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Archives for July 2012

The Benefits of Buying Locally

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Each year brings more national chains displacing locally-owned businesses throughout the country. We see clones replace unique establishments. People across the country are losing sense of community in their town, and consider this trend a symptom, but could it be a cause as well? Also, what are the impacts of this trend on our economic well-being?

It seems obvious that we do business where we perceive we receive the best value for our time and money. Perceptions, however, are not always accurate when we are lacking some of the essential information for fully informed decisions. We see and hear the omnipresent ads of corporate chains everyday, but are collectively under-informed about the many important values independent businesses provide us individually and as a community.

Some economists would call the chain encroachment a natural trend. Tough for the family who owns the small business, but it doesn’t really affect the economy. Overall sales may even go up a little when a chain drives out a small independent, so what’s the problem?

The disappearance of local businesses leaves a social and economic void that is palpable and real – even when it is unmeasured. The quality of life of a community changes in ways that macroeconomics is slow to measure, or ignores completely. Let’s look at some of the issues.

1. Building A Strong Local Economy –  The giant chains often win a town’s consent to build new stores with promises of growth and tax revenues. But when communities such as St Albans, VT & New Paltz, NY performed thorough analyses, they concluded proposed new “big box” retailers would create economic costs exceeding benefits, (loss of existing jobs and increased infrastructure demands being the top two) and wisely rejected them on those grounds. They are among more than 90 [now 200] communities around the country to have such foresight in recent years. Their scrutiny inevitably shows that most income of new chains comes directly from established businesses. For example, an extensive study of new Wal-Marts at Iowa State University found 84% of sales simply shifted dollars away from existing local merchants.

It’s time to consider the real costs to a community that loses its local business base. Independent local businesses employ a wide array of supporting services. They hire architects, designers, cabinet shops, sign makers and contractors for construction. Opportunities grow for local accountants, insurance brokers, computer consultants, attorneys, advertising agencies and others to help run it. Local retailers and distributors also carry a higher percentage of locally-made goods than the chains, creating more jobs for local producers.

In contrast, a new chain store typically puts in place a clone of other units, eliminates the need for local planning, and uses a minimum of local goods and services. In a company-owned store, the profits are promptly exported to corporate headquarters. These factors lead local independent merchants create a multiplier effect in the local economy of 3 – 3 1/2 times that of a chain outlet (the multiplier difference in non-retail businesses is generally lower, but no less important).While many communities focus on sales tax revenue, we need to remember that the one-time tax revenue is only one part of the economic picture.

Small manufacturers are also affected since they rely on local retailers to give their new products a chance. Local retailers are more free to take chances with the goods of a new manufacturer, or a product that is not part of a national sales plan. Therefore, small manufacturers and a wide variety of service industries have a clear stake in the nationwide health of local retailers.

In the larger picture, sales of the 500 largest corporations grew 700% in the past 20 years, yet those corporations are now net disemployers, firing more people than they hire despite record profits. That our economy is still in decent health is testimony to the employment generated by small business during this time. We need to recognize the impact of our dollars and support institutions that benefit our common interests.

2. Ensuring Choice and Diversity –  Retailers sift through competing goods and services to find those that appeal to their customers. Even though a single local shop may have a smaller selection than a big chain outlet, a multiplicity of independent retailers creates great diversity.

For example, when 3,000 or so national independent booksellers or music shops buy for their local customers’ tastes, the cumulative effect is demand for a wide variety of ideas and music. This makes accessible controversial books or music from new artists with the expectation that there will be a market somewhere within a variety of stores. As fewer giant corporations dominate both production and sales, our options – determined by a powerful few – will be drastically reduced.

Our freedom of choice is imperiled when a few buyers from national chains choose what reaches consumers. This may be only mildly disturbing for most consumer goods, but truly frightening when you consider the impact on our choice of news sources, books, music and other modes of expression.

3. Maintaining Community Character –  When asked to name our favorite restaurant, cafe, or shop, we almost always cite a unique local business (look at the results in any “Best of” polls as proof). We embrace the idea of distinctive businesses with local character, but often forget their survival depends on our patronage. It is easy for us to get so consumed by efficiency that we forget how much of our lives we spend eating out, shopping, and doing other business. We owe it to ourselves to consider the quality of our experience, and ask if we benefit when we choose a community-based business.

