Wayne O’Leary

Capital Strikes and Corporate Taxes

In late 1937, amidst the briefly stalled recovery from the Great Depression, New Dealers thought they saw a conspiratorial pattern in the general unwillingness of American business to invest and create employment. This financial pullback, justified by corporate leaders as a rational response to the “uncertainty” engendered by New Deal economic policies, helped produce the so-called Roosevelt Recession of 1937-38. It also created the firm suspicion among critics of business, including the president himself, that the country and its incumbent administration were being deliberately subjected to a “capital strike.”

The apparent capital strike of 1937-38, whether purposefully aimed at undermining the New Deal or not, arose from the usual Wall Street paranoia regarding government regulation, budget deficits, and tax increases (the dreaded business uncertainties); more explicitly, it was crystallized by the collective-bargaining provisions of the National Labor Relations (Wagner) Act of 1935, widely condemned by corporate management as a source of higher costs and lower profits.

In this respect, the original capital strike, which prompted an antimonopoly crusade by FDR’s Justice Department, had the same antecedents as the business slowdown of our own time. In 2011, with the stock market at its highest level in years, business borrowing rates at historic lows, company profits approaching record territory once more, and the Fortune 500 sitting on what The Economist magazine calls “mountains of cash,” corporate America refuses to make the investments that would reduce the chronically high domestic unemployment rate.

The reason for this modern capital strike, if that’s what it is (and all signs point in that direction), is American capitalism’s descent once more into “uncertainty” mode, featuring a disinclination to fund expansion in the US because of what it perceives as an adverse business climate — the product of an unsympathetic federal government liable to tax and regulate, and state governments not yet as willing to abolish union rights in the private-sector as they are in the public sector. In effect, what corporations, increasingly multinational, are saying is: “Give us what we want if you desire jobs, or the jobs will go elsewhere.” The truth is, they may go elsewhere anyway, because no matter how much the U.S. (or any individual state) cuts taxes, reduces wages, and deregulates industry, there will always be another country (or state) willing to up the bidding.

The more things change, the saying has it, the more they remain the same. American business in 2011 is making the identical arguments and threatening the same blackmail it did 75 years ago. The lessons of the 1930s were never learned — to wit: the only way to grow an economy is on the demand side, from the bottom up. Supply-side (giving money to corporations or individuals already awash in it and hoping for a trickle-down effect) has had a 30-year run; it’s proven ineffectual. Demand-side, or Keynesianism, which dominated economic thinking from the 1930s to the 1970s and led to America’s postwar golden age, deserves a longer revival than the mini-tryout it received in 2009-10 before the panicky clamor for austerity began.

Corporate business wants no part of Keynesian solutions, however; it wants what it considers to be its due, and it’s willing to hold the country hostage in the meantime — a brazen tactic considering Wall Street’s role in wrecking the economy in the first place. The immediate demand is for a corporate income-tax cut. Republican politicians (and some Democrats, including the current occupant of the White House) are happy to comply; Republicans, in fact, insist upon it.

The question is, Why should corporate America and its beloved shareholders get yet another gift from the taxpayers at a time of general budget retrenchment? Corporations, through their vast, loophole-savvy legal staffs, are already past masters at avoiding the existing federal income tax. Two-thirds of American-based corporations currently pay no US income taxes at all; this includes such major feeders at the public trough as bailout recipients Bank of America and Citigroup, as well as top-tier profit makers ExxonMobil and General Electric.

The corporate income tax has a long, if checkered, history in this country. The 16th Amendment to the Constitution, ratified in 1913 at the height of Wilsonian Progressivism, established the principle of both individual and corporate income taxes; annual corporate levies have been an integral part of the tax code ever since. The present marginal rates, ranging from 15% for the lowest taxable incomes (under $50,000) to 35% for the highest (over $18 million), were adopted under the Tax Reform Act of 1986. As befits a Reagan-era tax law, their progressivity is stunted; in 2009, the median Fortune 500 company (profits of $382.4 million) was theoretically assessed at the same maximum rate, after deductions, as top-ranked ExxonMobil (profits of $19.4 billion). Of course, the oil giant didn’t pay 35% on that 2009 income, nor on its 2010 income of $30.5 billion; it paid the IRS nothing at all.

ExxonMobil’s lawyers are easily able to use legal tax dodges, such as writing off inflated executive salaries and bank interest on business loans (for, say, mergers or outsourcing operations) as “costs of doing business.” Besides wiping out tax liabilities by claiming questionable operating expenses, ExxonMobil and other multinationals can keep their money offshore and move it around among their dozens of foreign subsidiaries to find the lowest possible tax venues for declaring their profits, a procedure called “transfer pricing.”

Such rampant tax avoidance has had predictable results; that portion of America’s general-fund tax revenues deriving from corporations has steadily declined from 33% in the 1940s to less than 10% today. But it’s still too much for the corporate sector. The one-third of US companies continuing to pay taxes want their obligations reduced, too. They and their political retainers have settled on an official maximum rate of 25%, a nearly 30% reduction; this would leave corporations paying a lower marginal income-tax rate than most middle-class Americans.

Those abused members of the middle class are the effective hostages of corporate America and its capital-strike strategy. President Obama, who’s endorsed the great corporate-tax giveaway, needs a rethink. FDR’s antitrust response to the 1930s version of the capital strike was the far more appropriate one. Otherwise, why have a Democratic Party?

Wayne O’Leary writes in Orono, Maine.

From The Progressive Populist, June 1, 2011