HOW CORPORATIONS MANIPULATE PUBLIC POLICY

Big corporations use a variety of techniques to manipulate public policies. The standard tactics that receive the most publicity are lobbying, campaign contributions and (supposedly) independent campaign spending, and the revolving door between jobs in corporations and related jobs in the public sector, including as regulators of the industry where the person formerly worked.

Less recognized and publicized techniques for affecting policy include funding think tanks and (supposedly) independent research and academic publications. Corporations also have funded (supposedly) grassroots organizations to advance their interests. Probably the most famous (or infamous) one is the National Rifle Association (NRA). Although it is a membership organization and is viewed and presented as a grassroots organization, it is heavily funded and supported by the manufacturers of guns and ammunition. It is what is called an “astroturf” organization, i.e., fake grass(roots).

Another tactic that is being adopted by the Big Tech corporations has more traditionally been associated with the military and the defense industry: putting jobs in the districts of key and powerful legislators. The military has for decades worked to have bases, other facilities, and contractors in every state and congressional district. The defense industry corporations have worked to spread their facilities and jobs widely across the country. This meant that when cuts to defense spending, such as closing of some bases, was discussed or when cutting funding for a specific weapon system was raised, it meant that congressional representatives considering voting to cut spending were painted as cutting jobs, often in their own districts. That’s a tough vote to make!

Recently, the four Big Tech corporations, Amazon, Apple, Facebook, and Google, all appear to have adopted this job placement strategy. In late 2017, Rep. Jerry Nadler of New York City became the ranking minority member of the House Judiciary Committee and became its chair when the Democrats won control of the House in the 2018 elections. The House Judiciary Committee is currently investigating the four Big Tech corporations for antitrust violations and anti-competitive behavior.

All four of the Big Tech corporations have announced they are opening offices and bringing jobs to the section of Manhattan which just happens to be in Judiciary Committee chair Jerry Nadler’s district. Amazon has recently signed a lease for space that will house over 1,500 employees. Not only does this put these jobs in Nadler’s district, but if the employees happen to live nearby, they will be voters in his district as well. (Remember that Amazon only months earlier had pulled out of a deal to locate its second headquarters in nearby Queens, despite having been promised (extorted?) $3 billion in public subsidies to locate a promised 25,000 jobs there.) [1]

Apple, Facebook, and Google have either opened new offices in New York City or announced plans to do so. All of them are on the west side of Manhattan in Nadler’s district. There is plenty of real estate elsewhere in the New York City area, so the fact that all four Big Tech firms happen to be locating in Nadler’s district is more than a little suspicious. (By the way, the runner-up for the position Nadler got on the Judiciary Committee was Rep. Zoe Lofgren, whose district includes a chunk of Silicon Valley.)

It is projected that by 2022 the four Big Tech corporations will have over 20,000 employees (and potentially voters) in nine different locations all on the west side of Manhattan in Nadler’s district.

The Judiciary Committee’s investigations, under Chairman Nadler, are the most significant antitrust investigations in decades and their outcomes could have significant effects on how the Big Tech corporations conduct their businesses and on their profits. Placing jobs in Nadler’s district, with the implicit or potential threat that those jobs might be at risk if Nadler and the Judiciary Committee take action that is viewed unfavorably by the Big Tech firms, is an escalation of these corporations’ on-going and persistent efforts to manipulate public policies in their favor. [2]

[1] Dayen, D., 1/10/20, “Silicon Valley’s big apple gambit,” The American Prospect (https://prospect.org/power/silicon-valleys-big-apple-gambit/)

[2] Dayen, D., 1/10/20, see above

NO BENEFITS FOR WORKERS FROM THE 2017 TAX CUT ACT DESPITE THE PR

The actual effects versus the claimed effects of the Tax Cuts and Jobs Act (TCJA) are becoming clearer all the time. (The TCJA is the December 2017 tax cut bill rushed into law by Republicans in Congress and President Trump.) A previous post provided a summary of what the TCJA did, the promises made about its effects, and the actual effects of the law. My last post reviewed the largely failed provisions that were supposed to tax the profits of multinational corporations more fairly.

Promised benefits for workers have failed to materialize and claims that the Tax Cuts and Jobs Act resulted in bonuses and wage increases for workers are unfounded. When President Trump signed the TCJA in December 2017, he stated that corporations would give “billions and billions of dollars away to their workers.” This has not happened.

