Higher taxes lead to more jobs

Make it harder for people to retain a job, and fewer people will. Adequate pay that makes a job worthwhile is one factor, but frequently overlooked are support structures that facilitate employment.

Contrary to orthodox economic ideology, punishing people does not increase employment.

Countries that provide more subsidies toward services that are complementary to work — such as child care, elder care and transportation — have higher workforce participation rates. This shouldn’t be surprising as we don’t leave the rest of our lives behind when we go to our jobs, however much bosses insist we should. Such a finding can only be controversial in a world dominated by ideologies that insist that conditions be made as harsh as possible to “force” people to work.

Alas, such a world is the one most of us live in, particularly in the English-speaking advanced capitalist countries. I have often noticed that the thinking of middle-class conservatives often boils down to “I had to suffer, so everybody else should have to suffer.” I’ve heard words to this effect from many conservatives. Although people who have enunciated that to me often are people who did indeed work hard to rise from modest circumstances, the reductionist hyper-individualism it reflects is blind to the social solidarity necessary for society to function.

Moving up the vertical scale represents higher rates of employment; moving left on the scale represents higher effective tax rates. (Graphic by Henrik Jacobsen Kleven)

Moving up the vertical scale represents higher rates of employment; moving left on the scale represents higher effective tax rates. (Graphic by Henrik Jacobsen Kleven)

More subsidies lead to a higher percentage of working-age people holding regular employment, and these subsidies are possible through higher taxation. Contrary to orthodox economics, higher rates of taxation lead to more employment. This is the conclusion of a study by Henrik Jacobsen Kleven, “How Can Scandinavians Tax So Much?” Professor Kleven, a professor at the London School of Economics, compared Denmark, Norway and Sweden with other OECD (Organisation for Economic Co-operation and Development) countries (a club of the world’s advanced capitalist and some of the largest developing countries) and found strong correlations between taxation rates and workforce participation.

More social services, more employment

Plotted on a graph, there is a steady progression of countries with higher “participation tax rates” having greater percentages of their population employed. This pattern, not surprisingly, is even stronger for women than men. The author defines a country’s “participation tax rate” as the average effective tax rate when including all income and consumption taxes, and public benefits. This rate is far higher in Denmark, Norway and Sweden than it is in, inter alia, the United States, Japan or Britain. Professor Kleven writes:

“[T]he Scandinavian countries spend relatively large amounts on means-tested transfer programs that create implicit taxes on working and therefore reinforce the distortions coming from the tax system. On the other hand, these countries also spend relatively large amounts on the public provision and subsidization of goods that are complementary to working, including child care, elderly care, and transportation. Such policies represent subsidies to the costs of market work, which encourage labor supply and make taxes less distortionary. Furthermore, Scandinavian countries spend heavily on education, which is complementary to long-run labor supply.” [page 7, citations omitted]

Denmark, Norway and Sweden also have unusually low rates of tax avoidance. Professor Kleven writes that systematic third-party reporting is “crucial” to minimizing tax avoidance. (If your income is reported, it is very difficult to avoid paying taxes on it.) The three countries also have a broad tax base and Denmark in particular allows very few deductions and exceptions.

The United States, in contrast, has a complicated tax system riddled with loopholes. U.S. tax policy for low-income workers centers on the Earned Income Tax Credit (EITC), yet the Scandinavian countries have higher rates of workplace participation without such tax deductions. Because child care subsidies act as a subsidy to labor participation, Professor Kleven argues, those countries have no need for a U.S.-style income tax credit.

Although the author recoils somewhat from his own conclusions at the end of his paper, he does earlier write:

“[E]empirical and theoretical arguments above suggest that public spending on work complements such as child care, preschool, and elder care allows for a more efficient provision of low-income support and at the same time weakens the argument for low participation tax rates at the bottom of the distribution through an EITC. In this sense, it is conceivable that Scandinavian countries (with their large subsidies to work complements and no EITC) got it right, while the US (with its small subsidies to work complements and a large EITC) got it wrong.”

More health care earlier, better jobs later

Perhaps imposing ever harsher conditions on working people makes for a weaker economy? It would seem that several years of punishing austerity has not exactly brought prosperity to the world. Another study daring to offer heterodox economic ideas, just released by the National Bureau of Economic Research, calculates that spending by the U.S. government on child health care through the Medicaid insurance program likely will pay for itself by the end of a recipient’s adult working career.

