(Image: Berrett-Koehler Publishers; Edited: to)
Unless you become more watchful in your states and check the spirit of monopoly and thirst for exclusive privileges you will in the end find that...the control over your dearest interests has passed into the hands of these corporations.
- Andrew Jackson
There is a huge difference between a mall full of chain stores or a big-box retailer, and a downtown area full of small, locally owned businesses. The transition from the latter to the former is what’s destroying local communities on the one hand and creating mind-boggling wealth for a very few very large corporations and multimillionaire CEOs on the other. Here’s how it works.
As I noted in my book Unequal Protection,1 when I shop in downtown Montpelier, Vermont, and buy a pair of pants, for example, at the Stevens Clothing Store on Main Street, at the end of the day the store’s owner, Jack Callahan, takes his proceeds down to the Northfield Savings Bank and deposits them. From Stevens, I walk next door to Bear Pond Books and buy today’s newspaper, a magazine, and a copy of Thomas Paine’s Rights of Man, a book that is as fascinating today as when it was first written in 1791.
At the end of the day, Bear Pond’s manager, Linda Leehman, will take my money down to the Chittenden Bank and deposit it.
From Bear Pond I go to one of the dozen or so local restaurants and exchange some of my cash for a good meal. At day’s end that cash, too, will end up in one of Montpelier’s local banks.
The next day Montpelier’s banks are richer by my purchases, as are Stevens, Bear Pond, and the restaurant. If my daughter, a Web designer, wanted to start her own design firm in an office on Main Street (or from her home), she could visit one of those banks, and, if her credit was good, they could loan her some of the money that was deposited with them the night before from the townspeople’s purchases.
If her work is good, Stevens or Bear Pond or the restaurant may decide they want to hire her to design their Web site, using the profits they made from my—and others’—purchases to pay for her work. She’ll put her money into the local bank, increasing its deposits available for local lending. Thus, by keeping money within the community, the community grows. This is how communities in America and most of the rest of the world have historically grown.
Consider, though, if my shopping trip had been to a mall full of chain stores or to a national superstore. Strict management of cash flow is the name of the game for such businesses, and some of them make deposits several times a day. But the money stays in town for only a day at best.
Every night, all around America, buttons are pushed that - like vampires draining blood from sleeping people - drain cash away from local communities, most of it never to be seen in town again.
At McDonald’s, Wal-Mart, Chili’s, Home Depot, and a hundred other national and international chains, local branches spend the entire day selling products made or grown far away and shipped over land or sea. Local customers who earned money locally buy these products every day. Although the companies pay a small amount of their revenue back in local taxes and payroll and services, most of it is sucked up nightly into each company’s headquarters bank in Chicago or Little Rock or New York or wherever it may be. And most of that money never returns to the local community.
This is how you destroy local communities; it’s the opposite of a healthy economy.
Clearly, we need to reverse this trend and stop the corporate Godzillas from tearing up our local towns and local economies. First, let’s take away all the local, state, and federal government incentives and subsidies that these chain operations feed on and which are not usually available to local small businesses. Second, enact measures to stop multinationals from evading U.S. taxes by moving their operations and assets to low-tax countries, and break up the giant trusts that have come to dominate every aspect of our economy. Third, implement and promote policies—through federal agencies such as the Small Business Administration—that provide help and know-how as well as financial incentives to small, independent, local businesses.
In Praise of Inefficiency
This homogenization of stores and restaurants and banks across America is a recent phenomenon; it was not the case for the first 200 years or so of our nation’s history.
Other countries are wary of making such stupid blunders.
India, for instance, has a complex of national and local laws that functionally makes it illegal for a business or person to own multiple retail locations anywhere in the country. Thus, while the retail sector accounts for a whopping 14 percent of GDP, 98 percent of the stores are what economists label “unorganized”—owned by single families or businesses. (There is tremendous pressure right now from international corporate oligarchs—being led by Wal- Mart and Microsoft—to change these Indian laws.)