Over the last two years, there has been no increase in workers’ compensation that can be attributed to the TCJA. In the short-term, to support the President and the rationale for the TCJA, some large corporations asserted that the bonuses they gave to workers in late 2017 were due to the TCJA. These bonuses were largely a public relations stunt. A few of those employers, such as AT&T and Walmart, engaged in major publicity around giving workers bonuses and then quietly laid off thousands of workers shortly thereafter.

The TCJA did incentivize the shifting of one-time bonuses from 2018 into 2017. Because expenses recorded in 2017 reduced 2017 profits when the tax rate was higher than it would be in 2018, it was advantageous to book as many expenses as possible in 2017. The value of the deduction of expenses, including the bonuses, from profits was more valuable under the 35% tax rate in place in 2017 than it would be in 2018 when the tax rate would only be 21%. In other words, it was cheaper for the corporations to pay the bonuses in 2017 than it would have been to pay them in 2018. Moreover, the TCJA provided a perverse incentive for the bonuses to be only a one-time occurrence, because in 2018 and beyond there would be increased incentives to maximize profits because of the reduced tax rate, which might not stay at that low level forever.

Nonetheless, bonuses accounted for only 2.7% of workers compensation in 2017, only a slight increase from 2.5% in 2016. Furthermore, this was a one-time blip as bonuses have declined since then.

If the TCJA were to have long-term or permanent effects on pay and the number of jobs, they would only be realized over a period of months or years, not immediately upon passage of the law, because making the necessary investments takes time. For the TCJA’s cut in the corporate tax rate to create a long-term, permanent increase in workers’ pay, corporations would need to use their tax savings for investments in improved equipment, worker skills training, or other steps that would improve workers’ productivity. To permanently increase the number of jobs, corporations would need to invest in increased production capacity. [1] Therefore, any compensation increases or growth in the number of jobs announced in late 2017 and early 2018 that were claimed to be results of the TCJA were public relations (PR) stunts, not effects of the TCJA.

Furthermore, corporate profits and cash reserves were high before the enactment of the TCJA, so corporations already had the resources needed to increase workers’ compensation or expand production if they wanted to. They weren’t increasing workers’ compensation or the number of jobs before the TCJA and they haven’t done so afterwards.

As background, corporate profits had risen dramatically from 5% of Gross Domestic Product (GDP, the total output of the U.S. economy) in 1990 to 9% in 2019, after having been largely in the range of 5% to 7% from 1952 to 1990. Furthermore, corporate taxes have been falling since the 1950s, so corporations have been keeping more of their profits. Taxes on corporate profits were 5% of GDP in 1952 and fell to 4% from the late 1950s to the late 1960s. They fell further to 3% of GDP from 1970 to 1980, and then to roughly 2% of GDP from 1982 until 2017. [2]

The bottom line is that the Tax Cuts and Jobs Act of 2017 has delivered none of the promised benefits for workers and low- and middle-income households, but has delivered much greater benefits than were promised (or admitted to) to wealthy individuals and to large, particularly multi-national, corporations. Increases in workers’ compensation that have occurred since the passage of the TCJA are ones that economic analysis indicates would have occurred anyway. Business investment and economic growth have not increased as promised. The promise of more fairly taxing multi-national corporations’ profits to increase tax revenue and discourage the shifting of profits and jobs overseas has been undermined. The multi-national corporations’ lobbying campaign got rules and regulations written for the implementation of the TCJA that significantly reduced the expected taxes on their profits. (See my previous post for more details on this.)

The truth about the Tax Cuts and Jobs Act is that despite the promises and public relations announcements that said otherwise, it has been a huge windfall for wealthy corporations and individuals, and of little or no benefit to workers. Historical experience and economic analysis indicated this would be the result in advance of TCJA’s enactment. The claims of benefits trickling down to workers from tax cuts for corporations and wealthy individuals had been convincingly rebutted. Nonetheless, proponents of the TCJA used this claim to argue for its tax cuts.

I believe many of the people who supported and voted for the TCJA knew what its actual effects would be. They lied about it because admitting that they wanted to enrich their political supporters and big campaign donors would have been unseemly and a political liability.