Local owners with much of their life savings invested in their businesses have a natural interest in the long-term health of the community. Community-based businesses are essential to charitable endeavors, frequently serving on local boards, and supporting a variety of causes. Yes, there are some corporate chains that give back to towns in which they do business, but anyone who raises funds for local non-profits will tell you that independents are their base of support. Not all local businesses are models to follow, and corporate chains are not inherently bad, but the overall impacts are clear: local businesses play a vital role in our community that corporate chains rarely do, while chains often even undermine community interests.

Recurring Problems

The loss of local businesses hasn’t just resulted from free market economics; it’s had plenty of help. Favoritism from large manufacturers toward corporate chains such as “promotional allowances” (free advertising), takes different forms, many of them illegal under anti-trust laws. Enforcement of these laws, created to protect consumers and communities, is an important step in solving these problems.

Local officials nationwide often fall for the seductions and political appeal of luring new national chains. They often look at promises of jobs and tax revenues, but fail to consider the greater losses that occur when the local business base is undermined. We see examples nationwide of tax and regulatory breaks worth millions used to lure out-of state corporations. Why should these businesses enjoy favors that our community-based businesses do not?

Let’s make future decisions based on full-cost accounting, and create a level (or better) playing field for local businesses with our policies; the chains already have enough laws rigged in their favor nationally.

Hope For The Future

For long-term progress, a conceptual change also is necessary. We need to consciously plan that future with rules that will encourage the values we want reflected in our communities. And each time we spend a dollar, we would do well to weigh the full value of our choices, not solely to ourselves immediately, but for the future we want in our own hometowns.

By Jeff Milchen, former executive director of Reclaim Democracy and co-founder of the American Independent Business Alliance (AMIBA). Please contact AMIBA for reprint permission (and updates to the article) or for assistance launching buy local campaigns or other initiatives to support community-based enterprise.

Help fund our cause by buying one of our corporate logo flags (the American flag with corporate logos in place of the stars) – it’ll show your objection to corporate personhood and raise awareness.

Justice Rehnquist’s Dissent in First National Bank of Boston v. Bellotti

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States should be permitted to limit corporate political “speech”

Case Argued November 9, 1977
Decided April 26, 1978
Case # 435 U.S. 765
Justice Powell delivered the opinion of the Court, in which Justices Burger, Stewart, Blackmun, and Stevens, joined. Justice Burger also filed a concurring opinion. Justice White filed a dissenting opinion, in which Brennan and Marshall joined. Justice Rehnquist filed a separate dissenting opinion.

Passages in red text are some we consider to be of particular interest.

Mr. Justice Rehnquist, dissenting.

This Court decided at an early date, with neither argument nor discussion, that a business corporation is a “person” entitled to the protection of the Equal Protection Clause of the Fourteenth Amendment. Santa Clara County v. Southern Pacific R. Co., (1886). Likewise, it soon became accepted that the property of a corporation was protected under the Due Process Clause of that same Amendment. See, e. g., Smyth v. Ames, (1898). Nevertheless, we concluded soon thereafter that the liberty protected by that Amendment “is the liberty of natural, not artificial persons.” Northwestern Nat. Life Ins. Co. v. Riggs, (1906).

Before today, our only considered and explicit departures from that holding have been that a corporation engaged in the business of publishing or broadcasting enjoys the same liberty of the press as is enjoyed by natural persons, Grosjean v. American Press Co., (1936), and that a nonprofit membership corporation organized for the purpose of “achieving . . . equality of treatment by all government, federal, state and local, for the members of the Negro community” enjoys certain liberties of political expression. NAACP v. Button, (1963).

The question presented today, whether business corporations have a constitutionally protected liberty to engage in political activities, has never been squarely addressed by any previous decision of this Court. 1 However, the General Court of the Commonwealth of Massachusetts, the Congress of the United States, and the legislatures of 30 other States of this Republic have considered the matter, and have concluded that restrictions upon the political activity of business corporations are both politically desirable and constitutionally permissible. The judgment of such a broad consensus of governmental bodies expressed over a period of many decades is entitled to considerable deference from this Court. I think it quite probable that their judgment may properly be reconciled with our controlling precedents, but I am certain that under my views of the limited application of the First Amendment to the States, which I share with the two immediately preceding occupants of my seat on the Court, but not with my present colleagues, the judgment of the Supreme Judicial Court of Massachusetts should be affirmed.

