Corporate Taxes, Mass Envy, and Economic Justice
In recent days it has been popular to attack General Electric Corporation for not paying any corporate taxes on the $14.2 billion in profits it made last year, $5.1 billion of which was made in the U.S. When the country is so badly in debt, it is easy to become insecure and hysterical and to look at any source of money and go after it, like a hungry wolf. However, this is a non-rational form of envy. Not only is envying the wealth of others a sin according to the Ten Commandments, in the case of corporate taxes it is economically unwise. In fact, corporate taxes and tax breaks are part of our social sickness, not the cure. In fact General Electric received a tax benefit of $3.2 billion last year as a result of this sickness.
(Reuters) – Most U.S. and foreign corporations doing business in the United States avoid paying any federal income taxes, despite trillions of dollars worth of sales, a government study released on Tuesday said.
The Foolishness of Corporate Taxes
It is foolish and counterproductive to tax corporations. Because corporations are driven by economic principles, rather than political ones, they will go to great lengths to avoid taxes. Here are a list of things corporations would usually rather do than pay taxes:
- Pay higher salaries to corporate executives and employees.
- Advertise more, even if advertising is poorly targeted.
- Build new expensive buildings.
- Sponsor corporate parties, golf trips, and buy luxury items.
- Hire batteries of lawyers to find tax loopholes.
- Hire corporate lobbyists to create tax loopholes.
- Move corporate headquarters or operations to another country.
All of these behaviors are a result of natural economic responses to present government policies. In my opinion legislators are directly to be blamed for General Electric’s tax avoidance. Causing corporations to engage in the above behaviors is poor government policy. Rather, if governments understood economic principles, instead of committing the sin of envy, they would enact policies that tapped completed economic activity not the production process. What would such policies look like?
- Taxation on profits dispensed outside the corporation and not reinvested. This includes stock dividends, executive bonuses and profit sharing plans. This would deter executive bonuses and stimulate reinvestment in the corporation. However, today taxes on increased corporate net worth and inventory deter capital investment in corporations and promote the non-productive activities listed above.
- A distinction needs to be made between income from ones own labor and passive income from the labor of others. Income from stocks, executive bonuses, and royalties are forms of income that generally require the labor of others. I do not believe it is wrong to set an amount like $250,000 to be a threshold to distinguish between one’s own labor and “passive income.” It is more ethical to tax passive income than a man’s labor.
- End corporate lobbying, donations, to political parties, patent protection, and other loopholes. This would eliminate a huge waste of corporate money for tax evasion and at the same time eliminate the government favoritism that eliminates the pure competition in the market that causes such profits in the first place.
Anyone who understands economic principles knows that pure competition does not generate large concentrations of profit. For in a climate of pure competition, if one corporation produces a $14 billion profit producing widgets, another corporation will happily enter the market and produce them for a $5 billion profit, and a third corporation will happily enter the market and produce them for a $2 billion profit. The main reason General Electric had a $14.2 billion profit and paid high CEO salaries last year was because of government policies.
In other words, it was Keynesian economic theories and not neo-classical economics that enabled General Electric to make such huge profits. It was incremental tinkering with the laws that eliminated a competitive market. This tinkering has been done ever since the Civil War through Supreme Court decisions and legislation aimed at consolidating economic power in the hands of elites rather than allowing all citizens equal economic opportunity through fair competition. As Hayek said, the role of government in the economic sphere is not centralized management of business but “planning for competition” (Road to Serfdom, p. 42).
Fair and competitive markets in the banking industry would create thousands of small banks and bring to an end the phenomenon of banks too big to fail. Fair and competitive markets in health care would create better service at lower prices rather than “too big to care” rationing of life insurance companies and government agencies. After government agencies that manage health care are created, they behave according to political and economic motives and do not place the lives of citizens first.
As an economist would expect, nearly all corporate taxes are paid by corporations that are able to obtain excessive profits as a result of government regulation that protects them from fair competition. For example, utilities. Such taxes are a result of “you scratch my back, and I’ll scratch yours” agreements.
Tax the Fruits not the Seeds
A slogan I used in my book, Life, Liberty, and the Pursuit of Happiness, Version 4.0 is “Tax the Fruit, Not the Seeds.” Taxing corporations is like taking seeds from a farmer before he plants them and creates a manifold yield for harvest. A wise agrarian government would take a portion of the harvest and let the farmer have all his seeds. The same is true of industry, the government will reap greater income by taxing the fruits of corporate production by taxing the profits that individual take out of the corporation by way of salaries or dividends.
