Corporatocracy: The Rise of Corporate Power in Politics and What it Means for You Part I: Taxation

The Basics

A 67% majority of Americans think that corporations wield too much power in our political system. And they are even more right than they probably realize. In fact, there are so many different ways corporations undermine our democracy that this will have to be a multi-part series.

One key example of this has to do with the tax code. On the books, the U.S. has one of the highest corporate tax rates in the world, at 39.1%. But the dirty secret is that through a series of loopholes in our tax code, most corporations never pay that amount. In fact, in the past several years, some of the most profitable companies in our country and the world have paid absolutely nothing in federal taxes. Nothing. Zero. These companies include but are not limited to Microsoft and Pfizer. In 2009, Exxon Mobil made $19 billion in profits and paid no income tax. In fact, they received a $156 million rebate.

So the reality in the U.S. is that the biggest corporate earners pay an effective tax rate of just 9%, significantly lower than the rest of the developed world.

How do they get away with it? It basically boils down to the use of offshore tax havens. A company that is incorporated in the U.S. and does most of its development, manufacturing, and sales in the U.S. can create a subsidiary in a tax haven like the Cayman Islands, for example. Then, they sell the trademark or patent for their product to the foreign subsidiary and pay significant royalties to it. Those royalties, paid with profits made in the U.S. and to a subsidiary of the U.S. corporation, are nonetheless then considered foreign income and not taxed.

The Arguments

Some people will tell you that it is necessary for companies to engage in these shenanigans, because otherwise they will move elsewhere to avoid the U.S. taxes and our economy will crumble.

Here’s why that is bullshit. For one thing, the U.S. has one of the biggest markets in the world for the products these companies are producing. So they’re not going to stop selling here.

But what about development and production? Those could be important jobs for Americans, and we don’t want them to move overseas.

True, but consider the advantages of conducting that business in the U.S. We have much better infrastructure than other countries a company might consider moving to (and way better than the Cayman Islands where they wouldn’t have to pay taxes.) We have some of the strongest intellectual property rights laws in the world, so companies would have to give up that security.

They might even have to give up actual physical security as well, because the U.S. is more stable with better law enforcement than much of the world.

While there are a lot of problems with our education system (which may be addressed at some point in another post,) we nonetheless do have a pretty significant and well-educated workforce.

And finally, when companies are selling in the U.S., they also have to consider the shipping costs of bringing their goods to our markets if they decide to base their operations elsewhere.

So it seems pretty unlikely that closing corporate tax loopholes in our tax laws will cause a mass exodus of companies doing business in the U.S.

Conclusion

The end result of this tax evasion is that while these corporations are reaping the aforementioned benefits of doing business in the U.S., they are not paying to support those benefits. That means ordinary citizens and small businesses either have to pay more in taxes to support our public services, or receive fewer public services. If we could reclaim the revenue lost when corporations dodge their taxes, we wouldn’t be dealing with as many budget cuts now.

We wouldn’t even need the sequester if we had just closed these loopholes. We could pay for the public benefits that actually make the U.S. such a good place to do business: infrastructure and an educated workforce. But instead, we expect the middle class to pay more, the poor and working class to suffer more; all to continue to allow corporations to make record profits and pay nothing back. We don’t have a social welfare problem; we have a corporate welfare problem.

Check over the next couple weeks for more on lobbying, the legal status of corporations as people, and of course, how that all ties into foreign policy as well as domestic. We’ll get focused back on international affairs soon.