Early in our history, Mr. Chief Justice Marshall described the status of a corporation in the eyes of federal law:

A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of creation confers upon it, either expressly, or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. 

-Dartmouth College v. Woodward, 4 Wheat. 518, 636 (1819).

The appellants herein either were created by the Commonwealth or were admitted into the Commonwealth only for the limited purposes described in their charters and regulated by state law. 2 Since it cannot be disputed that the mere creation of a corporation does not invest it with all the liberties enjoyed by natural persons, United States v. White, (1944) (corporations do not enjoy the privilege against self-incrimination), our inquiry must seek to determine which constitutional protections are “incidental to its very existence.” Dartmouth College, supra, at 636.

There can be little doubt that when a State creates a corporation with the power to acquire and utilize property, it necessarily and implicitly guarantees that the corporation will not be deprived of that property absent due process of law. Likewise, when a State charters a corporation for the purpose of publishing a newspaper, it necessarily assumes that the corporation is entitled to the liberty of the press essential to the conduct of its business. 3 Grosjean so held, and our subsequent cases have so assumed. E. g., Time, Inc. v. Firestone, (1976); New York Times Co. v. Sullivan, (1964). 4

Until recently, it was not thought that any persons, natural or artificial, had any protected right to engage in commercial speech. See Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, (1976). Although the Court has never explicitly recognized a corporation’s right of commercial speech, such a right might be considered necessarily incidental to the business of a commercial corporation.

It cannot be so readily concluded that the right of political expression is equally necessary to carry out the functions of a corporation organized for commercial purposes. 5 A State grants to a business corporation the blessings of potentially perpetual life and limited liability to enhance its efficiency as an economic entity. It might reasonably be concluded that those properties, so beneficial in the economic sphere, pose special dangers in the political sphere.

Furthermore, it might be argued that liberties of political expression are not at all necessary to effectuate the purposes for which States permit commercial corporations to exist. So long as the Judicial Branches of the State and Federal Governments remain open to protect the corporation’s interest in its property, it has no need, though it may have the desire, to petition the political branches for similar protection. Indeed, the States might reasonably fear that the corporation would use its economic power to obtain further benefits beyond those already bestowed. 6 I would think that any particular form of organization upon which the State confers special privileges or immunities different from those of natural persons would be subject to like regulation, whether the organization is a labor union, a partnership, a trade association, or a corporation.

One need not adopt such a restrictive view of the political liberties of business corporations to affirm the judgment of the Supreme Judicial Court in this case. That court reasoned that this Court’s decisions entitling the property of a corporation to constitutional protection should be construed as recognizing the liberty of a corporation to express itself on political matters concerning that property. Thus, the Court construed the statute in question not to forbid political expression by a corporation “when a general political issue materially affects a corporation’s business, property or assets.” (1977).

I can see no basis for concluding that the liberty of a corporation to engage in political activity with regard to matters having no material effect on its business is necessarily incidental to the purposes for which the Commonwealth permitted these corporations to be organized or admitted within its boundaries. Nor can I disagree with the Supreme Judicial Court’s factual finding that no such effect has been shown by these appellants. Because the statute as construed provides at least as much protection as the Fourteenth Amendment requires, I believe it is constitutionally valid.

It is true, as the Court points out, ante, at 781-783, that recent decisions of this Court have emphasized the interest of the public in receiving the information offered by the speaker seeking protection. The free flow of information is in no way diminished by the Commonwealth’s decision to permit the operation of business corporations with limited rights of political expression. All natural persons, who owe their existence to a higher sovereign than the Commonwealth, remain as free as before to engage in political activity. Cf. Maher v. Roe, (1977).

I would affirm the judgment of the Supreme Judicial Court.

[ Footnote 1 ] Our prior cases, mostly of recent vintage, have discussed the boundaries of protected speech without distinguishing between artificial and natural persons. See, e. g., Linmark Associates, Inc. v. Willingboro, (1977); Buckley v. Valeo, (1976). Nevertheless, the Court today affirms that the failure of those cases to draw distinctions between artificial and natural persons does not mean that no such distinctions may be drawn. The Court explicitly states that corporations may not enjoy all the political liberties of natural persons, although it fails to articulate the basis of its suggested distinction. Ante, at 777-778, n. 13.

