Tax and Lobby: The danger of directing too much at too few

The consequences of taxThere are over 25 million businesses in the US but companies which make up the Standard & Poor 500 contribute over 26% of the US government’s annual $2.4 trillion tax take. These 500 businesses are 6.5% of the total number of listed businesses .

Across the Atlantic, in the UK, the FTSE 100 index of companies contributes 3.3% of Her Majesty’s tax take. Even if you add in the salaries and other taxes that these companies manage on behalf of Treasury, it is no more than 7%.

The US taxation system is what is known as progressive; it falls more heavily on the wealthy than on the poor. The intention is that it is to be fairer. And so, in the US, the top 10% of taxpayers contribute 70% of taxes, and the top 1% contribute 40% of taxes. Conversely, the bottom 40% of registered taxpayers actually received more money back through tax grants than they contributed through their incomes.

Depending on how you feel about rich people, you could be cheered or charged about such information. However, you shouldn’t be surprised at the consequences.

Since 2000, the number of lobbyists in Washington has doubled to 34,750.

Because, you see, when a small number of businesses are responsible for such a large proportion of the tax-take, they have a special interest in ensuring that the money is spent on their interests, and a lot of influence in making sure it happens.

Oil companies, which pay taxes of around $ 60 billion, received $ 12 billion back in special tax concessions. Hardly a surprise when they’re actually paying 1.4 times more tax than they earn in profits.

That old joke, “When you owe the bank $100, they own you. When you owe the bank $1billion, you own them,” is still true. When a government depends on a very small base for its tax revenue then it is also in the pocket of their special interests.

Just as true is that, when a government pushes all its money into a few specialist vehicles designed to deliver on its promises (such as Fannie Mae, Freddie Mac, Medicare and Medicaid) it also stimulates them to spend vast amounts of money ensuring the largess continues.

Charities, too, vary widely in the amount they spend on fundraising relative to the amount they spend on their stated mission (from 15 to 25% for “good” ones, through to 95% for “bad” ones).

The point here is that this is hardly wise investment. If you put all your money in one investment, then that is a very concentrated risk. Most investors regard diversification as critical.

A call to a senior executive at Sony this week about how they were dealing with the credit crisis resulted in the response, “ Same as always, some parts of the business are up, and some parts of the business are down.” Sony is highly diversified, so they can ride this out.

But a government that depends on such a focused number of businesses for its tax take is going to have to ride up and down with those businesses. And when those self-same businesses demand a $700 billion bailout because they fucked up, then the government belongs to them and has to play ball.

As the US election runs to its final conclusion, it is very tempting to demand of politicians that they take more tax from the few than spreading the load around.

The consequence will be a government even more in hock to special interests.

23 replies »

  1. ‘Hardly a surprise when they’re actually paying 1.4 times more tax than they earn in profits.’

    This is a misleading statement. It implies that that they are actually not making any profits at all. If profit=x and taxes=1.4x then just the act of paying taxes would mean these companies actually do not profit, but instead are losing money at a rate of .4x per year. As we all know, record profits have been posted lately.

    Even taxed at an effective rate of slightly more than 58%, ExxonMobile managed to post record profits(after taxes) in 2007(around $40 billion). That figure set a record for ANY US company in history. Are you saying that they are being taxed too much?

  2. Yes, they still earn profits even though they pay more in tax than they earn in profits.

    Let’s not get distracted by this.

    Any politician who declares that they intend to cut taxes for the majority and make it up with an increase in taxation levied against industries which are doing “too” well, risks getting the country into all sorts of trouble when that industry suffers a downturn.

    The oil price has collapsed recently. Record profits are cyclical. It never pays to count on any circumstance continuing indefinitely.

  3. As the article linked with “top 10% of taxpayers” points out – if you read all of it- the real problem underlying all of this is the growing wealth inequality in the United States. “The top 1% paid an effective tax rate of 23% in 2005, down from 27.5% in 2001.” And then, “So if the rich are paying more income tax, yet are being taxed at a lower rate, there can be only one explanation: their incomes must be growing fast, much faster than the rest of the population’s.” The author points out that this issue is what we should really be talking about, not taxes.