The result is that every neighborhood in every city, every town, and every village in India is filled with small mom-and-pop stores: small grocery stores, small hardware stores, small electronics stores, small music stores, small bookstores, small shoe stores—and on and on through the whole “butcher, baker, and candlestick maker” realm of retail. All locally owned, almost all family owned, for generations.
It’s also how America looked from its founding until Reagan stopped enforcing the Sherman Antitrust Act. Shopping centers, strip malls, retail downtown areas, rural country stores - all were mostly family or small-business owned.
This local ownership of small businesses is relatively inefficient. India right now has “the highest shop density in the world” at “11 outlets for every 1,000 people.” And that inefficiency is just the way most Indians like it. Products are locally sold and locally consumed - often by people who locally produced them. It is revealing that India has roughly 11 million retail outlets, with 96 percent of them less than 500 square feet in size, and America has fewer than 1 million retail outlets, but they are, in sales, 13 times the size of the Indian market.2
That “inefficiency” in the Indian market also means that local money stays in local economies. A local purchase from a local store goes into the pocket of a local shop owner, who deposits the money in a local bank, where it can be loaned out to local people to buy local homes. The local business is also buying products locally to sell and is supporting services like accounting, cleaning, and maintenance. These local businesses in turn keep and spend their money locally.
The result of this “inefficiency” is a nation full of economically healthy local communities and healthy local small businesses. But when the economic theorists and the big corporations behind the so-called Reagan revolution surveyed the American retail landscape in the early 1980s, they looked at those healthy businesses the way a cancer cell looks at the rest of the body - wide open and ready for a takeover.
In the worldview of Ayn Rand and Milton Friedman, everybody in the world is motivated purely by “self-interest.” There are the “smart” people pursuing their own self-interest (also known as “the rich”) and the “lazy” people pursuing their own self- interest by using an instrument of force (government regulations, minimum-wage laws, collective bargaining laws, and the like) to extract wealth from the “smart” people for themselves. These latter people are labeled by Randians and Friedmanites as “parasites” or “moochers.”
When Reagan stopped enforcing the Sherman Antitrust Act, the result was an explosion of mergers and acquisitions by the “smart” people. Small- and medium-sized businesses were eaten alive by giant behemoths. Mom-and-pop shops went out of business left and right, as did small manufacturing and support companies. All were replaced by national chains, which brought in products from out of town, outsourced their accounting and other back-office work to national headquarters, and every night vacuumed up all the cash they’d collected locally.
They were highly efficient and highly profitable, and the result is a now -unhealthy American retail economy dominated by a few dozen major corporations doing business under thousands of names. Entrepreneurialism has largely vanished from the American landscape; the country of innovation and invention has become the country of imported new gadgets and big-box retailers.
Teddy the Trustbuster
This is only the second time in American history that we’ve faced such a concentration of wealth and power, of business and money, and of the political control that flows from it; and this is the first time it’s been extended to the retail sector.
The previous time was in the late 1800s, when John Pierpont Morgan came to dominate most of the American business landscape (it was called “Morganizing” back then), competing with a handful of oligarchs like John D. Rockefeller and Andrew Carnegie. When Theodore Roosevelt became president in 1901, he set out to break up these cartels, earning himself the moniker “Teddy the Trustbuster.”
Today we need a new trustbuster. Clinton and the Bushes refused to go back to enforcing the Sherman Act and other similar laws, both leaving in place and advancing the agenda of the Rand/ Friedman corporatists of the Reagan revolution. Obama has made tentative noises about enforcing the Sherman Act but has taken no serious actions.
Monopoly started out as a game invented by Elizabeth Magie and patented in 1904 (she sold her patent to Parker Brothers in 1935 for $500, and they incorporated it into the modern Monopoly game, which was patented that year by Charles Darrow3). Magie, who was a Quaker and a political activist, wanted to create a way to inform the average person of how concentration of property ownership and aggregation of rents over time would lead to the concentration of wealth in a few hands, with the rest of the population experiencing widespread poverty.