[ Footnote 2 ] Appellants Wyman-Gordon Co. and Digital Equipment Corp. are incorporated in Massachusetts. The Gillette Co. is incorporated in Delaware, but does business in Massachusetts. It is absolutely clear that a State may impose the same restrictions upon foreign corporations doing business within its borders as it imposes upon its own corporations. Northwestern Nat. Life Ins. Co., (1906). Appellants First National Bank of Boston and New England Merchants National Bank are organized under the laws of the United States. In providing for the chartering of national banks, Congress has not purported to empower them to take part in the political activities of the States in which they do business. Indeed, it has explicitly forbidden them to make any “contribution or expenditure in connection with any election to any political office.” 2 U.S.C. 441b (a) (1976 ed.). thus, there is no occasion to consider whether Congress would have the power to require the States to permit national banks to participate in political affairs. Cf. McCulloch v. Maryland, 4 Wheat. 316 (1819).

[ Footnote 3 ] The Court concedes, ante, at 781, that, for this reason, this statute poses no threat to the ordinary operations of corporations in the communications business.

[ Footnote 4 ] It does not necessarily follow that such a corporation would be entitled to all the rights of free expression enjoyed by natural persons. Although a newspaper corporation must necessarily have the liberty to endorse a political candidate in its editorial columns, it need have no greater right than any other corporation to contribute money to that candidate’s campaign. Such a right is no more “incidental to its very existence” than it is to any other business corporation.

[ Footnote 5 ] However, where a State permits the organization of a corporation for explicitly political purposes, this Court has held that its rights of political expression, which are necessarily incidental to its purposes, are entitled to constitutional protection. NAACP v. Button, (1963).

The fact that the author of that opinion, my Brother BRENNAN, has joined my Brother WHITE’s dissent in this case strengthens my conclusion that nothing in Button requires that similar protection be extended to ordinary business corporations. It should not escape notice that the rule established in Button was only an alternative holding, since the Court also ruled that the National Association for the Advancement of Colored People had standing to assert the personal rights of its members. Ibid., citing NAACP v. Alabama ex rel. Patterson, (1958). The holding, which has never been repeated, was directly contrary to an earlier decision of this Court holding that another political corporation, the American Civil Liberties Union, did not enjoy freedom of speech and assembly. Hague v. CIO, (1939) (opinion of Roberts, J.); id., at 527 (opinion of Stone, J.).

[ Footnote 6 ] My Brother WHITE raises substantially these same arguments in his dissent, ante, at 809-810. However, his heavy emphasis on the need to protect minority shareholders at least suggests that “[t]he governmental interest in regulating corporate political communications,” ante, at 809, might not prove sufficiently weighty in the absence of such concerns. Because of my conclusion that the Fourteenth Amendment does not require a State to endow a business corporation with the power of political speech, I do not find it necessary to join his assessment of the interests of the Commonwealth supporting this legislation.

The question of whether such restrictions are politically desirable is exclusively for decision by the political branches of the Federal Government and by the States, and may not be reviewed here. My Brother WHITE, in his dissenting opinion, puts the legislative determination in its most appealing light when he says, ibid.: “[T]he interest of Massachusetts and the many other States which have restricted corporate political activity . . . is not one of equalizing the resources of opposing candidates or opposing positions, but rather of preventing institutions which have been permitted to amass wealth as a result of special advantages extended by the State for certain economic purposes from using that wealth to acquire an unfair advantage in the political process ….” As I indicate in the text, supra, I agree that this is a rational basis for sustaining the legislation here in question. But I cannot agree with my Brother WHITE’s intimation that this is in fact the reason that the Massachusetts General Court enacted this legislation.

If inquiry into legislative motives were to determine the outcome of cases such as this, I think a very persuasive argument could be made that the General Court, desiring to impose a personal income tax but more than once defeated in that desire by the combination of the Commonwealth’s referendum provision and corporate expenditures in opposition to such a tax, simply decided to muzzle corporations on this sort of issue so that it could succeed in its desire.

If one believes, as my Brother WHITE apparently does, see ante, at 806, that a function of the First Amendment is to protect the interchange of ideas, he cannot readily subscribe to the idea that, if the desire to muzzle corporations played a part in the enactment of this legislation, the General Court was simply engaged in deciding which First Amendment values to promote.

