Corporations Are Not People: Why They Have More Rights Than You Do and What You Can Do About It (20 page)

The idea that the United States of America is a place where people can work hard and have a chance at getting rich is very strong, but so is the idea that people should pay their fair share and that graduated, progressive tax rates fairly balance the burden of funding the nation’s continued progress. Indeed, we have a progressive income tax only because Americans of all parties came together to amend the Constitution in 1913 to overturn a Supreme Court case that struck down the federal progressive income tax law.

Gross income disparities are an enemy of successful market economies.
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Nevertheless, shifting income to the very top lies at the heart of the corporatism agenda. In fact, the first of the modern corporate rights decisions arose from organized corporate opposition to a modest proposal in Massachusetts to tax the wealthy at a slightly higher rate than the middle-class and the poor. The 1978 decision in
First National Bank of Boston
v.
Bellotti
(written by Justice Lewis Powell) struck down a Massachusetts law banning corporate funding for or against citizen referendum campaigns. The referendum at issue in that case would have allowed Massachusetts to have a progressive, graduated income tax instead of one where the poor paid the same rate as the rich. That was the question that galvanized corporations such as Bank of Boston, Gillette, and Digital Corporation to sue for corporate speech rights to block a citizen referendum.

These corporations demanded that the Supreme Court guarantee them the right to spend as much corporate money as their executives decided was necessary to block the citizen tax referendum. Otherwise, the people might vote for progressive income taxes. According to the argument used by the corporations in the case, progressive income taxes would make it more difficult for corporations to recruit talented executives in Massachusetts. The corporations won. Now, thirty years later, Massachusetts still does not have progressive income taxes.
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What happened to the companies that got the Supreme Court to give corporations “speech” rights to spend unlimited money to defeat a citizen vote in Massachusetts? They presumably went on to recruit those talented executives whom the corporations claimed would not have come to Massachusetts if the state had progressive income taxes—right?

Massachusetts should have been so lucky. Here’s an update since the 1978
Bellotti
decision. Gillette sold itself to Procter &
Gamble in 2005, with the loss of more than one thousand jobs.
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The Gillette CEO who engineered the deal, James Kilts, made $188 million on the sale.
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Bank of Boston sold itself to Fleet (five thousand lost jobs; $25 million for the CEO), which then sold itself to Bank of America (thirteen thousand lost jobs; $35 million for the CEO).
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Digital sold itself to Compaq in 1998 (fifteen thousand lost jobs; $6.5 million for the Digital CEO who sold the company).
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The tax rate for those CEOs and the laid off employees remains equal.

It approaches a state of what Robert Kerr has called “cognitive feudalism” to imagine that there are no connections among corporate power, wealth disparity, and the erosion of democracy.
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The same CEOs and executives who decide to spend corporate lobbying money and corporate “independent” campaign money also make substantial personal contributions directly to candidates. They also decide how much to pay themselves, advised by a sympathetic board compensation committee. In the corporate era of today, that pay is now much, much more than it used to be, so that millions of dollars in CEO personal campaign contributions are relatively easy to make.

Between 2000 and 2008, CEO pay ranged from 319 to 525 times the average employee’s pay. In 1980, the average CEO made only 42 times the salary of the average employee.
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Even after the 2008 financial meltdown, the average CEO salary (nearly $10 million) remains 263 times higher than the average employee salary.

The nonpartisan Center for Responsive Politics (CRP) has pulled together data showing contributions to candidates and political parties from individual “heavy hitters.” The CRP defines a heavy hitter as someone who has given federal political candidates
and parties more than $50,000 during a single election cycle. That $50,000 giveaway to politicians is more than the annual income of 75 percent of Americans.