But over the years, that lesson has been long lost, and players simply enjoy the challenge of buying up every business and property available and, through the monopoly ownership of all businesses and rents, bleeding every other player into poverty.
Today people like Mitt Romney and T. Boone Pickens play the game in the real world, impoverishing real people and destroying real businesses while taking all the cash they can for themselves.
America needs a new Teddy Roosevelt to break up the modern-day monopolists and return opportunity and wealth to local communities and small businesses.
As major corporations are dominating our consumer markets and destroying local economies, they are also doing everything in their power to avoid paying their fair share of the taxes, on the one hand, and to get local and state governments to subsidize their operations, on the other.
A Forbes magazine report in April 2010 showed the extent of the scandal and how major U.S.-based multinationals have used an array of complicated tax loopholes and accounting methods to evade paying income taxes in the United States and instead move their tax responsibilities to offshore tax havens:4
The most egregious example is General Electric. Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion. Avoiding taxes is nothing new for General Electric. In 2008 its effective tax rate was 5.3%; in 2007 it was 15%. The marginal U.S. corporate rate is 35%....
But it’s the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us. It only makes sense that multinationals “put costs in high-tax countries and profits in low-tax countries,” says Scott Hodge, president of the Tax Foundation.
The fact that multinationals avoid paying taxes in the United States and even move assets overseas to do so is a clear sign of their loyalty—or rather their lack thereof—to their host country. Another such sign is that even within the United States these companies suck up more tax revenues than they contribute.
As I noted in my book Unequal Protection, Paul Hawken, author of The Ecology of Commerce, found data in the early 1990s indicating that the nation’s corporations were net consumers, rather than producers, of tax monies. Several recent books on corporate welfare point to similar trends and conclusions, although hard data are difficult to come by because the statistics necessary to compile it are spread across literally thousands of separate local, state, and federal government agencies and their reports. “It was almost certainly the case, when I did my initial research in 1992,” Hawken told me, “that the nation’s corporations took more out of the economy in tax dollars than they pay in.”5
For example, in 2001 the Boeing Company illustrated how much power it has in the economy. It announced that it would relocate its corporate headquarters from Seattle and then played the offers of three cities against one another. By the time the decision was announced on May 10, 2001, that Boeing chose Chicago, the New York Times reported that the winning destination had “promised tax breaks and incentives that could total $60 million” to seal the deal.6 Making matters worse for the government was the fact that Boeing enjoyed negative income-tax rates of –18.8 percent from 2001 to 2003.7
This is far from rare. According to a report from the Cato Institute, businesses in America receive direct tax subsidies of more than $75 billion annually.8 That equates to every household in America paying a $750 annual subsidy to corporations, according to Dr. David C. Korten, author and former faculty member of the Harvard Graduate School of Business.9
The way that this happens clearly illustrates the consequences of unrestrained “freedom of expression” in the halls of a government that was designed to serve the public good. In a situation that is reminiscent of the charter-mongering era, companies can once again be aggressive in getting local governments to offer tax breaks that are never offered for local, small businesses. All of the following have the effect of cash taken out of human pockets and put into corporate ones:
- In Louisiana a multinational chemical company was given a $15 million tax break.10
- In Ohio $2.1 billion worth of business property was taken off the tax rolls, leaving public schools struggling to find resources because they depend most on the now-eviscerated property-tax revenues.*
- New York State companies had, from just 1991 to 1992, “earned” $242 million in tax credits and held $938 million in “unused” tax credits they could “use” in future years to avoid paying an equal amount in corporate income taxes on profits.11
- Alabama offered $153 million to a German automobile company to build a factory there, an amount equal to about $200,000 per job created.12
- Illinois gave a national retail chain $240 million in land and tax breaks to keep it from moving out of state.13