Thomas Jefferson in his First Inaugural Address made the now familiar observation: “If there by any among us who would wish to dissolve this Union or to change its republican form, let them stand undisturbed as monuments of the safety with which error of opinion may be tolerated where reason is left free to combat it.” J. Richardson, A Compilation of the Messages and Papers of the Presidents 310 (1897). One may entertain a healthy skepticism as to whether the General Court left reason free to combat error by their legislation; and it most assuredly did not leave undisturbed corporations which opposed its proposed personal income tax as “monuments of the safety with which error of opinion may be tolerated.” But I think the supreme Judicial Court was correct in concluding that, whatever may have been the motive of the General Court, the law thus challenged did not violate the United States Constitution.

  • For the entire Bellotti decision, see Findlaw
  • For an extensive collection of resources relating to the Bellotti case and stripping corporations of their power to influence ballot questions, see our library of resources on Corporations and Ballot Initiatives or on Corporate Personhood.
  • Of related interest: memo by Justice Lewis Powell (author of the majority opinion) to the U.S. Chamber of Commerce, written weeks before his appointment to the Supreme Court, in which he called for an aggresive expansion of corporate legal and political power.

Kasky v. Nike — Do Corporations Have a Right to Lie?

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Contents

  1. Introduction
  2. Facts, Reporting, & Competing Views
  3. Arguments Against Nike or Against Corporations Enjoying Bill of Rights Protections
  4. Arguments for Nike or for Corporations to Enjoy Bill of Rights Protections
  5. Legal Briefs on Marc Kasky’s Side
  6. Legal Briefs on Nike, Inc.’s Side
  7. Kasky v Nike Court Decisions and Court Documents
  8. Some Major Court Cases Involving “Commercial Speech”
  9. The ACLU and Corporate “Rights”
  10. Background on the Underlying “Sweatshop” Dispute

Introduction

Kasky v. Nike (at the U.S. Supreme Court) involved Nike Corporation’s appeal of an April 2002 California Supreme Court ruling. The California court rejected claims by Nike’s lawyers the First Amendment immunized the company from being sued for an allegedly deceptive public relations campaign. A trial on the merits was precluded by the parties’ settlement, following the U.S. Supreme Court’s decision to send the case back to a lower court.

We presents all sides of the Nike case and the larger issues of corporate or commercial speech. We also examine the judicial creation of constitutional rights for corporations and raise awareness of the far-reaching negative effects the precedent has on democracy and our lives.

We reject the claim the authors of our Bill of Rights intended to define persons as including corporations (see Corporate Personhood for more). In addition to provoking public debate, we work to persuade the American Civil Liberties Union to halt or reverse its practice of advocating for corporate personhood (the ACLU board backed Nike in court, though they offer no evidence of member support). We believe such advocacy ultimately undermines the critical human rights work for which the ACLU was founded (more below).

Related stories:

No further posting of information relating to Nike v Kasky is planned on this archive.

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Facts, Reporting, & Competing Views

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Arguments Against Nike’s Claimed “Right to Lie”

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Arguments for Nike or for Corporations to enjoy Bill of Rights Protections

Commentaries Not Explicitly Advocating for Either Party

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Legal Briefs for Marc Kasky

Note: all briefs linked on this page are PDFs.

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Legal Briefs for Nike

Nike Inc.’s Briefs to the U.S. Supreme Court
Amici Briefs

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Kasky vs. Nike Inc: Court Decisions and Documents

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A Few Significant Court Cases in the Evolution of “Commercial Speech”

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The ACLU’s Support for Corporate Claims to Bill of Rights Protections and Our Campaign to Change It

The ACLU sided with Nike Inc. throughout this case. Its national board cites the position of the No. California ACLU as representing their rationale. That statement is followed by a copy with our responses interwoven: Statement by the Northern California ACLU on Kasky v. Nike.

The ACLU has a controversial history of defending “smokers rights” and “free speech” for tobacco corporations with earmarked funds from those same companies. We consider this to be important information for understanding the background of ACLU policy in this realm. We have no knowledge of the ACLU taking money from Nike Inc.

Former Washington Post reporter Morton Mintz published several in-depth investigations on the issue, like: The ACLU & the Tobacco Companies from Nieman Reports ( 366k pdf file)

Sending hard copy to ACLU is best, but please e-mail us a copy of your letters to any ACLU representative (and send copies of any substantive responses). We also urge you to speak with your state ACLU chapter and share your communications with us.