[1] Corser, M., Bivens, J., & Blair, H., Dec. 2019, “Still terrible at two: The Trump tax act delivered big benefits to the rich and corporations but nearly none to working families,” The Center for Popular Democracy and the Economic Policy Institute (https://www.epi.org/files/uploads/20191211_Trump-Tax-Bill-R6.pdf)

[2] Corser, M., Bivens, J., & Blair, H., Dec. 2019, see above

LOBBYING BY MULTI-NATIONAL CORPORATIONS UNDERMINES TAX FAIRNESS & INCREASES THE DEFICIT

The actual effects of the Tax Cuts and Jobs Act (TCJA) (the December 2017 tax cut bill rushed through by Republicans in Congress and President Trump) are becoming clearer all the time. My previous post provided a summary of what it did, noted the promises that were made about its effects, and provided an overview of its actual effects.

One result has been that the promise to tax the profits of multinational corporations more fairly remains largely unachieved. This was supposed to be accomplished by increasing taxes on profits shifted to overseas entities and by incentivizing corporations to repatriate trillions of dollars of profits previously stashed overseas.

Because the 2017 Tax Cuts and Jobs Act was rushed through Congress in a process some experts have called chaotic, it was sloppily written and left lots of details to be filled in by the executive branch agencies writing the rules and regulations implementing the law. (Congressional Republicans and Trump wanted to be able to claim a major legislative victory for their first year in full control of the federal government and to reward their wealthy campaign donors in the run-up to the 2018 elections.) Corporations had lobbied heavily during the writing and passage of the TCJA and they continued to lobby for favorable treatment during the process of writing TCJA’s rules and regulations.

The sloppiness and lack of detail in the law meant that lobbying for favorable rules and regulations was a potential gold mine for the big multi-national corporations. Therefore, in early 2018, shortly after the TCJA was enacted, the Treasury Department, a key agency writing rules and regulations, was swamped by corporate lobbyists. Reportedly, senior Treasury officials were having so many meetings with lobbyists, up to 10 a week, that they had little time to do their jobs.

The TCJA was supposed to be a grand bargain between the federal government and the big multi-national corporations where a big cut in the tax rate (35% to 21%) would occur in exchange for a reduction in tax dodging through the shifting of profits to low-tax offshore locations. Two new taxes were included in the TCJA to fulfill the second half of this bargain: BEAT and GILTI. The Base Erosion and Anti-abuse Tax (BEAT) targeted foreign corporations with major U.S. operations that had been dodging U.S. taxes by shifting profits from their U.S. subsidiaries to their foreign parents. Some payments sent to foreign parents would now be subject to a new 10% tax. The Global Intangible Low-Taxed Income tax (GILTI) targeted U.S. corporations that shifted profits offshore. Some of these offshore profits would be subject to a new tax of up to 10.5%.

At the time of the passage of the TCJA, it was projected that these two new taxes would generate about $26 billion a year of revenue for the federal government. However, lobbying on the writing of rules and regulations has succeeded in significantly reducing the taxes that will be paid. [1] In the lobbying on BEAT and GILTI rules and regulations, the revolving door has been very evident. For example, the senior Treasury official who has been writing them had previously spent decades at a consulting firm and a law firm where he guided corporations in using the tax avoidance strategies BEAT and GILTI were supposed to stop. Lobbyists from the firms he used to work for were lobbying him for rules that were favorable for their corporate clients. One of them had been a top Treasury official in the G. W. Bush administration.

A small group of foreign banks lobbied heavily against BEAT. Treasury Secretary Mnuchin, a longtime bank executive before taking his job at the Treasury, supported the regulatory loophole the foreign banks were asking for. Furthermore, one of the banks’ lobbyists joined the Treasury Department in September 2019 to work in the office that was writing the TCJA rules!