Providing health care ought to be a human right; it is something that should be provided as a matter of basic humanity to enable better lives. In the U.S., of course, such is not the case; health care there is a privilege reserved for those with full-time employment that provides benefits or for those who can afford it. But, in raw economic terms, Medicaid for children may be cost-free over the long term.

This study, “Medicaid as an Investment in Children: What is the Long-Term Impact on Tax Receipts?,” prepared by Amanda E. Kowalski of Yale University and two economists with the U.S. Treasury Department, David W. Brown and Ithai Z. Lurie, found that children who were Medicaid recipients as adults earn more money on average and thus pay more in taxes than those who did not receive that benefit. These cohorts were followed until age 28, but, projecting the results over a full working career, the authors estimate that the extra taxes accruing to the federal government will amount to 56 cents for every Medicaid dollar. That is virtually identical to the 57 cents that the federal government pays out of every Medicaid dollar.

Professor Kowalski, in summarizing the study, said:

“Although it will take years to know the long-term impact of current expansions of Medicaid undertaken as part of the Affordable Care Act, this study shows that the investments that the government made in Medicaid in the 1980s and 1990s are paying off in the form of higher tax payments now.”

The study did not take into account the extra tax money paid to state and local governments, nor benefits from decreases in mortality and increases in college attendance. If all factors could be calculated over a lifetime, it is conceivable that Medicaid for children will actually be a direct financial benefit. Such a crass calculation shouldn’t be necessary, but the U.S. health care system exists to provide corporate profits rather than provide health care, which is why U.S. spends much more on health care than other countries while achieving inferior results.

A society that provides the infrastructure for a productive, balanced life, as opposed to one that imposes grim struggles to survive, is a healthy society. We are, after all, a social species, something that the ever more propagandized individualist ideology of capitalism seeks to erase.

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Corporate tax dodging another capitalist innovation

Competition takes many forms in capitalism. Financial engineering by corporations to avoid paying taxes is one aspect of this competition — under the rigors of market competition, evading responsibility is an innovation to be emulated.

The magnitude of tax evasion on the part of multi-national corporations through one channel — the shifting of profits to countries and territories with low or nonexistent taxes — was quantified earlier this month by the U.S. Public Interest Research Group Education Fund and Citizens for Tax Justice. Their study, “Offshore Shell Games 2014,” reports that the 500 largest U.S.-based multi-national corporations have squirreled away almost US$2 trillion in profits that lie untouched.

An estimated $90 billion a year in federal income taxes are not paid through the creative use of subsidiaries set up in offshore tax havens.

The Cayman Islands and Bermuda are favored locations, although other tax havens such as Hong Kong, Ireland and Switzerland are frequently used. The report illustrated the preposterous number of corporations with sham “offices” in the Cayman Islands:

“Ugland House is a modest five-story office building in the Cayman Islands, yet it is the registered address for 18,857 companies. … Simply by registering subsidiaries in the Cayman Islands, U.S. companies can use legal accounting gimmicks to make much of their U.S.-earned profits appear to be earned in the Caymans and pay no taxes on them. The vast majority of subsidiaries registered at Ugland House have no physical presence in the Caymans other than a post office box. About half of these companies have their billing address in the U.S., even while they are officially registered in the Caymans.” [page 4]

Ugland House in the Cayman Islands. Almost 19,000 companies are located in this building.

Ugland House in the Cayman Islands. Almost 19,000 companies are located in this building.

The Cayman Islands has a corporate tax rate of zero. Not a cent. The government there raises revenue through taxes on imports (thus a consumption tax for the people who live there as virtually everything must be imported), but, as an added bonus should any corporate executive stop by to visit the company post office box, luxury goods such as diamonds are exempted. Bermuda also has no corporate tax.