On November 20, 2002, the ACLU of Southern California passed a policy on commercial speech that directly contradicts the ACLU of Northern California’s defense of Nike’s alleged right to lie. While this is not a strongly worded policy and it sticks narrowly to the commercial vs. non-commercial speech framing, it is a great first step in provoking needed debate within the ACLU.

Background on the “Sweatshop” Dispute

While we addressed the Constitutional issues in this case and not Nike’s practices, we offer these links for those seeking background on the underlying issue.

See our Corporate Personhood Page for more resources.

The Gap Between Statutory and Real Corporate Tax Rates

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Actual taxes paid by consistently profitable Fortune 500 companies now is less than half the statutory rate

By Robert McIntyre and T.D. Coo Nguyen
First published by the Multinational Monitor, Vol 25, No. 11

Ostensibly, the U.S. federal tax code requires corporations to pay 35 percent of their profits in income taxes.

But of the 275 Fortune 500 companies that made a profit each year from 2001 to 2003 and for which adequate information to draw conclusions is publicly available, only a small proportion paid federal income taxes anywhere near that statutory 35 percent tax rate. The vast majority paid considerably less.

In fact, in 2002 and 2003, the average effective tax rate for all of these 275 companies was less than half the statutory 35 percent rate. Over the 2001-2003 period, effective tax rates ranged from a low of -59.6 percent for Pepco Holdings to a high of 34.5 percent for CVS.

Over the three-year period, the average effective rate for all 275 companies dropped by a fifth, from 21.4 percent in 2001 to 17.2 percent in 2002-2003.

The statistics are startling:

  • 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. 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 after taxes than before taxes in those no-tax years.
  • Twenty-eight corporations enjoyed negative federal income tax rates over the entire 2001-2003 period. These companies, whose pretax U.S. profits totaled $44.9 billion over the three years, included, among others: Pepco Holdings (-59.6 percent tax rate), Prudential Financial (-46.2 percent), ITT Industries (-22.3 percent), Boeing (-18.8 percent), Unisys (-16.0 percent), Fluor (-9.2 percent) and CSX (-7.5 percent), the company previously headed by current Secretary of the Treasury John Snow.
  • In 2003 alone, 46 companies paid zero or less in federal income taxes. These 46 companies told their shareholders they earned U.S. pretax profits in 2003 of $42.6 billion, yet they received tax rebates totaling $5.4 billion. Almost as many companies, 42, paid no tax in 2002, reporting $43.5 billion in pretax profits, yet receiving $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.
  • In 2001, the Treasury paid corporations $40 billion in tax refunds, a third more than the 1998-2000 average.
  • Then in 2002 and 2003, after the law was changed to expand tax subsidies and make it easier for corporations to carry back excess tax breaks to earlier years, corporate tax refunds skyrocketed to an average of $63 billion a year – more than double the 1998-2000 average.

Corporations are now paying the lowest levels of taxes in the post-World War II era. In fiscal 2002 and 2003, federal corporate incomes taxes dropped to their lowest sustained level as a share of the economy since World War II. Only a single year during the early Reagan administration was lower.
In 1986, President Ronald Reagan fully abandoned his earlier policy of showering tax breaks on corporations. The Tax Reform Act of 1986 closed tens of billions of dollars in corporate loopholes, so that by 1988, the overall effective corporate tax rate for large corporations was up to 26.5 percent. That improvement occurred even though the statutory corporate tax rate was cut from 46 percent to 34 percent as part of the 1986 reforms.

In the 1990s, however, many corporations began to find ways around the 1986 reforms, abetted by tax-shelter schemes devised by major accounting firms.

Effective corporate tax rates then plummeted, thanks to Bush administration-backed tax breaks passed in 2002 and 2003, continued corporate offshore tax-sheltering, and the refusal of the Congress and White House to crack down on even the most abusive inherited corporate tax-sheltering activities.

Corporate taxes paid for more than a quarter of federal outlays in the 1950s and a fifth in the 1960s. They began to decline during the Nixon administration, yet even by the second half of the 1990s, corporate taxes still covered 11 percent of the cost of federal programs. But in fiscal years 2002 and 2003, corporate taxes paid for a mere 6 percent of federal expenses.

