Making sense of huge tax breaks for the world’s largest corporations

Globe-spanning corporations can boast of significant profits to their shareholders and still pay little in the way of taxes, or even receive major tax rebates. Not only did Amazon not pay any US federal income tax, it received $129 million in tax rebates despite an annual reported US income of $11 billion, giving it an effective tax rate of minus one percent for fiscal year 2018. That corporation is the world’s third largest, measured by stock market value (as of 21 March 2019). Dozens more international corporations have received similar benefits.

This takes place at a time when the already existing inequality of wealth between the very rich and the rest is generally and rapidly increasing, as evident in much of Europe, the US, and Canada, among others. At the same time, labour productivity (how much is produced per hour of work) has steadily increased through the past decades.

The incredible tax breaks and subsidies received by the some of the world’s wealthiest private institutions is explained by a series of economic and social trends. The concerned and curious observer should not be drawn to simple answers that may lead to a false reading of underlying causes. Solutions to relevant social and economic problems should attempt careful diagnosis in order that symptoms are not incorrectly assumed as the cause of the problems that even the World Bank has identified as the growing disparity between the pay of most workers versus the growth of economic output.

Such issues cannot simply be explained by a tale of greed, or understood as improper morality adopted by the ruling class. It will take more than good intentions to address the problems of structural and material inequality, such as the diseases of the labouring classes who die sooner and have lives more commonly riddled with health problems than the far fewer persons who constitute the wealthiest tranche of society.

There’s more at play here: the pressures of capitalist competition, the consequences of social divisions between those who command the means of economic production and the rest, as well as the sedimented weight of histories past (and the beckoning uncertainties of possible futures that may yet come to pass).

Corporate tax breaks in the US, a symptom…

Many of the world’s largest corporations, based in the USA, paid no federal government income taxes for fiscal year 2018. This is old news: it’s happened before, persisting for numerous years.

The Institute for Taxation and Economic Policy (ITEP) has found that in 2018, 60 of the USA’s biggest corporations paid no federal income tax, thanks to a series of tax breaks and subsidies available to them. Despite the official 21 percent statutory corporate tax rate, these companies enjoyed a net corporate tax rebate of $4.3 billion” (from the ITEP report).

These companies had a total USA pre-tax income of $79 billion.

Some well known corporations include:

US Federal Corporate Income Tax of Select Firms, 2018

US federal corporate income tax, select firms, 2018

Many of these corporations and those of their size and influence can receive further assistance and support in the form of additional services or subsidies from different levels of government. For example, according to a Yahoo Finance article,

IBM has secured a number of subsidies over the years from state and local governments that ring to the tune of $1.4 billion.

The company also has in its pocket federal loans, loan guarantees and bailout assistance at around $5.4 billion.

Productivity, profits, labour, and wages…

Labour productivity in the USA has increased by 77% between 1973 and 2017, yet the average pay (wages plus benefits) of workers has changed little, at 12.4% for the same period (source: Economic Policy Institute).

Labour productivity is equal to GDP divided by total hours worked.

US pay / productivity gap since 1973
Source: Economic Policy Institute, https://www.epi.org/files/charts/img/153034-19227.png

Before 1973, pay generally kept pace with improvements to productivity in post World War 2 USA. Effectively, workers’ made a stable share of what they produced.

Numerous political economists of various ideological stripes have noted the significance of the slowdown in economic growth and profitability in the advanced Transatlantic economies (Europe, USA, Canada) beginning in the 1970s. Among them the Marxist, Tony Norfield asserts, in his book, The City: London and the Global Power of Finance, that,

A steep fall in rates of economic growth and a sharp recession signalled the end of the postwar boom, with higher unemployment, inflation and government fiscal deficits. In the UK in the 1960s, an unemployment figure of 500,000 was considered to be a disgrace to the government in power; by the late 1970s, getting unemployment below a million was seen as a result. Capitalist profitability had slumped in all major countries, leading to stagnant investment and low growth. While the causes of the crisis were in dispute, it was inevitable that economic policy had to change. Everywhere the capitalist state moved to restrict the rights of trade unions and undermine working conditions. Such was the normal policy reaction to crisis. But an important new development from the 1970s was the final collapse of the Bretton Woods monetary system and the start of a new phase in global financial markets.”

(from Norfield’s book, The City, chapter 3)

One way a capitalist business can improve profits and deliver them to its owners, shareholders, and senior management is by way of cutting tax contributions. Another is to cut wages and pay. Businesses can also intensify the working day (increase productivity), by introducing relevant machinery or demanding longer working hours. They may also receive subsidies, or buy up the competition in order to capture as much of the market as possible (monopolies and oligopolies). These are some of the most common means by which, in the face of a falling rate of profit, a firm can maintain or even expand the capitalist owners’ and managers’ profits.

Notice that the value of a product, is not the same as profits made on the sale of that product. For example, a business may produce a product of very high value, such as a house, adding to the GDP of a country. However, the business may lose money on the product after sale if the cost of production exceeds sale price.

So, the above chart shows us the share of pay tied to value produced (measured by GDP) and not according to the profits made by businesses.

Michael Roberts and Anders Alexsson have run similar calculations on the rate of profits in the US, also concluding that returns on investment have been dropping over the long term, since the 1970s. Cutting costs, monopoly capitalism, and the collaborative assistance of the state are ways to deal with these, from a capitalist perspective. The broad range of such measures, when applied to an entire society, and carried via the leadership of the state, is called austerity. The appropriation of a greater share of wealth by the captains of the economy helps to explain the current trend in favour of the widening gap of wealth between social classes.

Within the capitalist economy, profits are commonly distributed among individual owners, owning families, and shareholders of businesses. The producing workers receive compensation in the form of wages and benefits. So, cutting business costs by the means explained above redistributes wealth from workers (via labour savings), or directly from an aggregate of society (via state and local subsidies, tax breaks, etc.) This may seem like a sound business decision from the perspective of managers and owners who, within the capitalist economy, attempt to maintain and maximise profits. But, it has social repercussions, further concentrating wealth and power in the hands of those who already have the most, while weakening the position of those whose main source of livelihood is derived by physical and mental labour rather than ownership of the means of production.


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