The CRP heavy hitter list includes dozens of CEOs and executives of global financial corporations that received billions of dollars in taxpayer-funded bailouts or other government aid during the recent financial crisis, including Goldman Sachs, Citigroup, AIG, JPMorgan Chase, UBS, Credit Suisse, Wachovia, Merrill Lynch, and Bank of America. The list of $50,000 campaign contributors also includes executives from global energy, media, tobacco, telecommunications, and pharmaceutical corporations that benefit from government policy decisions (or inaction) to the tune of billions of dollars in corporate profit.
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These “investments” seem to pay off for the companies
and
for the executives. Both receive coddling tax treatment that makes no sense from the perspective of national interest or sound fiscal policy in times of high deficits. Despite large profits and multimillion-dollar executive payouts, bailed-out Bank of America has paid zero taxes since 2009. GE ($14 billion in profits) paid zero taxes and instead claimed a $1 billion tax credit. The wars go on, Medicare and school budgets are cut, and “temporary” tax cuts for those making more than $250,000 (2 percent of American households) remain sacrosanct.

Then there’s the “hedge fund loophole.” In 2009, twenty-five hedge fund managers paid themselves a total of $25.3 billion—yes, that is
billion,
with a
b.
If these twenty-five billionaires paid income taxes like everyone else, one would expect those billions in earnings to be taxed at 35 percent, the federal income tax rate for the highest-paid Americans, or at 38 percent if the “temporary” tax cut enacted after the September 11 attacks had been allowed to expire in 2010. As the late billionaire Leona Helmsley famously said, however, “Only the little people pay taxes.”

Hedge fund managers do not pay income taxes like other people do. Hedge fund managers take a fee in the form of a “carried interest” in the performance of the fund or, in other words, a designated percentage of the profits from investing other people’s money. Hedge fund managers call this a “gain” rather than “income” and hence claim the right to pay a low capital gains tax rather than a normal income tax. The top capital gains tax rate is 15 percent, the same as the
lowest
income tax rate possible, available only to those with income of $34,000 or less. To put this in perspective, 75 percent of Americans make less than $50,000 per year. Say you are doing much better than most or have a high combined income with your spouse, and you make $100,000 per year. You would pay federal income tax at a 28 percent rate. Yet if you are a hedge fund manager who makes $1 billion, you pay a 15 percent tax. That’s the hedge fund loophole.

Unsurprisingly, this loophole outrages regular taxpayers (that is, almost everyone). Perhaps good arguments may be made, as a general proposition, for taxing capital gains at a lower rate than general income taxes. Lower capital gains taxes may encourage investment, generating economic growth, jobs, and wealth. The lower rate reflects risk-taking: investments might result in a gain, but they might also result in a total loss. But do hedge fund managers who make billions of dollars need the additional encouragement of a tax discount to do what they do? Are they going to stop making billions of dollars unless we promise not to tax them at more than 15 percent? Hedge fund managers do not have a risk of loss because they are investing other people’s money, not their own. Hedge fund managers’ compensation is in fact much closer to income than it is to investment gain.

Congress considered proposals to close the hedge fund loophole in 2007, 2009, and 2010. Each time, people thought that the loophole did not have a chance to survive because it is
so indefensible. Undaunted, the hedge fund and private equity industry drove millions of dollars in lobbying expenses, up 800 percent and 560 percent, respectively.
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The U.S. Chamber of Commerce rushed out “studies” claiming that economic disaster would befall America if the hedge fund managers paid taxes like other people, and corporate-funded front groups with names like American Crossroads and Crossroads GPS shouted “liberty” and inveighed against “taxes and wasteful government spending.” With that snap of the leash, Congress did nothing.
³⁰
At the end of 2010, a hedge fund manager paid himself $5 billion for the year’s work or, as he would prefer, a year’s “gain.”

Perhaps nothing illustrates the “intermingled elite” of crony capitalism and its devastating consequences for the American economy better than the creation of the Citigroup financial conglomerate in 1998 and its decadelong dance into financial apocalypse.
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Citigroup is the largest and perhaps the most dysfunctional of the “too big to fail” financial conglomerates. In 2007, it fired its CEO but paid him $105 million.
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In 2009, the federal government bailed out Citigroup with a $306 billion guarantee of its toxic assets and a $20 billion cash infusion.