U.S. tax laws allow profits earned abroad to remain untouched until the money is brought into the country. Profits booked in other countries are instead subject to the local tax rate, even if zero. Accounting, rather than geography, often controls what constitutes “offshore” profits, however. The “Offshore Shell Games 2014” study reports that:

“Many of the profits kept ‘offshore’ are actually housed in U.S. banks or invested in American assets, but registered in the name of foreign subsidiaries. A Senate investigation of 27 large multinationals with substantial amounts of cash supposedly ‘trapped’ offshore found that more than half of the offshore funds were invested in U.S. banks, bonds, and other assets.” [page 5]

Corporate money is “off shore” if the corporation says it is

A 2013 report in The Wall Street Journal revealed that many corporations, including Microsoft Corp. and Google Inc., “keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities.” Under federal tax law, those funds are “offshore” and thus exempt from taxation.

Microsoft, in its fiscal year 2013 filing with the U.S. Securities and Exchange Commission, said its funds held by its foreign subsidiaries are “deemed to be permanently reinvested in foreign jurisdictions.” It said, “We currently do not intend nor foresee a need to repatriate these funds.” It pays to be a monopoly in more ways than one.

A sampling of corporate highlights, according to “Offshore Shell Games 2014”:

  • Bank of America reports 264 subsidiaries in offshore tax havens, more than any other company. The bank would otherwise owe $4.3 billion in U.S. taxes on the $17 billion it keeps offshore.
  • Nike officially holds $6.7 billion offshore for tax purposes, on which it would otherwise owe $2.2 billion in U.S. taxes. Nike is believed to pay a 2.2 percent tax rate to foreign governments on those offshore profits.
  • Apple holds more money offshore than any other company — $111.3 billion. It would owe $36.4 billion in U.S. taxes if these profits were they not offshore for tax purposes. Two of Apple’s Irish subsidiaries are structured to be tax residents of neither the U.S. (where they are managed and controlled) nor Ireland (where they are incorporated), ensuring no taxes are paid to any government.
  • Google increased the amount of cash it reported offshore from $7.7 billion in 2009 to $38.9 billion. An analysis found that, as of 2012, the company has 23 tax-haven subsidiaries that it no longer discloses but continues to operate.
  • Microsoft increased the amount of money it held offshore from $6.1 billion to $76.4 billion from 2007 to 2013, on which it would otherwise owe $19.4 billion in U.S. taxes. The company is believed to pay a tax rate of three percent to foreign governments on those profits.

You pay when corporations don’t

These arrangements don’t benefit working people in the tax havens. After Ireland’s then prime minister, Brian Cowen, announced that the government would assume all the debts of Ireland’s three biggest banks, he negotiated for what became an €85 billion bailout. In doing so, he demanded, and received, only one concession: There would be no increase in corporate tax rates, which are less than half the level of Ireland’s sales taxes. Taxes on incomes, cars, homes and fuel, however, did rise to pay for the bailout.

Critics, the authors of the “Offshore Shell Games 2014” study not excepted, propose various reforms and tend to discuss this issue in terms of morality. That massive corporate tax dodging is odious from any reasonable ethical standard is indisputable, but reducing it to immorality completely obscures the larger structural problems.

In the relentless competition fostered by capitalism, any successful innovation must be matched by competitors. Such an innovation could be a new production technique but also includes measures to lower costs. If production is moved to a location with low wages and little or no safety and environmental regulations, the boost to profits for the company that does this has to be matched by competitors that otherwise would become uncompetitive and/or fall into disfavor with financiers.

Financial engineering to avoid paying taxes is another boost to profits, and thus a competitive advantage. Other corporations, under the rigors of competition and the ceaseless necessity of expansion and pressure to increase profits, are compelled to copy these innovations.

However much we might wish to morally condemn such behavior, the personality of corporate executives is irrelevant. Expand or die is the remorseless logic of capitalism, and the executive who doesn’t do everything possible to maximize profits will soon be replaced by someone who will.

Nike, to provide an example, proudly announced that, in the past 10 years, it had “returned over $15 billion to shareholders through dividend payments and share repurchases” and assured it would provide more in the future. Nike’s shareholders’ report made no mention of what the company does to extract that money — through brutally exploitative sweatshop labor, paying workers less than a minimum wage set well below subsistence level in places where complaining leads to beatings or firings and striking lands you in prison. And by not paying taxes.