In December 2019, the Treasury Department issued final versions of some of the BEAT regulations and the corporations, foreign banks, and their lobbyists got most of what they wanted. The loophole for the foreign banks alone is estimated to reduce BEAT revenues by $5 billion a year. Experts estimate that BEAT, given the rules and regulations promulgated after all the lobbying, will produce a small fraction for the $15 billion a year that it was projected to raise. [2]

The lobbying around GILTI’s rules and regulations was similarly intense. As background, many multi-national corporations, including Apple, Google, Facebook, Coca-Cola, and drug companies Pfizer and Merck, use elaborate legal, financial, and accounting strategies to make it appear that sizable chunks of their profits are earned by subsidiaries in low-tax offshore countries such as Ireland, the Cayman Islands, Bermuda, or Luxembourg. For example, the drug and technology corporations shift the rights to their patents and other intellectual property (such as trademarks, logos, and copyrights) to offshore subsidiaries. Then these subsidiaries charge their U.S. parent corporations very high licensing fees, which, on paper, shift profits to these offshore entities.

In June 2019, the Treasury Department announced rules and regulations that greatly reduced the profits subject to GILTI’s new taxes, reducing corporate taxes by tens of billions of dollars. This increases the federal deficit while allowing multi-national corporations to continue to shift hundreds of billions of profits to offshore tax havens.

Finally, the multi-national corporations have repatriated far less of the profits they had previously stashed overseas than the projected $4 trillion; only about $1 trillion has been repatriated and therefore subjected to U.S. taxes. Once again, this has substantially reduced the amount of new tax revenue the federal government received, increasing the deficit further beyond the promised level.

The overall result of all the corporate lobbying during the writing of TCJA’s rules and regulations has indeed been a gold mine for multi-national U.S. and foreign corporations. The Treasury’s rules and regulations mean that these multi-national corporations will pay little or nothing in new taxes on profits shifted offshore, saving them tens if not hundreds of billions of dollars. The Organisation for Economic Cooperation and Development reported that in 2018 the U.S. had the largest drop in tax revenue among its 36 member countries and had the largest federal budget deficit of any of the countries by a wide margin. [3]

The Treasury Department is likely to finish the last set of rules and regulations for the TCJA shortly. The multi-national corporations have continued their intense lobbying through the fall and some of the U.S.-based ones have even threatened to move their headquarters overseas if the rules and regulations don’t further cut the new taxes BEAT and GILTI were supposed to impose.

The result of the multi-national corporations’ lobbying has been rules and regulations for implementing the BEAT and GILTI taxes that:

Significantly reduce the revenue for the federal government from what was projected and, therefore, increase the federal budget deficit much more than what TCJA proponents promised;
Dramatically undermine the effort to increase tax fairness; and
Have made the supposedly even-handed grand bargain for the big corporate tax rate cut very one-sided.

[1] Drucker, J., & Tankersley, J., 12/30/19, “How big companies won new tax breaks from the Trump Administration,” The New York Times

[2] Drucker, J., & Tankersley, J., 12/30/19, see above

[3] Drucker, J., & Tankersley, J., 12/30/19, see above

LIES ABOUT THE 2017 TAX CUT ARE NOW CLEAR

The effects of the December 2017 tax cut bill, the Tax Cuts and Jobs Act (TCJA), rammed through by Republicans in Congress and President Trump, are now quite clear. I’ll provide a summary of what it did, note the promises that were made about its effects, and then review its actual effects.

The 2017 Tax Cuts and Jobs Act, among other things:

Permanently cut the corporate tax rate from 35% to 21% (the lowest level since 1939)
Repealed the 20% corporate alternative minimum tax (which had required profitable corporations to pay at least some taxes on their profits)
Allowed up to $63,000 of pass-through business profits to go untaxed to help small businesses (supposedly). (These are profits from businesses that are not taxed because they are passed through to and taxed on an individual’s tax return.)
Provided significant tax benefits to corporations for investments in facilities and equipment, as well as for borrowing money
Adjusted the taxation of multinational corporations to more fairly tax their profits, for example, by increasing taxes on profits shifted to overseas entities and by incentivizing corporations to repatriate trillions of dollars of profits previously stashed overseas
Doubled the size of an estate that is exempt from taxation from $5 million to $10 million per person
Repealed the requirement of the Affordable Care Act (aka Obama Care) that individuals have health insurance or pay a tax to support the health care system
Made changes in the personal income tax system that are generally neutral for most taxpayers, although several of the tax reduction provisions are scheduled to expire in 2025

The supporters of the TCJA, including Members of Congress, the President, corporate executives, and wealthy shareholders all promised that it would:

Provide a sizable tax cut for workers and middle-income people, while increasing taxes on high-income people
Increase wages and workers’ incomes by $4,000 a year
Increase business investment, and hence worker productivity, the number of jobs, and economic growth in the U.S.
Limit the increase in the federal government’s deficit to $150 billion a year
Discourage the shifting of corporate profits and jobs overseas through new taxes, while also increasing tax revenue by giving corporations an incentive to bring up to $4 trillion of profits stashed overseas back to the U.S. by reducing the taxes they would have to pay on those profits. (More on this topic in my next post.)

The actual effects of the TCJA have been: [1]

No discernable wage increase due to the TCJA. In fact, wage growth appears to have slowed in 2019.
Clear failure to increase business investment; no increase in 2018 and a significant decline in the first 9 months of 2019. When the TCJA was enacted in 2017, year-over-year investment growth was at 5.4%. However, it has been dropping sharply and was only 1.3% in the third quarter of 2019 (the latest data available). [2]
Larger than projected decline in federal corporate tax revenue, which was expected to be $96 billion a year (roughly a 26% tax cut). As a result, the deficit is increasing by about $30 billion a year more than the $150 billion a year that was promised. The deficit is projected to increase to over $1 trillion a year in 2020.
The latest information suggests that the decline in revenue and the increase in the deficit may be even larger. (More on this in my next post.) The Congressional Budget Office now estimates that the deficit (including interest payments) will be an average of $230 billion a year higher over the next 10 years due to the TCJA and $310 billion a year higher in 2028.

The federal government’s revenue from corporate taxes had already been declining as a portion of total federal tax revenue, largely due to corporate tax evasion and avoidance. The trend of declining tax revenue from corporations has been accelerated by the TCJA, which cut corporate taxes by about 26% or $96 billion a year. The corporate tax cut has primarily benefited corporate shareholders, at least in the short run; the 10% wealthiest households own roughly 80% of corporate shares and, therefore, these already wealthy households are the primary beneficiaries of the corporate tax cuts. [3]
Business profit pass-through tax exemption, supposedly targeted at small businesses, has largely benefited millionaires, which isn’t what most people think of when they think of a small businessperson. This shouldn’t have been a surprise to anyone, as 49% of pass-through income appears on the tax returns of the richest 1% of taxpayers.
Increase in income and wealth inequality along both class and racial lines. Rich corporate executives and wealthy shareholders have been enriched at the expense of workers. White households are 67% of taxpayers but are estimated to receive 80% of the TCJA’s benefits, and most of this will go to the 5% of households with the highest incomes, i.e., over $243,000 a year. The average tax cut for a Black household has been $840, but $2,020 for a White household. For families with incomes under $25,000, the average tax cut has been about $40.
In 2018, the 5% of individuals with the highest incomes received nearly 50% of the TCJA’s benefits. After the individual tax cuts expire in 2025, the 1% of households with the highest incomes will receive 83% of the benefits of the TCJA.
A bigger tax cut for foreign investors than for low- and middle-income households in the U.S. Foreign investors, as a group, will receive an estimated $38 billion tax cut from the TCJA in 2020, while the 20% poorest households in the U.S., as a group, will receive an estimated $2 billion.

The bottom line is that the Tax Cuts and Jobs Act of 2017 has delivered none of the promised benefits to workers and low- and middle-income households, but has delivered much greater benefits than were promised (or admitted to) to large, particularly multi-national, corporations and to wealthy individuals. Economic benefits for workers and low- and middle-income households have not materialized and there is no reason to expect them to. Business investment and economic growth have not increased as promised. The promise of more fairly taxing multi-national corporations’ profits to increase tax revenue and discourage the shifting of profits and jobs overseas have not lived up to the promises made, and the most recent findings indicate that this failure has been more dramatic than was initially realized. (More on this topic in my next post.)

The loss of revenue for the federal government is significantly larger than was projected and, therefore, the increase in the federal budget deficit is much greater than what was promised.

[2] Blair, H., 12/17/19, “On its second anniversary, the TCJA has cut taxes for corporations, but nothing has trickled down,” Economic Policy Institute (https://www.epi.org/blog/on-its-second-anniversary-the-tcja-has-cut-taxes-for-corporations-but-nothing-has-trickled-down/)

[3] Corser, M., Bivens, J., & Blair, H., Dec. 2019, see above