Posts Tagged ‘corporations’

April 25, 2016

Special mention

holb_c14077820160428120100 Thank You For Yoiur Suggestion

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Posted: 29 April 2016 in Uncategorized
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DJIA

Capitalism is, if anything, remarkably unstable.

Yesterday, the Dow Jones Industrial Average dropped more than 200 points (a bit more than 1 percent). And, today, it’s already down more than half that amount—and headed lower.

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What’s going on?

Well, for one thing, corporate profits are declining.

U.S. corporate profits, weighed down by the energy slump and slowing global growth, are set to decline for the third straight quarter in the longest slide in earnings since the financial crisis.

Weakness was felt across the board, with executives from Apple Inc. to railroad Norfolk Southern Corp. and snack giant Mondelez International Inc. saying the current quarter remains tough. 3M Co., which makes tapes, filters and insulation for consumer electronics, forecast continued weak demand for that industry. Procter & Gamble Co.reported sales declines in its five business categories despite price increases.

And that’s exactly how capitalism works: corporations got exactly what they wanted in the early years of the recovery—with cheap financing, low wages, and foreign sales, which fueled high profits. And now those same conditions are coming back to bite them. And so they’re deciding to engage in less investment, which is further slowing growth and cutting into profits.

As we know, under capitalism, what goes up must come down—even for capitalists and their profits.

oxfam

Yesterday, I argued that the U.S. tax system is broken. That’s because many corporations pay no federal taxes and, even when they do, the effective rate is much lower than the statutory rate.

And that’s just on the tax-revenue side. On top of that, as Oxfam (pdf) shows, U.S. corporations received a wide variety of subsidies. For example, from 2008 to 2014, the top 50 U.S. corporations collectively earned $4 trillion in profits, paid $412 billion in federal taxes, and received $11.2 trillion in support in the form of loans, loan guarantees, and bailout assistance from the federal government.

There is no doubt that data from this time frame is shaped heavily by the federal programs, like the auto-bailout and TARP, that were created to deal with the largest economic crisis since the Great Depression. Additionally most loans and bailouts are paid back in full with interest. There are also relevant distinctions to be made between companies and sectors on their tax practices and their receipt of federal support.

Companies benefit in different ways from federal investments and from tax laws, only some of which are revealed in the data Oxfam analyzed. The data also does not show the value of other forms of federal support that companies receive beyond loans, loan guarantees and bailouts.

Nonetheless, the data is useful to observe in aggregate because it puts in stark relief the taxpayer financed benefits large companies in general enjoy in relation to the taxes they pay.

In addition, those same corporations hold $1.4 trillion in offshore cash reserves, which are not subject to taxation. And they spent roughly $2.7 billion on lobbying from 2008 to 2014.

That means for every $1 they invested in shaping federal policy through lobbying, they received $130 in tax breaks and more than $4,000 in federal loans, loan guarantees and bailouts.

Those breaks indicate that not only is the U.S. tax system broken; so, too, is the political system.

Except, of course, for U.S. corporations.

corps-taxes

The other day, I wrote that, while the United States government is not broke, corporate income taxes represent a small percentage of total federal tax revenue and they’ve been steadily declining for a very long time.

And that’s because, as demonstrated in a new study by the U.S. Government Accountability Office (as requested by Senator Bernie Sanders), a large percentage of U.S. corporations pay no federal income taxes.

In each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability. Larger corporations were more likely to owe tax. Among large corporations (generally those with at least $10 million in assets) less than half—42.3 percent—paid no federal income tax in 2012. Of those large corporations whose financial statements reported a profit, 19.5 percent paid no federal income tax that year. Reasons why even profitable corporations may have paid no federal tax in a given year include the use of tax deductions for losses carried forward from prior years and tax incentives, such as depreciation allowances that are more generous in the federal tax code than those allowed for financial accounting purposes. Corporations that did have a federal corporate income tax liability for tax year 2012 owed $267.5 billion.

Keep that in mind the next time someone claims that the U.S. corporate tax rate needs to be lowered. The fact is, effective tax rates are much lower than statutory rates. Thus, for example, the statutory tax rate on net corporate income ranges from 15 to 35 percent, depending on the amount of income earned. For tax years 2008 to 2012, profitable large U.S. corporations paid U.S. federal income taxes amounting to, on average, only 14 percent of the pretax net income that they reported in their financial statements.