As a second example, Bank of America reported that it paid $3.2 billion to buy back its stock in 2013, money spent to boost its stock price and give extra profits to speculators. (Stock bought for this purpose is paid for at a price higher than the current stock-market value.) That money was available thanks to the billions of dollars it didn’t pay in taxes.

Reforms are good, but reforms can and are taken back when the pressure for them relents, and ultimately leaves the system that rewards such behavior untouched.

Three things you can’t avoid: Death, taxes and corporate lies

Corporate leaders in the United States and the politicians who love them are fond of pointing to the statutory federal tax rate of 35 percent, but the reality is that businesses pay taxes in far smaller amounts. The latest study demonstrating this inconvenient fact has been published by the government itself, not exactly a font of radical theory.

The study, consistent with studies previously published by watchdog groups, found that the effective tax rate for U.S. corporations is only 12.6 percent. In other words, you are paying more taxes than some of the world’s biggest corporate behemoths. Despite all the rhetoric that flies about that would have you believe that poor innocent multi-national corporations are being bled to death, more than half of U.S.-based multi-nationals had at least one year of paying no taxes at all on their profits in the years immediately preceding the economic crash of 2008.

Wells Fargo Plaza, HoustonWe are not talking small change here — corporate tax avoidance amounts to hundreds of billions of dollars in subsidies to some of the world’s most profitable businesses.

The government report detailing the low rate of actual taxes paid was released earlier this month by the U.S. Government Accountability Office and commissioned by a Senate committee. The study covered the years 2008 to 2010. And lest neoliberal apologists moan that downtrodden multi-nationals had to pay other taxes, the GAO study found that the rate of local, state, federal and non-U.S. taxes paid was a combined 16.9 percent — not much of an addition to the 12.6 percent paid to the U.S. government.

To put the above figures in perspective, individuals pay eight times more than businesses in taxes when Social Security taxes are added to federal income tax, according to the GAO report:

“At about $242 billion, corporate income taxes are far smaller than the $845 billion in social insurance taxes and $1.1 trillion in individual income taxes that the Office of Management and Budget (OMB) estimates were paid in fiscal year 2012 to fund the federal government.”*

Another way of looking at this is the percentage of contributions to U.S. government revenue:

  • Individual income tax 47.1%.
  • Social Security taxes 35.3%.
  • Corporate income tax 8.3%
  • Estate and gift taxes 0.4%.

High profitability is no barrier to not paying taxes. A study by Citizens for Tax Justice and the Institute on Taxation and Economic Policy, “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010,” found that 280 of the largest U.S.-based corporations, each among the world’s 500 biggest, received a total of $223 billion in tax subsidies. That’s taxes not paid.

Thirty of these companies paid no taxes or actually received rebates from the government — that is, they had more money after filing their taxes than before — despite reporting composite profits of about $160 billion for the years 2008 through 2010. The most profitable that paid no taxes include, according to the tax dodgers report:

  • Wells Fargo, $49.4 billion in profits for 2008-2010.
  • Verizon Communications, $32.5 billion in profits for 2008-2010.
  • General Electric, $10.5 billion in profits for 2008-2010.
  • Boeing, $9.7 billion in profits for 2008-2010.

Robert McIntyre, director at Citizens for Tax Justice and the report’s lead author, noted:

“This is wasted money that could have gone to protect Medicare, create jobs and cut the deficit.”

Something to keep in mind next time you hear “there is no alternative” to neoliberal austerity programs or that everything would be fine is only we cut corporate taxes more. Businesses are not investing because there is a lack of demand due to shrinking wages, not because they don’t have capital. Recall that, early in 2012, U.S. corporations were sitting on about $2 trillion in cash.

Swimming in a sea of more money than they can spend or invest with, corporations and the wealthy plow money into increasingly risky speculation. That fuels the process of financialization, especially when speculation is, during bubbles, more profitable than actual production.

Generous loopholes and creative accounting are part of the same mad scramble for profits regardless of social cost embodied by the continual shifting of production to locations with ever lower wages. In the race to the bottom, you pay your taxes but your employer pays less than you — or maybe none at all.

* One billion is 1,000 million and one trillion is 1,000,000 million throughout this article.

It’s not only jobs that are off-shored; the profits are as well

By Pete Dolack

There’s no money! Cut, cut, cut! So go the mantras of austerity. The second exclamation follows on the first, but the first is not so. Where then is the money?