Billions and billions

Over the 2001-2003 period, the 275 Fortune 500 companies that were profitable each year and for which adequate information is publicly available earned almost $1.1 trillion in pretax profits in the United States. Had all of those profits been reported to the Internal Revenue Service (IRS) and taxed at the statutory 35 percent corporate tax rate, then the 275 companies would have paid $370 billion in income taxes over the three years. But instead, the companies reported only about half of their profits – $557 billion – to the IRS. Instead of a 35 percent tax rate, the companies as a group paid a three-year effective tax rate of only 18.4 percent.

In 2002 and 2003, the 275 companies sheltered more than half of their profits from tax. They told their shareholders they earned $739 billion in those two years, but they paid taxes on less than half of that, only $363 billion.

Loopholes and other tax subsidies cut taxes for the 275 companies by $43.4 billion in 2001, $60.8 billion in 2002 and $71.0 billion in 2003, for a total of $175.2 billion in tax breaks over the three years.

Half of the total tax-break dollars over the three years – $87.1 billion – went to just 25 companies, each with more than a billion-and-a-half dollars in tax breaks.

General Electric topped the list of corporate tax break recipients, with $9.5 billion in tax breaks over the three years.

Industrial divide

Effective tax rates varied widely by industry. Over the 2001-2003 period, industry effective tax rates for the 275 corporations ranged from a low of 1.6 percent to a high of 27.7 percent.

In 2003, the range of industry tax rates was even greater, ranging from a low of -30.0 percent (a negative rate) up to a high of 27.9 percent.

  • Aerospace and defense companies enjoyed the lowest effective tax rate over the three years, paying only 1.6 percent of their profits in federal income taxes. This industry’s taxes declined sharply over the three years, falling to -30.0 percent of profits in 2003.
  • Other very low-tax industries, paying less than half the statutory 35 percent tax rate over the entire 2001-2003 period, included: transportation (4.3 percent), industrial and farm equipment (6.2 percent), telecommunications (7.5 percent), electronics and electrical equipment (10.8 percent), petroleum and pipelines (13.3 percent), miscellaneous services (14.4 percent), gas and electric utilities (14.4 percent), computers, office equipment, software and data (16.0 percent), and metals & metal products (17.4 percent).
  • Not a single industry paid an effective tax rate of more than 29 percent, either for the entire three-year period or in any given year.

Within industries, effective tax rates also varied widely. For example, over the three-year period, average tax rates on oil companies ranged from 3.0 percent for Devon Energy up to 31.4 percent on Marathon Oil. Among aerospace and defense companies, three-year effective tax rates ranged from a low of -18.8 percent for Boeing up to a high of 25.0 percent for General Dynamics.

How they do it

There are myriad reasons why particular corporations paid low taxes. The key major tax-lowering items revealed in the companies’ annual reports – plus some that are not disclosed – include:

Accelerated depreciation. The tax laws generally allow companies to write off their capital investments considerably faster than the assets actually wear out. This “accelerated depreciation” is technically a tax deferral, but so long as a company continues to invest, the tax deferral tends to be indefinite. In 2002 and again in 2003, Congress passed and President Bush signed new business tax breaks totaling $175 billion over the 2002-2004 period. These new tax subsidies centered on a huge expansion in accelerated depreciation, coupled with rules making it easier for companies with an excess of tax breaks to get tax rebate checks from the Treasury by applying their excess tax deductions to earlier years and still other new tax subsidies.

Atop the list of accelerated depreciation beneficiaries are SBC Communications, with $5.8 billion in accelerated depreciation tax savings, Verizon (with $4.5 billion), Devon Energy ($4.4 billion), ExxonMobil ($2.9 billion) and Wachovia ($2.8 billion).

Stock options. Most big corporations give their executives and other employees options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it is worth. But in reporting profits to shareholders, companies do not treat the effects of stock-option transactions as business expenses – based on the arguable theory that issuing stock at a discount doesn’t really reduce profits because the market value of a company’s stock often has only a very attenuated relation to earnings.

The corporate tax benefits from stock option write-offs are quite large. Of the 275 corporations, 269 received stock-option tax benefits over the 2001-2003 period, which lowered their taxes by a total of $32 billion over three years. The benefits ranged from as high as $5 billion for Microsoft over the three years to tiny amounts for a few companies.

