The Taxman Cometh

You Can Run But You Can’t Hide, Joe Lewis and others

Most cartelists meet in secret. Usually in hotel rooms, in the case of a price-fixing scheme by France’s hoteliers, some of the finest in the world. They try not to leave a paper – “No notes leave the room” is a common instruction — or email trail. Indeed, when the Silicon Valley titans met to join Steve Jobs’ in agreeing to fix wages at below-market levels, one conspirator sent an email to the others advising them not to send emails.

They use code names because in many countries their scheme to set a floor under prices, if uncovered, would send them to jail, certainly so in the US. Executives fitted for prison garb have included Alfred Taubman, one-time chairman of auction house Sotheby’s, found guilty of conspiring with Christie’s to fix commission fees.

The Taxpersons’ Cartel: None of that for the cartelist-members of the international bureaucracy[1] inflamed by what it calls “strategies used by multinational corporations … to avoid paying tax.” No hotel rooms: plush government meeting rooms instead. No secrecy: instead, press releases hailing progress in ending what they call “a race to the bottom”, in effect a deal not to compete too vigorously for new business, in this case corporations looking for a home. Henceforth, every international company will pay taxes at a rate of at least 15% of profits, unless Ireland, which has “significant reservations”, insists that its 12.5% rate is the better level.

Treasury secretary Janet Yellen held out for 21%, but gave in. After all, Rome wasn’t destroyed in a day, and when the Constitution was amended to allow a personal income tax the initial rate was set at 1% in 1913. Now, Tax Freedom Day, the date until which Americans work to pay their taxes, falls on April 16, 105 days into the year. Patience is a virtue for the tax collector: Germany and France now have corporate rates crowding 30%, and so must be planning to press for an increase in the 15% minimum once the principle of such a benchmark is established.

Getting From Here To A Drinks Party: Corporations will most assuredly attempt to pass any higher tax costs that might result from the cartel’s efforts on to their own customers in the form of higher prices. Procedural hurdles – and opposition from Ireland and a few other countries that fear the 15% minimum will stifle their growth — remain to be dealt with before it’s drinks all around. Meanwhile, accountants and lobbyists are preparing to minimize the real impact of all this, and G7 tax collectors are salivating at Biden’s blessing for a deal allowing them to tax US digital giants without retaliation. Of course, the cartelist have agreed on only one of the factors that affect international competition – the tax rate. Inevitably there will be cheating – subsidies, special regulations and other goodies to offer footloose firms. To be followed by efforts to stamp out all forms of competition that might rear their unwelcome heads. More work for the bureaucracies.

Capitalism Under Threat From Its Beneficiaries: Big business and the men who run it cannot be exempted for blame about this turn of events. According to the left-leaning Institute on Taxation and Economic Policy, 55 of the nation’s largest corporations paid no federal income tax on more than $40 billion in profits last year, and 26 corporations, including Nike, Starbucks and Fed Ex, have paid no federal income taxes since 2017, when the Trump tax cuts have been in effect.

Worse from a political point of view, Trump’s tour of duty in the White House focused attention on the fact that property developers can become billionaires without ever paying income taxes, simply by quite legally investing the profits of each project in the next, ad infinitum. One such, the late Leona Helmsley, testified, “Only little people pay taxes,” a suboptimal defense of tax-evasion charges that did not find favor with the jury, and resulted in an involuntary stay in a government-run residence not up to the posh standard of such Helmsley hotels as the St. Moritz and Helmsley Palace. Donald Trump, who so far has avoided such a fate but who is a target of Manhattan district attorney Cyrus Vance, Jr., announced that not paying taxes “makes me smart” and went on to become President of the United States in a testimonial to the awfulness of the Democratic candidate.

CEO Compensation’s Escalator Ride: Meanwhile, CEO compensation becomes more difficult to explain. It is easy to accept, even while envying, the wealth accumulated by great entrepreneurs — Steve Jobs, Elon Musk, Bill Gates, Jeff Bezos, Sergey Brin and Larry Page – who have created great enterprises providing hundreds of thousands of jobs and products/services consumers have come to treasure. But mere managers of those creations and America’s large corporations find it increasingly difficult to justify the tens of millions their boards bestow on them. For one thing, they seem to be winners of a rigged game in which the only direction of their compensation is up. Just last week the board changed its deal with GE’s CEO so that even though he had failed to boost the company’s share price, which caused his stock awards to become worthless, the rejiggered award would be worth $100 million. For his nine months’ tenure. One of what The Economist describes as “nifty conjuring tricks performed in board rooms across America last year…”.

For another, the “continuation of the inexorable rise of CEO pay…during a year … of massive job losses…” occurred in a pandemic-afflicted year in which some CEOs racked up pay raises in the tens of millions even though their firms lost money, and while they were laying off tens of thousands of the employees whose pay has not kept pace with their own in recent decades. Whether or not these raises were justified by some not easily espied superior performance is arguably less relevant than a seeming insensitivity by these corporate statesmen to the current pressures on the acceptability of the capitalist system that has enriched them.

Enter Lobbyists and Accountants: Economists can explain the forces that create salaries that permit executives to stock up on multi-million condos while “the little people” struggle to meet their mortgage obligations, politicians not so much. Which explains why the wiser among high earners, the sound of approaching tumbrils in their ears, are not publicly resisting President Biden’s plan to raise their marginal tax rates. They rely on their accountants to do quiet damage control, preserving the many of the special features of the tax code that keep their actual tax rates below stated levels. Remember: these features of the tax system were created by the very politicians who now profess outrage at their consequences, and come to the table with some obligations to the former colleagues now in the employ of K Street lobbying firms. American taxpayers generally play with the cards these politicians deal them: avoidance, yes, but not evasion.

We have come through a period in which globalization unleashed billions of low-paid workers on the international market for Labour, suppressing the pay of the unskilled, and enabling talented managers to spread their skills over larger and larger enterprises, driving up their market value. A period in which the Federal Reserve chose to keep interest rates at zero and support asset prices, to the benefit of those who already own assets. A period in which a pandemic scarred those already at the low end of the income spectrum while allowing higher earners to accumulate massive savings for a post-Covid consumption orgy, in part because of indiscriminate federal largesse.

Biden’s Tough Job: Biden now must calibrate the sweep of the pendulum as it necessarily reverses course. Not easy to find the path between healthy reform and the sort of over-reaction that might strangle the market system in taxes and regulations, making Bernie Sanders the real victor in the 2020 election.

[1] Technically, the Steering Group of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).