Citigroup is a monument to virtually every component of corporate misconduct that wiped out millions of jobs, homes, retirement funds, and other assets of middle-class America in the 2008 financial crisis. These components include incestuous relationships with high government officials, subprime mortgage scams, unregulated derivatives and credit default swaps, misleadingly inflated assets, securities packed with junk loans and stamped with bogus ratings, wildly excessive and irresponsible CEO and executive compensation, billions in government bailouts, unapologetic resistance to regulation or oversight, and millions of dollars
in lobbying and campaign spending to continue the flow of government favors. Almost as a bonus, Citigroup has also been a leader in corporate outsourcing of thousands upon thousands of American white-collar jobs to what it calls “lower-cost locations” such as India.
³³

Back in April 1998, Citigroup, at the time one of the largest bank corporations in the world, announced its merger with Travelers Group, also a large financial and insurance conglomerate. The merger would create the largest financial company in the world. According to reports at the time, “Much of Wall Street liked the deal,” and the share price of both companies soared.
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There was only one problem: the corporate conglomerate they had in mind was illegal.

The law of the United States for at least fifty years had banned this kind of financial conglomerate. The law, known as Glass-Steagall, was passed after the 1929 stock market collapse and the ensuing financial panic that led to the Great Depression. Requiring separation of commercial and investment banks, Glass-Steagall created “firewalls” that had successfully prevented a repeat of the financial panic and Great Depression for half a century.

Illegality, though, was no deterrent. The CEOs and leaders of Citigroup and Travelers privately consulted with President Bill Clinton, Federal Reserve Chairman Alan Greenspan, and Treasury Secretary Robert Rubin (former chair of Goldman Sachs) before going public with the merger, confident that they would change the law.
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Announcing the merger, Sanford Weil, CEO of Travelers, said that the corporations could take time to “divest” the illegal pieces of the business if they must but did not think they would need to do so. “We are hopeful that over that time the legislation will change.”
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They were right; the legislation did change. Congress dutifully repealed Glass-Steagall with the Financial Modernization
Act of 1999 soon after the merger. A few days after Secretary Rubin’s Treasury Department and the White House paved the way for Citigroup by supporting the repeal of Glass-Steagall, Rubin announced that he would be leaving government to become a top official and “senior adviser” at Citigroup. In the next decade, Citigroup paid Rubin $126 million.
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Upon leaving the company in the midst of the meltdown and bailout in 2009, Rubin said he regretted that he did not “recognize the serious possibility of the extreme circumstances that the financial system faces today.”
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At least Rubin acknowledged regret. The same cannot be said for former Senator Phil Gramm, who as chair of the Senate Banking Committee drove the repeal of Glass-Steagall and was a longtime antiregulatory zealot. In Congress from 1983 to 2002, Gramm, like the corporate pharmaceutical lobbyist Billy Tauzin, was flexible enough to be both a Democrat and a Republican, depending on the winds. Gramm led the way to repeal Glass-Steagall’s stabilizing regulation for Wall Street and the financial industry. A year later, he led the way to enact a law to exempt derivatives from government oversight.
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Consensus opinion, apart from Phil Gramm, links the financial meltdown in 2008 directly to this rash abandonment of responsible government. Congress essentially surrendered the country’s fortunes to the “years-long, massive lobbying effort by the banking and financial services industries to reduce regulation in their sector.”
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Economists say this deregulation of the financial services industry and the related failure of oversight created a “less competitive and more concentrated banking system” that directly contributed to the financial crisis of 2008.
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Conservatives and libertarians like Robert Ekelund and Mark Thornton at the Ludwig von Mises Institute say, “This ‘deregulation’ amounts to corporate welfare for financial institutions and a moral hazard
that will make taxpayers pay dearly.”
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Investigative journalists at
Mother Jones
say: