between emissions and climate change. Furthermore, the smack on “unelected bureaucrats” demonstrates no regard for government as standing for the interests of the whole when externalities from cumulative individual decisions are too much from the perspective of the whole. To be sure, with industries swaying legislators and regulators in democracies, laws and regulations can indeed benefit a part at the expense of the whole, but this deplorable flaw does not negate the need to protect the whole from parts from exploiting conflicts of interest. Unlike the auto industry, the oil industry sought to exploit its conflict of interest by putting its narrow interest ahead of that of the whole where the whole supposed to be paramount—in the halls of government.

I suggest, therefore, that heightened scrutiny is warranted where a company or industry (or the business sector—still but a part of the whole) seeks to influence lawmakers, regulators, or the general public in line with the private (profit) interest. This is especially needed in a culture that is generally in line with its business sector’s values. People and government officials alike in such a culture (such as that of the U.S.A.) find it difficult to realize the need to see that such conflicts of interest are not exploited. In fact, in my book, Institutional Conflicts of Interest, I argue that a conflict of interest is inherently unethical even if it is not exploited. A few other scholars on the subject argue in contrast that if a conflict of interest is not exploited, no harm is involved, but I contend that another reason exists why arrangements or situations that include conflicts of interest are unethical. I actually met one of those scholars on the Loyola campus in Chicago, but once in his office, I found he only wanted to talk about Obama. So much for scholarly exchanges.

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1. Hiroko Tabuchi, “The Oil Industry’s Covert Campaign to Rewrite American Car Emissions Rules,” The New York Times, December 13, 2018.

2. Ibid.

3. Ibid.

4. Coral Davenport, “Major Climate Report Describes a Strong Risk of Crisis as Early as 2040,” The New York Times, October 7, 2018.

5. Ibid.

6. Hiroko Tabuchi, “The Oil Industry’s Covert Campaign to Rewrite American Car Emissions Rules,” The New York Times, December 13, 2018.

7. Ibid.

8. Ibid.

9. Ibid.

Political Contributions in the U.S.: Political Bribery Beyond Access

What exactly does a large political contribution do for a contributor? The standard line is that access is “bought.” Being far removed from the Washington “belt-way,” the American people have swallowed the line, admittedly naively. As of 2015, we can look at the proverbial “man behind the curtain” for a much more realistic grasp of the extent to which private interests seeking particular benefits even at the expense of the whole (e.g., increasing a deficit) corrupt the American political system.

Speaking in 2012, former U.S. president Jimmy Carter asserted, "we have one of the worst election processes in the world right in the United States of America, and it's almost entirely because of the excessive influx of money."[1] In 2015, both Carter and the current federal president, Barak Obama, lamented what Carter characterized as political bribery, “a complete subversion of our political system as a payoff to major contributors.”[2]  No one is clean in Washington, Obama said at a news conference. We have to take the money to compete in elections and that obliges us. In other words, both presidents were confirming for us that major political contributors do indeed get more than access; the elected office-holders feel obliged to repay the contributors with benefits through favorable legislation or regulation.

Hence, Goldman Sachs was the largest single contributor to Obama’s 2008 campaign, and the financial reform law passed two years later steered clear of breaking up the five largest U.S. banks, which at the time had even more assets—a third more—as a group than they did in September 2008. Additionally, Obama backed off including even a public-sector health-insurance option after the health-insurance industry lobby objected. Had that industry contributed to his campaign? If so, did the companies that denied pre-existing conditions bribe the president to insure that the insured would still have to rely on those companies?

Bribery is a strong term; it is a stark indication that the United States are not cities on a hill—salubrious bastions of clean business and government in a corrupt world where bribery runs rampant. American CEOs cannot justifiably lament having to pay brides in other countries because the political contributions domestically are in fact bribes. Put another way, legalized bribery is still bribery even if the shiny veneer makes it more difficult to see underneath. Speaking in 2015, Carter’s recommendation was to make public financing of elections mandatory, hence limiting or expunging altogether private contributions. For this to happen, the U.S. Supreme Court would have to step down from its judicial doctrine that money is speech. The next question in need of a real answer may be whether the Court is subject to bribery, whether directly or through a power-elite.

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1. The Associated Press, “Jimmy Carter Slams ‘Financial Corruption in U.S. Elections,” CBS News, September 12, 2012.

