Tuesday, December 19, 2006

The "Hidden Hand" of Free-Market Corporate Subsidy

This a continuation of two earlier posts on

  • Subsidized Global "Free Trade" - I (Farm and Agriculture)
  • Subsidized Global "Free Trade" - II (Industry)

    The current zeitgeist is that
  • the business of business is business (i.e., make profits for the shareholders, and serve the customers)

    Fair enough!... That is what all that "free-market" doctrine is all about - i.e., let the business have a free-hand, let it focus on what it is supposed to do, and prosperity (and political freedom) will follow, etc...

    ...till one looks at the "internals" of how this "free" market is achieved... And this one is from the land/country that champions "free market", "free trade", "hidden hand of the market", "globalisation", etc.

    [for the time being, we will not go into the dynamics how the the "hidden hand" worldwide needs a "hidden fist" to maintain the "free market" afloat, as described by the flat-earther, Thomas Friedman... To quote:
    "The hidden hand of the market will never work without the hidden fist — McDonald's cannot flourish without McDonnell Douglas, the designer of the F-15. And the hidden fist that keeps the world safe for Silicon Valley's technologies is called the United States Army, Air Force, Navy and Marine Corps."]

    Coming back to the "free hand" thingie, one way of "doing business"/making profit is by evading taxes by the companies (or, in other words, making citizens pay for their profits)

    A study covering 275 profitable Fortune 500 corporations by Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) found that:
    ("right click/save" to download)

    • Eighty-two of the 275 companies, almost a third of the total, paid zero or less in federal income taxes in at least one year from 2001 to 2003. Many of them enjoyed multiple no-tax years. In the years they paid no income tax, these companies earned $102 billion in pretax U.S. profits. But instead of paying $35.6 billion in income taxes as the statutory 35 percent corporate tax rate seems to require, these companies generated so many excess tax breaks that they received outright tax rebate checks from the U.S. Treasury, totaling $12.6 billion. These companies’ “negative tax rates” meant that they made more money after taxes than before taxes in those no-tax years.

    • Twenty-eight corporations enjoyed negative federal income tax rates over the entire 2001-03 period. These companies, whose pretax U.S. profits totaled $44.9 billion over the three years, included, among others: Pepco Holdings (–59.6% tax rate), Prudential Financial (–46.2%), ITT Industries (–22.3%), Boeing (–18.8%), Unisys (–16.0%), Fluor (–9.2%) and CSX (–7.5%), the company previously headed by our current Secretary of the Treasury.

    • In 2003 alone, 46 companies paid zero or less in federal income taxes. These 46 companies, one out of six of the companies in the study, told their shareholders they earned U.S. pretax profits in 2003 of $42.6 billion, yet received tax rebates totaling $5.4 billion. In 2002, almost as many companies, 42, paid no tax, reporting $43.5 billion in pretax profits, but $4.9 billion in tax rebates. From 2001 to 2003, the number of no-tax companies jumped from 33 to 46, an increase of 40 percent.

    • After 2001, the average effective rate for all 275 companies dropped by a fifth, from 21.4 percent in 2001 to 17.2 percent in 2002 and 2003, less than half the statutory 35 percent corporate tax rate that corporations ostensibly are supposed to pay.

    Here is the list of top-25 "tax negative" companies (figures mentioned are in "mn US$"):
    Image and video hosting by TinyPic

    If one thinks that these "incentive" (i.e., tax breaks) would lead to more capital investments by the companies, the data shows a different picture:

    • The 25 companies in the study who reported the largest tax savings from accelerated depreciation — garnering two-thirds of the total depreciation benefits for all 275 companies over the three years — cut their total property, plant and equipment investments by 27 percent from 2001 to 2003.

    • In contrast, the remaining 250 companies reduced their investments by only 8 percent.

    • Overall, the 275 companies in the study reported that their capital investments fell by 15 percent from 2001 to 2003.

    The study concludes that:
      Most of the loopholes and tax dodges that corporations use to slash their taxes may be technically ‘legal’ in the sense that the tax law allows them. But remember that these subsidies got into the tax code because corporations lobbied to put them there. Saying something is ‘legal’ doesn’t mean that it’s right....The sharp increase in the number of tax-avoiding companies reflects the results of aggressive corporate lobbying and a White House and a Congress eager to do the lobbyists’ bidding."

    The losers from widespread corporate tax avoidance include:

    • The general public, who must pay higher taxes, lose public services, or be responsible for big future debt burdens.

    • Relatively disadvantaged industries and companies that will find it harder to compete for investment capital with tax-favored corporations.

    • The U.S. economy, which is harmed by the distortions that corporate subsidies produce.

    • State governments and state taxpayers, which see their corporate tax systems erode along with the federal system.

    • The integrity and sustainability of the tax system as a whole.

    The report, unfortunately, misses out mentioning that one of the largest set of losers are the industries in developing nations, who have to compete against these subsidised corporate gaints!!!

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