Much of the money is hiding in tax havens; both corporations and the top executives and financiers who rake in fabulous wealth on the backs of the employees of the enterprises they control make full use of such havens. U.S. elites are encouraged to do this is because U.S. tax law, through mind-numbing complexity, allows profits and income to be shifted offshore, where they remain untaxed.

Such accounting legerdemain is openly acknowledged (although the details and scale are always hidden), and most often justified by another oft-repeated mantra: That U.S. tax rates are simply too high. But a simple lesson in history demonstrates that is not so, either.

The highest personal tax rate was 91 percent during the 1950s and early 1960s. The latter decades were not periods of U.S. economic hardship, nor did the wealthy by and large fail to remain wealthy. But as neoliberal ideology became dominant, those tax rates fell sharply — from 70 percent at the start of Ronald Reagan’s two presidential terms to 28 percent by the time he was done.

Today, the top tax rate in the U.S. is 35 percent in the wake of several adjustments. The top corporate tax rate is the same. Millionaires, however, don’t pay anywhere near that rate, nor do corporations, because there are so many generous loopholes, making the Right-wing argument that the U.S. corporate tax rate is among the world’s highest specious. (And most of the wealthy’s income derives from capital gains, which are taxed at only 15 percent.) Just how little many economic elites actually pay in taxes was revealed again in an interesting study released earlier this month by the Institute for Policy Studies.

The report found that:

  • In 2011, for the second year in a row, 25 of the 100 highest-paid corporate chief executive officers in the U.S. took home more in pay than their company paid in federal income taxes. On average, the 25 firms had nearly $1 billion in U.S. pre-tax income but still received net tax benefits that averaged $129 million.
  • The chief executive officers of these 25 firms received $20.6 million in average total compensation last year. Combined, the 25 firms have 533 subsidiaries in tax-haven locations such as the Cayman Islands, Bermuda and Gibraltar.
  • The four most direct tax subsidies for excessive executive pay cost taxpayers an overall estimated $14.4 billion per year. That amount could cover the annual cost of hiring about 212,000 elementary-school teachers or Head Start slots for about 1.9 million pre-school children for one year.

The Institute for Policy Studies report states that:

“Nationwide, budget cuts have axed 627,000 public service jobs since June 2009, all but 6 percent of that total at the state and local level. Schools, health clinics, fire stations, parks, and recreation facilities—virtually no public service has gone unsqueezed. … Yet tens of billions of these scarce tax dollars are getting diverted. These tax dollars are flowing from average Americans who depend on public services to the kingpins of America’s private sector. They’re subsidizing, directly and indirectly, the mega-million paychecks that go to the top executives at our nation’s biggest banks and corporations.”

One of the ways that working people subsidize stratospheric executive pay is a loophole that allows unlimited compensation to be deducted from a corporation’s tax bill — the more outlandish the executive pay, the less a corporation owes in taxes.

The massive tax cuts for the wealthiest put through by the Bush II/Cheney administration is often cited as a leading reason for the yawning deficits that opened up during the decade of the 2000s. The wealthiest certainly benefited, as the Institute for Policy Studies report demonstrates: Fifty-seven chief executive officers alone saved a composite $104 million, or $1.8 million per CEO, as a result of the Bush tax cuts.

U.S. economic elites are not unique, and there are many more than 57 people enjoying massive benefits from tax cuts, subsidies, tax havens and tax shelters. A July 2012 Tax Justice Network report found that:

“A significant fraction of global private financial wealth — by our estimates, at least $21 to $32 trillion as of 2010 — has been invested virtually tax-free through the world’s still-expanding black hole of more than 80 ‘offshore’ secrecy jurisdictions. We believe this range to be conservative.”

That is a whole lot of wealth not being taxed. And while most of that total is accumulated by the wealthiest in the advanced capitalist countries, much of it comes from elites in other countries. The Tax Justice Network studied 139 middle- and low-income countries for which it had sufficient World Bank data and found that:

“Since the 1970s, with eager (and often aggressive and illegal) assistance from the international private banking industry, it appears that private elites in this sub-group of 139 countries had accumulated $7.3 to $9.3 trillion of unrecorded offshore wealth in 2010, conservatively estimated, even while many of their public sectors were borrowing themselves into bankruptcy, enduring agonizing ‘structural adjustment’ and low growth, and holding fire sales of public assets.”