    Jon deals with the oil company argument. But i will add that those numbers come from “The Tax Foundation” which is hardly non-partisan and often upbraided by economists and organizations such as the Congressional Budget Office for misleading the public. It should also be noted that most of their funding comes from the Scaiffes, Coors, etc. They are not a reputable enough source to form the basis of a serious discussion about this issue.

    And the first step to reforming the US tax code would be to force the government to live within its means. We can have a trillion dollar per year “national security” budget (that includes all the places that the DoD hides expenses like the Department of Energy) or low taxes for all, but not both.

    Finally, i have a hard time buying the argument that if sectors like oil and banking didn’t pay such high taxes they would stop lobbying the government. In fact, i’d argue that they’d just use the money saved to shower politicians with more contributions.

  4. Yes, they still earn profits even though they pay more in tax than they earn in profits.

    Without getting distracted by it, how is that possible?

  5. Lex and Jon, are you two being deliberately obtuse? Say a company earns 100, and pays 20 in tax, but only keeps 10 as profits … then it pays more in tax than it earns in profits i.e. profits after tax. Who gives a fuck about profits before tax? And why do you think companies shop around to have their primary listing in countries with a low business tax rate?

    Namby-pamby arguments that the companies concerned can stand to be taxed more so that others can be taxed less completely ignores my point: yes, you can do this, but be prepared then to do exactly what these companies want since your entire tax-base is entirely reliant on these few companies.

  6. Whythawk:

    To be fair to Jon and Lex, I had to read that sentence several times with my eyes crossed before I understood what you were getting at. Maybe I’m stupid. I admit to the possibility. But maybe juxtaposing numbers in that way can too easily lead to a misunderstanding?

    I’m not sure what the cure would be, here. It seems a priori to me that any government has to raise its taxes from the places where there is actually money to be raised. The reason the Standard and Poors 500 contributes so much is that these are simply enormous companies, many times the size of the FTSE 100 in revenues, in most cases (Royal Dutch Shell, at #1, is huge of course, but any list where Rolls Royce is #33 falls far short of the Fortune 500 or S&P 500). The top companies on the Fortune 500 list are, in many cases, some of the largest economies in the world (Walmart’s annual revenues are higher than the GDP of Sweden, making it #30 in the world!)

    Naturally, companies of this mammoth size are going to generate significant tax revenues and, in a country where income disparity seems to be getting wider, it also makes sense that taxes at the lower end are declining. Blood, squeezing, turnips, and all that.

    So, what would you suggest? In the US, how would one manage to shift the tax burden away from these massive companies to reduce their influence with forcing many families below the poverty line, or farther below the poverty line, than they already are?

  7. Whythehawk…..great post.

    I understand what you’re saying:)

    The government has it’s hand stretched out every step of the way. It taxes the corporation’s profits, taxes the dividends received, taxes the gains.


  8. What’s really funny is my tax return usually goes to paying my outrageous heating bills in the winter anyways.

  9. How about “Offshore” and “Numbered bank accounts” uised to avoid taxes? The go-hards who claim major payers pay so much quote percentage as back up. This percent is large but what would it be without so many companies dodging all their tax obligations?

  10. JS: It isn’t the tax-paying that causes lobbying and distortions, it is the asymmetry in tax collection that does it. Stock exchange traders look for arbitrage opportunities. If the returns on investment were the same for every company, and all reported exactly what was happening in the same way, then there is little opportunity for arbitrage – for calculating that things may be different than they appear to be.

    Lobbyists do the same thing with taxes. The fact that political representatives are open to such manipulation means that lobbying has value.

    The countries that have created a symmetric system also happen to be Eastern European ex-Communist countries, now listed by the World Bank in their Ease of Doing Business Report as the easiest places in the world to do business.

    What they did was quite simple: they introduced flat taxes. Every company places the same flat tax on revenue. There are no distortions, no opportunities for arbitrage, and so no question that lobbying will get you anywhere.

    Since they also levy consumption taxes designed to convert consumer behaviour, they do still get some lobbying, but nothing like the bizarre behaviour in the US.

    And, of course in absolute terms the S&P 500 will be more interesting than the FTSE100, but the UK economy is also seven times smaller than that of the US. The proportions are what is interesting.

  11. David, you’re still missing the point. The proportion of tax illegally off-shored in this way is tiny, in any case. The point is, whether you feel they should pay more is immaterial to how much influence you give companies you depend on over how those taxes are spent.