Overall, tax benefits from stock options cut the average effective corporate tax rate for the 275 companies by 3 percentage points over the 2001-2003 period.

The benefits declined after 2001, however, falling from $13 billion in 2001 to about $9.5 billion a year in 2002 and 2003. The tax-rate effects of stock options are likely to continue to decline as accounting standards are changed to reduce the disparity between the book and tax treatment of options.

Tax credits. The federal tax code also provides tax credits for companies that engage in certain activities – for example, research (on top of allowing immediate expensing of research investments), certain kinds of oil drilling, exporting, hiring low-wage workers, affordable housing and supposedly enhanced coal (alternative fuel). As credits, these directly reduce a company’s taxes.

Some credits have unexpected beneficiaries. For instance, Bank of America cut its taxes by $580 million over the 2001-2003 period by purchasing affordable-housing tax credits. Clorox saved $36 million, Kimberly-Clark, $115 million, and Illinois Tool Works, an unspecified amount, from those same credits. Bank of New York obtained $100 million in alternative fuel credits over that period. Marriot International operates four coal-based synthetic fuel facilities solely for the tax benefits, which cut Marriot’s taxes by $233 million in 2003 and $159 million in 2002.

Offshore tax sheltering. Over the past decade, corporations and their accounting firms have become increasingly aggressive in seeking ways to shift their profits, on paper, into offshore tax havens, in order to avoid their tax obligations. Some companies have gone so far as to renounce their U.S. “citizenship” and reincorporate in Bermuda or other tax-haven countries to facilitate tax sheltering activity.

Not surprisingly, corporations do not explicitly disclose their abusive tax sheltering in their annual reports. For example, Wachovia’s extensive schemes to shelter its U.S. profits from tax are cryptically described in the notes to its annual reports merely as “leasing.” It took extensive digging by PBS’s Frontline researchers to discover that Wachovia’s tax shelter involved pretending to own and lease back municipal assets in Germany, such as sewers and rail tracks, a practice heavily promoted by some accounting firms. Other tax shelter devices, such as abuses of “transfer pricing,” also go unspecified in corporate annual reports. Nevertheless, corporate offshore tax sheltering is estimated to cost the U.S. Treasury anywhere from $30 billion to $70 billion a year, and presumably the effects of these shelters are reflected in the bottom-line results of what companies pay in tax.

Tax Reform (& Deform) Options

Almost two decades after the major corporate tax reforms under Ronald Reagan in 1986, many of the problems that those reforms were designed to address have re-emerged, along with an array of new corporate tax-avoidance techniques.

If policymakers wanted to reform the corporate income tax to curb tax subsidies and make the taxation of different industries and companies more equal, they certainly could do so. They could focus on the long list of corporate tax breaks, or as they are officially called, “corporate tax expenditures” produced each year by the Joint Committee on Taxation and the U.S. Treasury. They could reinstate a stronger corporate Alternative Minimum Tax that really does the job it was originally designed to do. They could rethink the way the corporate income tax currently treats stock options. They could adopt restrictions on abusive corporate tax sheltering, as the Clinton Treasury Department proposed. They could reform the way multinational corporations allocate their profits between the United States and foreign countries, so that U.S. taxable profits are not artificially shifted offshore.

But all signs point to movement in the opposite direction. In October, Congress adopted legislation to comply with a World Trade Organization (WTO) ruling that an export tax subsidy violates certain WTO obligations. The legislation closed some heavily criticized corporate loopholes that almost everyone agrees are unwarranted. But at the same time, the bill expanded existing and created new tax breaks – to the tune of $210 billion, mostly for corporations. They even include measures that would make it easier (and more lucrative) for companies to shift taxable profits, and potentially jobs, overseas.

The tax bill will further reduce corporate taxes substantially over time. In fact, one of the biggest winners under the bill will be General Electric, the company that already enjoys more tax subsidies under existing law than any among the 275 Fortune 500 firms making a consistent profit from 2001 to 2003.

Robert McIntyre is Director of the Citizens for Tax Justice. T. D. Coo Nguyen works with the Institute on Taxation and Economic Policy. This article is based on the two organizations’ report, “Corporate Income Taxes in the Bush Years,” published in September 2004.

© 2005 Multinational Monitor

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