Within the United States, Citizens for Tax Justice reports that:

“Tax evasion by individual taxpayers is estimated to deprive the U.S. Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).”

The U.S. government budget deficit is much larger than $160 billion per year, but the total in the above paragraph is only an estimate of shell games performed with off-shore tax havens. Add in tax loopholes, accounting gimmicks and assorted other ways to avoid paying tax on income and profits, and the numbers begin to add up.

The wealthy would much rather loan money than pay taxes. They would like more money to flow to them. But extreme inequality leads to hard times and a vicious circle — more austerity is imposed, reducing the amount of money in the hands of working people, causing them to spend less due to fear of the future, which leads to more weakness in the economy. (No small factor when consumer spending constitutes 60 to 70 percent of the gross domestic product of advanced capitalist countries.)

As more money and capital is concentrated into fewer hands, and the ability to move jobs and production is more unfettered, more power is concentrated in the hands of economic elites, giving them a greater ability to have their preferred policies adopted by governments.

The cycle of austerity can be summarized in two paragraphs: Governments borrow money from the rich and from corporations instead of taxing them, then have to pay higher interest rates on those borrowings because the rich and the corporations complain that too much is being borrowed. To ameliorate the demand for higher interest rates, the governments’ central banks are lending money nearly interest-free to financial institutions so that they will continue to buy the governments’ loans at the higher interest rates. In exchange for continuing to buy government debt (which will earn them a nice profit because they are using the cheap money to buy the debt), the financial institutions demand that the governments cut social services, lay off workers, sell assets and impose other austerity measures.

As a result of the austerity, governments take in less revenue, so they have to borrow more from the rich and corporations, who have hoarded the country’s wealth, at the same time the governments’ central banks are giving financial institutions more cheap money and giving them the green light to hand out more money to insiders, leaving them more vulnerable to the next economic downturn, when, because they are “too big to fail,” they are confident they will receive another bailout.

The standard ideological obfuscation used to justify ever lower tax rates on the wealthy is a variation of “you can decide what to do with your money better than government”; a subset of this is that higher taxes on the wealthy are meant to “punish” them. But social services — schools, transportation infrastructure, court systems, police, fire departments, unemployment insurance and much else — cost money, and a civilized society has to pay for them.

Moreover, the successful businessperson, whether he or she inherited the business or led the building of it, benefits enormously from the society that enables them to amass their wealth. The line of “you can decide what to do with your money better than government” is seductive: Of course you should make your own choices. But that’s not what taxes are — they are not a “taking away” of an individual’s autonomy, they are the price we all pay to live in a civilized country.

The plutocrat making that argument is not concerned about his or her employees’ autonomy; only about his or her ability to slake his or her greed. But the problem with greed is that it can never satisfied; more is never enough.

Nor do plutocrats “create” jobs —  they are created by a need to fulfill demand. More jobs mean more employees to profit from because profits are derived from the work of employees.

“Freedom” is equated with individualism — but as a specific form of individualism that is shorn of responsibility. More wealth for the rich is advertised as good for everybody despite the shredding of social safety nets that accompanies the concentration of wealth. Those who have the most — obtained at the expense of those with far less — have no responsibility to the society that enabled them to amass such wealth. Imposing harsher working conditions is another aspect of this individualistic “freedom,” but freedom for who?

“Freedom” for industrialists and financiers is freedom to rule over, control and exploit others; “justice” is the unfettered ability to enjoy this freedom, a justice reflected in legal structures. Working people are “free” to compete in a race to the bottom set up by capitalists — this is the freedom loftily extolled by the corporate media and the institutions of the wealthy.

As I have previously noted, the economist Richard Wolff, in his Economic Update radio show, points out that if only U.S. residents with at least $1 million at their disposal for investment were taxed 10 percent on this portion of their wealth — their fixed assets such as mansions, yachts and collectibles such as works of art would remain untouched — the entire yearly U.S. government budget deficit would be eliminated.

There is enough to go around — if there is enough collective will and organization to make it happen.