Change That Makes Sense?

Pat Garofalo writes about Sen. Carl Levin’s  (D-MI) proposal to raise $200 billion over ten years by closing corporate tax loopholes. This includes closing down a number of unnecessary, costly giveaways to corporations, including tax loopholes or wealthy individuals.

Among them are corporate deductions for stock options, extremely advantageous rates on investment income known as “carried interest,” which costs the Treasury about $1.3 billion a year,  and  by strengthening enforcement of the tax code. Levin has asked the congressional Joint Tax Committee to estimate budget costs and savings for the provisions.

Legislative representatives from both parties often promote “revenue-neutral corporate tax reform”, where every dollar raised if offset by a reduction in the corporate tax rate. Levin has joined the more knowledgeable economists in consistently opposing this approach as counter productive to economic recovery.

Economically, it just makes no sense to balance the budget on the backs of consumers, whose demand is the major source of economic growth, especially now that corporate profits are at record highs and corporate taxes have plummeted. Here’s how out of whack the situation has become:

  • Corporations paid just a 12.1% effective tax rate in 2011.
  • Corporate income tax formerly accounted for 33% of federal revenue, but today makes up less than 9%.

Economist Robert Reich points out:

A newly-released analysis by the Economic Policy Institute shows that the super-rich have done well in the economic recovery while almost everyone else has done badly. The top 1 percent of earners’ real wages grew 8.2 percent from 2009 to 2011, yet the real annual wages of Americans in the bottom 90 percent have continued to decline in the recovery, eroding by 1.2 percent between 2009 and 2011.

Not only has the decline of middle class consumers mired the economy in recession, but, as the corporate income tax was decoupled from corporate profits, the  negative impacts for the federal budget have been dramatic, as shown in this backwards-looking chart:

The Economic Win Win

Given the fact that corporations thrive on consumer spending, the question that corporate decision makers should be contemplating is who is going to buy all the goods and services America is capable of producing?

Returning to another debt-financed consumption bubble will create an even deeper crash. Since no economy has ever grown by cutting, Reich points out that public investment, not ill-considered social program cuts is the way to recovery:

If they were rational, the wealthy would support public investments in education and job-training, a world-class infrastructure (transportation, water and sewage, energy, internet), and basic research – all of which would make the American workforce more productive.

If they were rational they’d even support labor unions – which have proven the best means of giving working people a fair share in the nation’s prosperity. The decline of labor unions in America tracks exactly the decline in the bottom 90 percent’s share of total earnings, and shrinkage of the middle class.

Shooting Itself In the Foot

foot

In other words, we have a corporate sector that is shooting itself in the foot:

The average pay of a Walmart worker is $8.81 an hour. A third of Walmart’s employees work less than 28 hours per week and don’t qualify for benefits.

Walmart is a microcosm of the American economy. It has brazenly fought off unions. But it could easily afford to pay its workers more. It earned $16 billion last year. Much of that sum went to Walmart’s shareholders, including the family of its founder, Sam Walton. The wealth of the Walton family now exceeds the wealth of the bottom 40 percent of American families combined, according to an analysis by the Economic Policy Institute.

A Twofold Approach To Asset Gathering

In the financial services industry, asset gathering is the name of the game today. In order to thrive in a low interest rate environment, in which it is difficult to turn a profit on assets under management, financial firms are taking a twofold approach:

  • Enhancing share of wallet – In other words, we must cross sell new products to our most loyal customers.
  • Acquiring high net asset customers – Financial firms can hardly afford to cater to the most modest earners because the marketing spend to acquire them may be too costly to justify. So firms are seeking ways to engage high net worth individuals and win their business.

Can companies afford to ignore these principles?  How can Walmart expect to continue to profit from customers who are in a downward economic spiral?

The Proven Road to Recovery

Those who advocate cutting of social programs and investment on infrastructure and government employment, rather than obsolete defense spending areas and counterproductive corporate giveaways are making a profound economic mistake.

This is not to say that Federal Spending cannot be addressed, but that cutting consumer benefits should be the last resort, especially when Medicare and Medicaid – the two most costly consumer benefit programs – are bloated due to indiscriminate payments to big pharma, which you can read about in ‘s insightful column here.

Those who advocate taking an ax to social spending – even though the real problem lies elsewhere – are only shooting the consumer, the economy, and ultimately their own viability in the foot.

Advertisements