Thus, the country is not broke—but the tax system, especially when it comes to large corporations, certainly is broken.

The problems surrounding the central institution of capitalism—the corporation—are so widespread and enormous they’ve even provoked concern in sympathetic quarters, such as the Harvard Business School.

This past November, Harvard hosted a conference during which participants attempted to grapple with the tensions between Milton Friedman’s theory of the firm—according to which firms can and should only benefit society by focusing on maximizing shareholder value—and the growing political influence of corporations after Citizens United—when it has become increasingly easy for firms to tweak the rules of the game in their favor.

Now, for the rest of us—citizens, nonmainstream economists, and academics in disciplines outside of business and economics—both the history of corporations and the prevailing neoclassical theory of the firm present so many problems it’s hard to believe Friedman’s ideas are still taken seriously. Long before Citizens United, corporations have exercised a great deal of influence both inside (over their workers) and outside (in politics and in the wider society). That’s why the corporation has been a contested institution—legally, economically, politically—since its inception. Similarly, the neoclassical theory of the firm (initially in its “black box” form, then when the owner-manager agency problem was raised) has swept most of the serious problems under the theoretical rug.*

But for the scholars gathered at Harvard, the key issue (as presented in the brief paper coauthored by Harvard Business School faculty members Paul Healy, Rebecca Henderson, David Moss, and Karthik Ramanna [pdf]) was a relatively narrow one:

if firms have the power to generate profits not only by producing socially beneficial goods and services, but also by tilting public policy and the “rules of the game” to their advantage (whether through aggressive lobbying, effective use of the revolving door between political and corporate appointments, or campaign contributions), then the core assumption that firms can maximize social value by maximizing shareholder value may not hold, and framing managerial responsibility as simply a matter of maximizing shareholder value may well be inappropriate.

Having read the paper, it is extraordinary that there’s no real history—no story about the invention of the corporation as a legal “person,” no Louis Brandeis or the Progressive movement, no Knights of Labor or United Mineworkers, no mention of the role of International Telephone & Telegraph in overthrowing Salvador Allende in Chile, no Massey Energy killing 29 miners in the Upper Big Branch mine. It’s as if the problem of corporate power only emerged after the 2010 Citizens United decision.

Still, from the perspective of neoclassical economics, even that problem looms large. According to the reigning paradigm (which guides much policy and is taught to hundreds of thousands of students every year), under conditions of perfect competition, free markets (including firms that maximize shareholder value) lead to Pareto-efficient outcomes. But if corporations (whether single firms or industries) can shape the institutions of the market (or the rules and ethical customs that help to maintain them), then all bets are off: “Maximizing shareholder value by deliberately distorting critical market institutions or regulations for private advantage seems unlikely to lead to the maximization of social value.”

That’s why the participants in the Harvard conference were caught between the real implications of Citizens United (that corporations can increasingly bend the social rules to their private advantage) and their continued adherence to the neoclassical theory of the firm (according to which maximizing shareholder value also maximizes social value).

I suppose it’s no surprise, then, which won out at the Harvard conference:

“I went into the conference with the understanding that one could question the premise of the Neoclassical paradigm in economics through logical arguments—e.g., the inconsistencies between Friedman’s assumptions and Stigler’s theory. I left with a sense that logical arguments on their own are unlikely to carry the day, because the Neoclassical paradigm is so powerfully ingrained into the discipline, into the fabric of modern economics,” says Ramanna.

 

*Including the problem neoclassical economists share with many of their heterodox counterparts, namely, what exactly does it mean that corporations maximize profits or shareholder value? First, how do we define profits or shareholder value, i.e., what is the appropriate metric, over what time horizon should it be defined, and how should it be measured? Second, corporations do many different things, such as exploit workers, give lavish pay to top managers, attempt to eliminate rivals, chart particular short-run and long-term growth path, buy favors and influence legislation, hoard cash, accumulate capital, and so on—why reduce all of what they do to a single dimension?

And this is before the Panama Papers [ht: ra]. . .

revenue_pie,__2015_enacted ind_and_corpo_tax_line_chart,_enacted_2015

Corporate income taxes represent a small percentage of total federal tax revenue (only 11 percent) and they’ve been steadily declining for a long time (since the 1940s).

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