A Musing About Incentives, Profits, And Stagnant Salaries

The Sioux Falls Argus Leader reports, "No one testified against Building South Dakota, part of Senate Bill 235. Several lawmakers had skeptical questions about part of the proposal, but the committee voted 12-0 to send SB 235 to the full House." The legislation is an effort to bribe provide incentives for corporations to locate in South Dakota:

The complex proposal includes tax incentive for large business projects, grants for local infrastructure and affordable housing, and millions of dollars for education.

It would be funded by tax revenue from projects incentivized by the fund, and from part of the state’s “unclaimed property” revenue from banks.

Meanwhile, the New York Times reports that the Dow has hit a record high.

The Dow Jones industrial average, which measures the performance of 30 blue-chip companies, rose more than 100 points in morning trading on Tuesday, surpassing its previous record close of 14,164.53, which it achieved nearly five and a half years ago, as well as its record intraday high, set around the same time, of 14,198.10.

The Times also reports, "the split between American workers and the companies that employ them is widening and could worsen in the next few months as federal budget cuts take hold." That trend seems unlikely to change:

With millions still out of work, companies face little pressure to raise salaries, while productivity gains allow them to increase sales without adding workers.

“So far in this recovery, corporations have captured an unusually high share of the income gains,” said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. “The U.S. corporate sector is in a lot better health than the overall economy. And until we get a full recovery in the labor market, this will persist.”

The result has been a golden age for corporate profits, especially among multinational giants that are also benefiting from faster growth in emerging economies like China and India.

The Times also reports that this golden age of corporate profits has not been seen in decades:

As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966. In recent years, the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008 and 2009, said Dean Maki, chief United States economist at Barclays.

Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation.

“There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said

.Let's review:

1. South Dakota legislators believe that companies that are making record profits can be given incentives to come to South Dakota

2. Despite record profits corporations aren't hiring new workers and the workers who are on the payroll are not getting raises.

3. In effect, South Dakota is going to give corporations awash in cash a chance to make more money even though the evidence indicates that they will not do anything to employ more workers or raise the salaries of the workers they do employ.

Why is this a good idea?

Of Big Government and Big Corporations

Neil M. Barofsky, former special inspector general of the TARP bailout program, penned a rather disturbing op-ed in yesterday's New York Times.

Barofsky's assertion that the provisions of the bailout designed to help Main Street "have been a colossal failure" should surprise no one.  In fact, it's surprising, if not shocking, that a former government official has admitted that failure.  Nor should one be surprised that the "Treasury [Department] apparently has chosen to ignore rather than support real efforts at reform."  I seldom expect Washington to make things better; I foolishly continue to hope that they will do no harm.

The disturbing element of the editorial is "[t]hese banks now enjoy record profits and the seemingly permanent competitive advantage that accompanies being deemed “'too big to fail.'"  More frighteningly,

The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller institutions, which continue to struggle.

 If one parses that last quotation a bit, the true failure of TARP and the true hubris of corporate America becomes clear.  The institutions that caused the financial collapse expect to be bailed out again.  Further, they are bigger than they were when they were to big to fail.  Logically, that means that when they bring America to the brink of collapse again the economic devastation will be greater.  Finally, smaller institutions will not be able to catch up.  If that's the case, individuals have little or no chance of getting ahead.

More On GE's Tax Avoidance

The fact that GE paid no US income tax in 2010 is not the only reason to worry about the lobbying efforts that the NYT reports and this article from The Atlantic summarizes.  GE has posted a response here.

This February Derek Thompson article from The Atlantic reminds us that "President Obama named General Electric CEO Jeffrey Immelt the chair of his new Council on Jobs and Competitiveness, which is expected to suggest changes to the corporate tax code."  I may be a bit paranoid, but is really good policy to have the CEO of a company that spent $4.1 million in lobbyists and who paid no 2010 taxes in a position of influencing tax policy?

Thompson links to a Martin Sullivan Tax.com page that provides the following analysis and conclusion.  Visual learners should feel free to follow the link for a few charts.

Fact: #1 GE's effective tax rate reported to shareholders has dropped precipitously from the 30s in the 1990s to extremely low levels.

Fact #2: The decline in GE's effective tax rate has little to do with domestic tax breaks but is almost entirely due to low-tax foreign profits.

Fact #3: More and more of GE's business and employment is outside of the United State. Still, profits booked outside of the United States have grown even faster, suggesting GE is taking advantage of lax U.S. transfer pricing rules that make it easy to shift profits into tax havens.

Fact: #4. The rapid increase in profits booked abroad has resulted in a massive accumulation of earnings "permanently invested" outside the United States.

Like the CEOs of most U.S. multinationals, Jeffrey Immelt wants the option of repatriating GE's accumulated $84 billion under the provisions of a temporary tax "holiday" where U.S. tax would only be 5.75 percent instead of the full 35 percent corporate tax rate. Immelt and his CEO brethren argue this will create jobs although evidence from the prior holiday (enacted in 2004) does not support this. Citizens have a right to be concerned the president's new advisor will give priority to promoting the competitiveness of U.S. multinationals rather than the competitiveness of the overall U.S. economy. And why shouldn't he? He has a fiduciary responsibility to his shareholders to do exactly that. 

A Major WTF Moment

I knew corporations dodged taxes, but, like Ronald Reagan, “I didn’t realize things had gotten that far out of line.”   According to a NYT article,

General Electric, the nation’s largest corporation, had a very good year in 2010.
The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.
Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

The reason is pretty simple; "The company spent $4.1 million on outside lobbyists last year, including four boutique firms that specialize in tax policy." [page 4 of article]

Tax cuts are supposed to produce jobs.  Since GE is able able to "write its own tax rate,"  one would assume that the company had produced thousands, if not millions of jobs.  That assumption would be wrong:  "Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion." [page 4 of article]

I often tell my students to put facts in context and not to assume that readers will draw the same conclusions that they do.  In this case, I'm not sure there's much context.  Earning $14.2 billion and getting a tax refund of $3.1 billion is an insult to everyone who files and pays on income of $20,000 or $50,000 or even $500,000.  It also shows the flaws of South Dakota's efforts to gain jobs by bribing businesses; clearly, businesses know how to manage bribes far better than government.