2. Paige Lavender, “Jimmy Carter Blasts U.S. ‘Political Bribery’,” The Huffington Post, July 31, 2015.

Sen. Mitch McConnell Re-elected: A Washington Insider Sustained by the Establishment

The human brain is likely hard-wired to assume that tomorrow will be like today. This coping mechanism effectively narrows the window of our cognitive and perspectival range. The status quo not only endures; it is dominant, whereas reform must push hard to see the light of day. In politics, establishment interests, made wealthy in the status quo, bet their contributions on the political insiders—the establishment politicians who embrace the status quo. As a result, an electorate is manipulated and mislead by branding ads to the extent that it cannot be said that the real will of the people is done. The ensuing public policy is also not of that will; rather, legislation protects the vested interests in return for their contributions. A republic in the grip of this self-sustaining cycle can be said to suffer from a kind of hardening of the arteries. As times change, such a ship of state becomes increasingly unmoored from its people. Eventually, the ship sinks, after the pressure of incongruity has reached an unsustainable level. I contend that the 2014 U.S. Senate election in Kentucky between the Senate’s minority leader, Mitch McConnell, and his Democratic challenger, Alison Grimes, illustrates this political illness in action.

In a Louisville Courier-Journal poll conducted January 30 through February 4, 2014, only 27 percent of registered Kentucky voters viewed Mitch McConnell favorably, while fifty percent had an unfavorable opinion of the minority leader.[1]  President Obama’s approval rating came in 2 percentage points above that of McConnell’s.  With a 3 percent margin of error, the poll gave McConnell 42 percent to Grimes’ 46 percent—meaning that were the election held then and the actual turnout was not skewed, Grimes would be the next U.S. Senator from Kentucky.

With the U.S. House and the president deadlocked through the midterm election in November, legislative achievement cannot explain how McConnell’s 27 percent turned into the 56.2 percent who voted for him. Similarly, Pat Roberts of Kansas had had low favorability ratings only to come up with 53.3 percent of the vote. Both senators were Washington insiders who had strayed from their respective home states. Yet in the end, this is what saved them.

According to the New York Times, McConnell’s campaign benefitted from $23 million in spending from independent groups including the National Rifle Association, the National Association of Realtors, and the National Federation of Independent Business. The Kentucky Opportunity Coalition, registered as a social welfare organization, spent $7.6 million on attack ads against Grimes.[2] That organization ran more political ads in Kentucky than any other outside group, which means that Grimes could not counter the critical ads sufficiently. In short, McConnell’s strategy was at least in part to bring in out-of-state money to get a chunk of Grimes’ favorable rating.  Although positive correlation is not causation, the widening spread between the two candidates through the summer and fall, with McConnell on top, coincided with the onslaught of outside-group spending on attack ads against Grimes. 

It is possible that the people of Kentucky sent their incumbent senator back to Washington in spite his low favorability rating. In other words, Kentucky’s electorate may have been manipulated and mislead, deprived in effect of making the choice.

The implications in terms of public policy are just as bad. Contributors to the “social welfare” organization are not publically listed, so they have cover should anyone accuse the incoming majority leader of paying them back with favors. Whereas Grimes as a freshman senator would have much less power with which to make the favors happen, McConnell’s position as majority leader attracted the contributions like a tall beacon on a clear night. The establishment money, in other words, backed up the Washington insider, effectively protecting the status quo and thwarting real reform.

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[1] James Hohmann, “2014 Election Poll: Mitch McConnell Trails Alison Lundergan Grimes by 4,” Politico, February 6, 2014.

[2] The Editorial Board, “Dark Money Helped Win the Senate,” The New York Times, November 9, 2014.

Federalism and the Democratic Deficit: The E.U. as Suboptimal?

One major criticism of the E.U. has concerned its “democratic deficit.” The European Commission, the E.U.’s executive branch, has taken most of the criticism because the bureaucrats are not elected. Even though the European Council consists of elected state executives, the state legislatures are viewed as “closer to the people” and therefore more democratic. At the E.U. level, the European Parliament is the most directly democratic, as the EP’s representatives are directly elected by E.U. citizens. Therefore, one means of reducing the “democratic deficit” has been to increase the Parliament’s authority relative to those of the Commission and the Council. Lest it be thought that this solution has no drawbacks, the case of whether E.U. ships should be permitted to be beached for recycling in South Asia illustrates a problem.

Beaching old ships for recycling in South Asia is cheaper but can result in leaks of toxic chemicals. Image Source: Agence France-Presse/Getty Images

Facing pressure from South Asian governments, the E.U. state leaders on the European Council opposed a ban on beaching over the objections of environmental groups. Facing a different political dynamic, the European Parliament favored the ban. After weeks of negotiations, the parliament and council agreed to a compromise. Beaching a ship would be allowed as long as “fixed structures” are involved. As this wording is notoriously open to interpretation, clarity was sacrificed for the sake of a compromise.[1]

Interpretation may not even be necessary, as the E.U. has no language in the compromise to prevent ships from changing their flags, Patrizia Heidegger of the NGO Shipbreaking Platform observed. “So the stronger language won’t mean much,” she added.[2] The compromise looks a bit like Swiss cheese. Lest this flaw be attributed solely to politics, that the Council had to negotiate with the Parliament on the matter means that the solution to the “democratic deficit” is at least partly to blame. That is to say, public policy can suffer from efforts to reduce the deficit.

Of course, that the E.U. consists both of states and citizens means that the Council and Parliament both have vital roles in the E.U.’s government aside from the issue of democracy in a federal system. So public policy being diluted in the negotiation process is also a necessary part of having a federal union of states with direct effect. Even if no “democratic deficit” existed, in other words, the involvement of both the Council and the Parliament, and thus the negotiation, would be on firm ground. Even so, this “cost” of having a federal union can be minimized by the principle of subsidiarity, wherein legislation is to be accomplished at the lowest governmental level possible. In the case of the U.S., the problem of “lowest common denominator” federal legislation can in principle be mitigated by the fact that Congress’s powers are enumerated, and thus limited, with the residual sovereignty residing with the state governments. The problem is thus when too much legislation occurs at the federal level, whether in the E.U. or U.S.

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1. Costas Paris, “EU Won’t Ban Ship Recycling on Asian Beaches,” The Wall Street Journal, June 26, 2013.

2. Ibid.

"Real Change" Belied: Lobbyists in Obama's White House

Visitor logs for January 17, 2012 show that the lobbying industry that Obama had vowed to constrain was nonetheless a regular presence at 1600 Pennsylvania Ave.[1] That's the address of the White House. Even though the president barred recent lobbyists from joining his administration or even serving on its advisory boards and forbid federal employees from accepting free admission to receptions and conferences sponsored by lobbying groups, records suggest that lobbyists with personal connections to the White House enjoyed the easiest access. The principle of fairness (not to mention consistency) seems to have been sacrificed for political (and campaign finance) expediency.

Lobbyist Marshal Matz, for example, who served as an unpaid adviser to Obama’s 2008 campaign, gained access to the White House roughly two dozen times through May 2012.[2] He brought along the general council for the Biotechnology Industry Organization, the chief executive of cereal maker General Mills and pro bono clients, including advocates for farmers in Africa. It seems that the “Wall Street needs reform” president was rather pro-business behind the gates.

Another such lobbyist with close ties to the White House was former New York congressman Tom Downey, who at the time was married to Carol Browner. Until 2010, she was Obama’s energy czar. Downey was the head of Downey McGrath Group, a lobbying firm whose clients include Time Warner Cable and Herbalife, which sells nutrition and dieting products. As of January 2012, he had been to the White House complex for meetings and events 31 times. On Dec. 10, 2010, Downey held a meeting with economic adviser Lawrence H. Summers and just happened to bring along Bill Cheney, the head of the Credit Union National Association and one of Downey McGrath’s clients. John Magill, the top lobbyist for the association, said that the group was pushing to lift the cap on the percentage of assets its members can lend out.[3]

“A lot of folks,” Obama said in April 2012, “see the amounts of money that are being spent and the special interests that dominate and the lobbyists that always have access, and they say to themselves, maybe I don’t count.”[3] That is also the inevitable reaction from the White House visitor log. Even members of Congress may conclude that they don't count.

According to U.S. Sen. Ron Wyden (D-Oregon), for example, the U.S. Trade Representative was sharing draft negotiation documents on the Trans-Pacific trade deal with the governments of other countries and American corporate executives who serve on advisory boards, no such access was being provided to the majority of Congress or most nonprofit groups. "The majority of Congress is being kept in the dark as to the substance of the TPP negotiations, while representatives of U.S. corporations--like Halliburton, Chevron, PhRMA, Comcast and the Motion Picture Association of America--are being consulted and made privy to details of the agreement," Wyden said[4]. A subsidiarity of Halliburton had been accused by the U.S. military of charging it $1.6 billion for fake services. The Motion Picture Association had former U.S. Senator Chris Dodd (D-Conn.) as its head. 

Furthermore, ABC News had reported in 2011 that employees of Comcast had "contributed more money to President Obama's reelection bid than employees from any other organization, according to [an] analysis of the Federal Election Commission data by the Center for Responsive Politics."[5]  It appears that the Obama administration was being quite responsive to Comcast in enabling the company to "buy" the access to the trade negotiations. In fact, Obama attended "an intimate fundraiser at the home of Comcast executive vice president David Cohen in Philadelphia in June [2011] and a private 'social reception' at the Martha's Vineyard estate of Comcast CEO Brian Roberts [in August 2011]. Cohen put together more than $500,000 in contributions to the Obama campaign and the DNC for the 2012 election. Nonetheless, the president’s press secretary—speaking as if tone-deaf—said, “Our goal has been to reduce the influence of special interests in Washington — which we’ve done more than any Administration in history.”[6] 

It seems to me that the Obama administration's mutual back-scratching with big business can explain why Obama caved on the "public option" in his health-insurance reform law--essentially handing the existing private insurance companies tens of millions of new customers financed by the U.S. Government without any competition from a public insurer. The close ties can also explain why Obama backed off from his statements that Wall Street banks too big to fail should be broken up preemptively (rather than merely having the government get involved to help out on the liquidation after a bank has gone bankrupt as is the case in the resulting law). Even though the positive correlation of campaign contributions and favorable access and legislation (and trade negotiations) does not in itself prove the existence of a quid pro quo, the fingerprints are all over the darkened windows of Obama's White House. Rather than attacking capitalism, Obama was wallowing in it even as he occasionally threw red meat to his anti-corporate base to get it out to the polls. 

Moreover, both the matter of White House access and access to trade deal negotiation point to the partisan nature of the office of the U.S. Presidency. With regard to the White House access, the Post reports that “Republican lobbyists coming to visit are rare, while Democratic lobbyists are common, whether they are representing corporate clients or liberal causes.” This suggests that the presidency itself may be more partisan than is consistent with representing the United States itself (i.e., the figure-head role of the office).

In general terms, it would be naïve to suppose that powerful figures in Washington, D.C. could somehow be immune from lobbyists when the clients have so much money (i.e., economic power). In other words, concentrated wealth must needs eventuate in pressure on public policy. To restrict lobbyist access at the White House would thus only plug a hole that is a symptom. While doing so might assuage our frustration at such blatant favoritism bought with campaign (or SuperPac) donations, it is that money and the related mammoth size and power of modern corporations that must ultimately be challenged for there to be any change in substance. However, we should not be so naïve as to expect that barring lobbyists from the People’s House or even outlawing corporate political campaign contributions would reduce the influence. Where there are deep pockets of concentrated private wealth, the public weale must needs be so oriented. 

1. T. W. Farnam, “White House Visitor Logs Provide Window into Lobbying Industry, The Washington Post, May 21, 2012.

2. Ibid.

3. Ibid.

4. Zach Carter, "Trans-Pacific Partnership: Key Senate Democrat Joins Bipartisan Trade Revolt Against Obama," The Huffington Post, May 23, 2012.

5. Devin Dwyer, "Comcast Employees Top Donors to Obama Campaign Accounts," ABC News, August 25, 2011.
6. Ibid.

The Revolving Door: A Public-Private Sector Conflict of Interest

In Illinois, at least as late as 2011, state and local legislators could use their position to benefit paying clients. According to The New York Times, fourteen elected officials in Cook County, where Chicago is located, were registered as lobbyists in the 2009-2011 period and had clients who did received government contracts in Illinois. Rep. Fred Crespo observes, “When I see them [the law makers] at a hearing in the Capitol, I often can’t tell of they’re here for their constituents or for their paying clients.” Legislators in Illinois “can legally vote and otherwise act on matters that directly benefit their lobbying clients.”[1] As this involves a conflict of interest, which is inherently unethical, this case demonstrates for us the contention of ethicists that ethics as a field is distinct from law.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

1. Mike McIntire and Michael Luo, “When Santorum Left Senate, Some He Aided Found Him Work,” The New York Times, January 6, 2011; John Sullivan and Fredric Tulsky, “When Office Holders Also Represent Clients, Collisions Are Likely,” The New York Times, January 6, 2011; and Fredric Tulsky and John Sullivan, “Is It a Conflict? Yes, But It’s Legal,” The New York Times, January 6, 2011.