    The more you concentrate taxes, and the more asymmetric those taxes are (in other words, the more targeted taxes are) then the more asymmetric spending becomes (lobbyists have influence over special tariffs, or tax breaks, or bonuses to the companies concerned).

    Lobbyists, and the distortions and money-politics that result, are a consequence of distorted tax policy.

    For instance, do you really think that it makes sense that employee-based health-insurance companies get a tax break, but that independent contributions do not? This isn’t the sole reason, but it is one reason, why health insurance coverage is so unbalanced in the US.

  12. Whythawk:

    A flat tax on revenue only? So, if you bring in $500 in revenue for your business and spend $20,000, for a net loss of $19,500, you would still owe a tax? What would you pay it with? Why not have a tax on profits, instead? I can’t believe that’s a good idea for start-up businesses, and would tend to drive them out of business early, wouldn’t it?

    As for a flat tax for Americans, it would be pretty certain to spark virulent class warfare. I’m pretty sure that the countries you’re talking about have enormous social safety nets, universal health care, and even free higher-ed in many cases, don’t they? Because they don’t have the distortions our health care system has, health care costs per citizen are far lower than ours. And because of the social safety nets, a very low, taxed income doesn’t mean no food or shelter as it can in the US.

    I’ve seen several flat tax proposals for the US, and I have yet to see a single one that would yield the revenues necessary to meet outlays (or even keep the insane current deficit where it is), and those that come closest tend to drive millions of citizens into abject poverty.

    In the US, real wealth is concentrated in the hands of relatively few. That is where the money is. You can’t raise adequate tax revenues to support, say, 12 carrier battle groups by trying to raise it from the least wealthy people.

    I mean, we already have some flat taxes. Social Security tax is flat (and regressive for high-earners as they exceed the maximum taxable amount). Most states have flat sales taxes, and it sounds as though you would want to add a European-style VAT on top of those to drive costs of goods up, which would also have its largest impact on the poorest people who find their necessities costing more while their disposable income decreases.

    I can’t see what you’re proposing having a snowball’s chance of working without an enormous restructuring of social systems throughout the US, and I can’t see that happening without a 1930s style depression driving the political will to change. Further, I believe the reason there is so much revenue coming from so few companies is because that’s where the money is, and that’s where the US must go if it is to (partly) fund its outlays.

    There simply is no other choice.

  13. Whythawk:

    What is an “employee-based health insurance company”? I’ve been working around the health care field for a couple of decades, and I’ve never heard that term. Do you mean “employer-paid” health insurance as opposed to “individually paid” health insurance? If so, you’re partly correct, but changes in tax laws make it so that individual contributions to health care can be tax deductible these days.

    And it wasn’t lobbying that made employer-paid health care tax-deductible. It was actually a means, during WWII, of getting around wage and price controls to offer a cheap benefit that didn’t get taxed by the very high marginal rates of the day. It was widely lauded, and required no real lobbying that I know of.

  14. There may be an alternate solution, though – make political donations from corporations to politicians and political parties illegal. As JS pointed out, WalMart has a larger economy than Sweeden, so why are we treating donations from WalMart as if they came from a person instead of another country?

    Equating money with speech, especially money from corporations, was a really, really dumb idea.

  15. JS, yes that’s one of those “mortgage” / “bond” / “property loan” problems where different nations call the same things different names. I was simply grabbing for the first memorable tax-arbitrage thing I could remember.

    Flat taxes can be arranged in a number of ways, or you could move entirely to consumption tax (which is a form of flat tax). I always argue that there is a reason franchisors take their royalties as a percentage of turnover and not profit, since you can’t argue about revenue, but you can argue about profits.

    Brian, as for banning political donations? Won’t work. I’m Boeing, I’m going to build a new manufacturing hub, create 2,000 jobs and generate hundreds of millions of dollars in taxes. You think I’m not going to shop that offer around and see who gives me the best deal? You think you’re going to find a way to outlaw me shopping around?

  16. Whythawk:

    Once again, because of income disparities in the US, distortions in the health care market and its costs, the lack of an effective social safety net, almost universal suffrage, and the fact that US citizens must pay for services that are provided through tax revenue elsewhere, there’s just no way that a flat tax is even remotely politically feasible here. The reason we have progressive taxes is systemic. It’s the only way I’ve ever seen to actually raise the tax revenues we need in a society where real wealth is concentrated among the few.

    I respect and admire your intellect and experience, whythawk, but I believe that, in this case, you’re trying to apply a solution that won’t work, politically, in the US absent a complete restructuring of our society towards a more socialistic model. It’s simply not practical to fund current government outlays by seeking more money from those who have the least of it. The money isn’t there.

  17. Ok, so i didn’t get it with oil company tax sentence. All i asked for was an explanation.

    I maintain that taxing corporations, or even rich people, less is not going to reduce their influence over the government. They have many reasons to want that influence that go beyond getting the most bang for their bucks.

    But let me see if i’ve got this straight. We tax those with more at a lower rate and tax those with less at a higher rate so that it’s “fair”. Is that correct? This may not be well known, but a lot of Americans can barely afford to live on their incomes while not paying any income taxes. And i’ll believe that those who end up paying less in taxes will voluntarily trickle their increased wealth down the social ladder when a pig breaks its neck against my second story window. (which i don’t have, but i’m confident here)

    I’d be all for lowering/removing the income tax and replacing it with VATs or some form of consumption tax, because it would allow me to control how much tax i pay.

    But the real issue is income disparity. Without alleviating that in some way this will just be running around in circles. And, no, i’m not a socialist. And the deeper issue is a nation living well beyond its means and trying to lower any taxes at all. Which doesn’t mean that taxes should go up; the first step would be to live within our means.

  18. There’s a lot of discussion defending the distorted nature of the progressive taxation system. And, JS, you’re right, there is no way that the current structure of government would ever vote to remove the trough of lobbyist-spending-largesse from the game.

    However, you do have to recognise that the poor pay for it regardless. A progressive tax becomes regressive through higher prices, limited consumer choice, and the occasional market collapse that becomes a deficit-plummeting binge.

    That $700billion bail-out will result in massive cuts in social benefits, and state-investment foregone, no matter who winds up controlling the government. In kinder times, when the US was the de facto leading economy with the most powerful capacity for growth, that wasn’t a problem. But, if the US intends to remain competitive, then it is going to have to find a new way to compete.

  19. Whythawk:

    I will stipulate to the fact that higher taxes on businesses mean higher prices, which is regressive, but certainly less so than a VAT or other sales tax some are suggesting. And I would also argue that the higher taxes lead to pressure to become more efficient so that US firms can compete with foreign goods on price points, greatly reducing the effect of the flat, and unseen, “price tax.”

    I do not understand your link to reduced consumer choice. I cannot imagine any society in the history of the world with great consumer choice than what Americans enjoy.

    I assume that the “occasional market collapse” of which you speak harkens back to the issue of lobbying? I’m going to take it that way, anyway, since I don’t follow your argument otherwise.

    I think you put too much stock into the effect of pure lobbying, and perhaps too little into the effect of campaign contributions. Your example, above, of how a business lobbies for tax breaks when it decides to move (rare) is apt, but a national flat tax wouldn’t stop that. Those businesses are lobbying for state and local concessions, and that’s a horse of a different color, entirely.

    Certainly, lobbying had the effect of reducing regulation in the US, but a greater contributor was ideology. There are many in the US who believe wholeheartedly that government, any government, is borderline evil, and that any regulation must be so, as well. These people would have pushed the deregulation agenda regardless of lobbying, but it is campaign contributions that got them elected in the first place. Would businesses pull back on campaign contributions if taxes were lower? Perhaps. There may be an ROI equation, at some point, that would cause them to do that, but we’re a LOOOOONNNNNGGGGG way from that point. There can be few investments with a larger ROI than campaign contributions. A few million dollars of investment can yield billions in return, and that won’t change by changing tax law.

    Ideologically, the US cannot (at this time) institute a flat tax because we are not socialistic enough. Socialism redistributes wealth downwards (whether in the form of cash, goods, or services) … wealth that can then be taxed. The US is likely to resist, and strongly resist, any further efforts at income redistribution. As long as this is the case, a flat tax will not yield sufficient revenues without causing unacceptable pain among too many voters.