It is important to note that income taxes on labor used to produce goods is also counter productive as it is a tax on the “seeds” rather then the fruit and it causes the price of goods to be higher and less competitive on a global market. Other countries, if they are smarter, will not tax labor but the sales of goods. Then they can offer their goods at a lower price globally.
The Archaic U.S. Tax Structure
To some extent the U.S. government was able to get away with corporate taxes and income taxes on labor before globalization, when the U.S. economy was rather self-contained. This is because capital could not productively flee to other countries, and because all labor was taxed at the same rate. China, on the other hand, entered the global economy after it gave up on communism in the 1980s and has been able to create a tax structure more appropriate to a global economy.
Today, Americans create products that cost more than Chinese-made goods, not simply because the Chinese work for less money, but because more than 30% of the cost of U.S. labor is taxes. On the other hand, if there was no income tax on labor, and a federal sales tax of the same rate on Chinese-made and American-made goods, then the U.S. government would not be giving the Chinese such an unfair market advantage. As it is, our tax policies are shooting ourselves in the foot.
Of course, the United States has other regulations, for example related to safety and pollution, that make it harder to produce goods domestically. Further, class-action lawsuits and high damage awards for malpractice and unsafe products is another reason not to produce in the United States. In these areas we have to learn to separate safety from envy, for most people want a clean environment and safe products, but many of the winnings of such suits are motivated by envy and greed. We do not have the time or space to discuss this topic in this article.
The Problem of Mass Envy
The main point I wanted to make is that corporate taxation is foolish, counterproductive, and proof that a society must obey the Tenth Commandment “Thou Shalt Not Covet.” Ancient societies learned that just like “Thou shalt not kill,” and “Thou shalt not steal,” violating the command “Thou shalt not covet” will bring about social collapse.
We live in a scientific age and many people believe that these ancient commandments can be ignored because they are contained in pre-scientific works of literature. However, as Santayana said, “Those who fail to learn from history are doomed to repeat its mistakes.” Corporate taxes are rooted in envy, pure and simple; they make no economic sense and have caused much of the economic injustice that we so dislike.
A very good analysis Gordon. It often surprises me how hostile some people are to companies that try to avoid paying tax. If they paid a lot more tax they would go out of business. Business are the wealth generating part of a society. In that sense business should be called ‘public service’ and the ‘public sector’ as it is the one that contributes the most. It is a misnomer to call government the ‘public sector’ or to call people who work for the government ‘public servants or employees’ as they are consumers not creators of wealth. The so-called ‘private sector’ has to support people who work in the ‘private sector’ as well as the people who work in non productive jobs in the ‘public sector’. So who is the most ‘public minded?’ I guess the envious one tend to be the ones working for the government. The British government under Gordon Brown failed to regulate the financial sector properly because the banks were generating such huge profits that could be taxed. So there was a lot of collusion going on – ‘you scratch my back . . .’
William, Thank you for the comment. There are three spheres of society; culture, economy, and government. These three spheres are governed by the respective principles of love, the market, and force. I think “Public” and “Private” generally denote whether a collective activity is run under the auspices of government and with the principle of compulsion, or as a private voluntary activity. In this regard the more activity is public, the less freedom exists, the less the market works, and the less love can be exercised. While it is true that churches and NGOs can be said to promote the public good, they are not what I would define as public institutions, but cultural ones.
Main reason not to have corporations pay tax is that it is a way for governments to hide how much they are spending, by pretending that individuals aren’t paying the taxes. No corporation has ever paid a cent in taxes, taxes are considered a cost of doing business. All the government has done is make their products more expensive, for if the company can not recover the costs of the taxes in the price of its products, it will go bankrupt and cease to do any business at all.
Essential fact of life is that the individual citizens pay the taxes on corporations. For the citizens of a nation, what they have done is made the products of their labors harder to trade with other nations, because the products you made are now being sold there, and the company has to pay the taxes you made by charging more there. It directly hurts the citizens every time, and the only way that government gets away with it is by maintaining the ignorance of the citizens and falsely promoting themselves as the savior of the people, because they are ‘taxing the corporations their fair share.’
As I discussed with you on FB, I am typically impressed with your logic and penmanship. But in this case, I must disagree with you. The only thing the government has a moral right to tax are things it created. And about the only things it created are corporations.
Corporations are given benefits not available to people by their creator ie, God. Corporations live forever, enjoy limited liability, the ability to raise monstrous sums of money on Wall street, etc. As a price for these significant advantages they have over Mom & Pop operations they should be taxed heavily, in order to level the playing field between the Home Depots of the world and “My Pa’s Hardware Store” on Main Street.
All the tax avoidance measures you cite can be easily handled within the code. Don’t like that the CEOs are paying themselves to avoid taxes? Tax their Gross before executive compensation is factored in, etc…
Love your work Gordon! This is the first disagreement I have had with anything you have written, and I have read!
Yes Jim, I generally agree with you on social issues, and it would probably take more dialogue on this matter as there are several conflicting questions at issue. You have a certain moral logic to your reply, but I don’t think it addresses practical economic incentive very well. And, I think the high CEO pay is better attacked by distinguishing between two forms of income. Let me try to explain a bit more:
One point is whether corporations ought to exist at all. Another is whether they ought to be entitled to hold patents or get any other form of government protection. Another is whether they ought to have personhood. Another is whether they ought to be able to contribute to any political candidate or party. I have questions about all of these points.
However, if they exist as they do now, then I want to separate the cost of production of goods from the concept of profit. And, I want to separate the cost of labor in the production of goods from income due to sales of products. These numbers are currently conflated for political purposes by both corporate and government spokespersons.
As I said in the article, high CEO pay is one of several ways of masking profit from sales to avoid paying taxes. There are many other types of non-productive expenditures, as I outlined above, that taxing corporations causes. Most companies that pay taxes do so as a result of some bad law that gives them more protection from the government than they pay in taxes.
If you increase the taxes on the corporations, they will just re-organize or move out of the country. They understand money better than the government does. And, they can respond to market conditions faster than a government can. The real thing that seems to irk you–and it irks me too–is exorbitant CEO pay that is hard to justify on moral grounds. This ought to be taxed before your wage laborer trying to make ends meet, but not as an income tax from labor but as a tax on profit. Hence, if you take money out of the corporation after the production processes are complete, you can tax them.
However, as I have said elsewhere, this high CEO pay could not exist in a market with pure competition, only in a market that has a measure of protection by the government. Hence, government economic policies are a major source of this high pay to begin with. It is ironic that government policies cause the high CEO pay, and then government gets angry and jealous. It is a sign of dysfunction.
As Hayek has said, the solution is for the government to ensure conditions of rigorous competition, in which case profits tend toward zero and maximum productive efficiency is achieved. In pure competition there could be no exorbitant CEO pay or spurious corporate expenditures for very long because a competitor would be able to provide the same goods at a lower rate by running a leaner company. Wayne Miller outlines the conditions for a competitive market here: http://www.youtube.com/user/wmiller24#p/u/14/DZhphhNk1e8
Republican leaders, who are fighting against raising taxes on the rich, fail to separate income from labor and income from profit on sales. They purposely seem to try to hide this distinction. And they have not convinced me that progressive taxation on high salaries and bonuses will be used to create jobs more than if it were left in the corporation directly for productive purposes. Obviously, there will be some jobs created in building mansions and yachts, but there would be more jobs if the corporations had a climate of pure competition, reinvested any profit into more production, and corporations didn’t move jobs overseas. This high CEO pay is a reward not unlike high salaries of football and movie stars. This money is a result of reaching a type of superstar status in which you have millions of consumers excited by your product, not as a result of labor for hours you put in the office. This is therefore not wage labor, but a form of superstar bonus.
I believe that a moral case can be made that one is entitled to the fruits of one’s labor, and that money made off of other people’s labor is a better thing to tax. It might be hard to draw a line, so I would simply exempt anyone earning less than $250,000 in income from filing taxes, and consider the amount over that as some form of bonus income.
Now to return to your points: The repeal of federal income tax as you advocate would fit nicely in this system from that standpoint that you ought not tax wage labor, and that is where most of the income tax revenue comes from anyway. And of course, the federal income tax is an unconstitutional non-apportioned tax anyway.
Secondly, the idea of taxing income from profit should not ideally be done by the federal government anyway because corporations are incorporated by states, not the federal government. Thus the bonus income should be paid to the state in which the corporation is incorporated. This would accord to your theory that government creates corporations and has the right to tax them. Where I would differ is that I would not tax them if they do something productive with the income, but I would tax the cash people take out.