  20. Interestingly enough, flat taxes are not socialist, however, they usually are adopted by ex-communist countries as they become capitalists. And for all the posturing, the US has one of the most unfair tax systems in the world (according to the World Bank). Plus, despite spending more on health and eduction (via taxes) per capita than just about anybody, you don’t have as much to show for it as Canada or Europe.

    The point I’m making is that the determination to tax in an arbitrary way, means that consequent spending is just as arbitrary and open to manipulation. And, even in the US, this DOES reduce consumer choice.

    Consider that industries as unrelated as steel making and lobster fishermen have imposed high import tariffs on Chinese producers who they accuse of “dumping” cheap products on the US market. Technically, when WalMart offers a price special as a loss-leader, they too are dumping, but consumers benefit from such actions and it keeps all companies competitive.

    However, the US doesn’t indulge in much tariff action. It is the subsidies to chosen industries that have the real impact. Subsidies for corn producers (in support of bio-ethanol) caused the dramatic food price rises seen all around the world, while tariffs against Brazilian sugar producers keep that cheaper and less environmentally harmful product off the US market. Similar subsidies to cotton producers have destroyed international cotton markets all over the developing world while costing US taxpayers a great deal of cash.

    You might think, well, the subsidies keep the products cheap, so they’re good for US consumers… really? Think “opportunity cost” – if the subsidies didn’t exist then poor farmers in the developing world could produce those products and sell them to the US keeping the prices pretty much where they are, while taxes currently subsidising wealthy farmers (as US agricultural subsidies have the perverse effect of causing agricultural consolidation and closing down small, family-run farms) could be spent on things like paying down the national debt, or financing health-care….

  21. Whythawk:

    I’m scratching my head here. If I read what you just wrote correctly, you haven’t understood a word I’ve said. I never said a flat tax was socialistic. I said that it can only work in a system where wealth is fairly evenly distributed, and that the US would have to be more socialistic if a flat tax were to work here for a very simple reason I keep bringing up and that keeps getting ignored: One must raise tax revenue where there is actually wealth to be had. Trying to raise tax revenue from sectors where there is little or no wealth will not produce sufficient revenue, and will certainly produce a political backlash that would destroy the flat tax in its infancy. It’s not practical. It won’t work.

    It doesn’t surprise me a bit that former socialistic countries adopt a flat tax since, presumably, wealth is far more evenly distributed there than in the US. And it will not surprise me a bit if, in the future, those countries adopt a progressive tax if wealth become unevenly distributed and they produce a semi-permanent underclass because … and I’ll say it again … if they want to raise sufficient tax revenues, they will have get it from places where there is actual wealth to be taxed.

    As for the US’s spending more on health and education, I’m extremely familiar with the health care situation here since I’ve spent a good part of my life dealing with it peripherally, working with people whose life’s work is tied up in the US health care mess. It is a prime example of when the market doesn’t work well. The issue of education is also tied to the issue of the underclass and very uneven distribution of wealth. We get “less” for our money because so many of our children come from intellectually deprived environments.

    A flat tax is simply not practical in the US, and I would assert that the flat tax, as a “one size fits all,” is simply ideology triumphing over careful consideration of actual structural factors in place in the US that make a flat tax completely impractical. I liken it to the idea that we can hand the US Constitution to Afghanistan and solve all their problems.

    As for the lecture on tariffs, subsidies, etc., if that was aimed at me, you’re preaching to the choir.

  22. “Technically, when WalMart offers a price special as a loss-leader, they too are dumping, but consumers benefit from such actions and it keeps all companies competitive.”

    I don’t disagree with the sentence; it is true. But i question the long-term benefit to the consumer in this situation, particularly in regards to it keeping all companies competitive. It surely keeps the companies big enough to compete with WalMart competitive, but if your supply chain isn’t big enough to bully suppliers you’re toast. What consumers see is a small benefit now that often leads to a big liability down the road…when WalMart is the only choice and so has no reason to keep prices low; when WalMart is the only employer in town and they give you the paperwork to apply for state health insurance because they pay little enough that you can work full time (or as close as they’ll let you get) and still qualify for “welfare”.

    Don’t get me wrong, i’m not blaming WalMart for the world’s ills. The Consumer is powerful and personal responsibility is paramount here. Nor am i against free trade or open markets; i’m very much for both. A well informed consumer is as important (or more) as a well informed electorate.