- The state of Indiana borrowed millions from its citizens by a bond issue and gave that money as an “upfront cash subsidy,” along with other grants and tax breaks that totaled $451 million, to an airline to build a maintenance facility.14
- Pennsylvania gave a Norwegian transnational corporation $235 million in economic incentives to build a shipyard, an amount that cost the state, according to Time magazine, $323,000 per job.15
- New York City gave tax breaks of $235 million, $98 million, and $97 million to three corporations to keep them from moving to New Jersey, and $25 million to a media corporation to keep it in town. (Few of these breaks created any new jobs anywhere.) Says the New York Times, “Since Mr. Giuliani took office in 1994, he has provided 34 companies with tax breaks and other incentives totaling $666.7 million.”16
- Kentucky gave nearly $140 million to two steel manufacturers-more than $350,000 per job created.17
- In Louisiana over a 10-year period, just the top 10 corporations getting breaks (there were others) received $836 million to “create jobs.” Time magazine did the math and found that the cost to the state’s taxpayers per job created among those 10 ranged from $900,000 to $29 million.18
- The state of Michigan created the Michigan Economic Growth Authority (MEGA), which as of 1999 had awarded more than $900 million in tax breaks and grants to corporations, costing Michigan taxpayers, according to the Mackinac Center for Public Policy, $40,000 per job created or moved from other states into Michigan.19
In almost every case, benefits to one community were subtracted from another. “No new jobs are created in the process” of most of these sorts of tax breaks, according to former U.S. Secretary of Labor Robert B. Reich, quoted in the New York Times. “They’re merely moved around. Meanwhile, the public spends a fortune subsidizing these companies. But there’s no way that mayors or governors can withstand the heat once a major company announces it is thinking about leaving.”20
Break the Tax-Avoidance Corporate Cycle
So how do we stop multinationals from squeezing major subsidies out of local and state governments to move their operations there - or sometimes simply to stay in their town or state (and threaten to move elsewhere if they are not offered subsidies)?
Withhold Federal Funds
Senator Bernie Sanders, independent from Vermont, suggested a simple solution on my radio show in 2008: “Just pass a law denying federal highway matching funds to any state that participates” in these efforts by corporations to play one state against another.
Because federal highway funds are vital to every state just to keep the roads functioning, the federal government has a long history of threatening to withhold them to coerce desired behavior from the states without actual mandates that may violate the Tenth Amendment. A good example is how Jimmy Carter cut our oil consumption nationwide in the late 1970s by telling states that if they allowed a speed limit above 55 miles per hour (mph), their federal highway funds would be cut: within a year every state in the nation had new signs up proclaiming a 55 mph limit.
So denying federal highway funds to local and state governments that offer huge cash incentives to businesses to move or to stay is really a simple solution and one that needs to be made into law today to stop them from eating your town next!
Close the Tax Loopholes
Another way to stop multinationals from evading taxes in the United States is to close the loopholes that allow them to, for instance, not pay the U.S. tax rate on overseas earnings. The Obama administration has made some noises about doing this.
Under current law, if I give a speech in Australia and earn $10,000, it is taxed by the IRS as earned income. On the other hand, if a multinational corporation earns income in Australia and keeps it in an office there, the IRS can’t touch it. Our tax laws should be changed back to the way they were decades ago so that U.S.-incorporated corporations have to report and pay tax on all their income, regardless of where it’s earned, so they don’t have an incentive to move their operations - and keep their profits - overseas.
And if a corporation wants to change its nation of incorporation from the United States to, as in the case of now-Dubai-based Halliburton spin-off KBR, the Cayman Islands (to avoid paying corporate income taxes in the United States), the entire corporate management and their offices should be required to move to the nation of incorporation. Or, more simply, just require that any corporation whose principal operations and management are domiciled in the United States must also be incorporated in this nation and pay taxes here. It’s frankly embarrassing to the United States that trillions of dollars spent during the Bush and Obama administrations for the wars in Iraq and Afghanistan went to corporations that didn’t pay income taxes here on their profits because they reincorporated overseas. Taxpayers are subsidizing tax cheats!
Finally, if we as a nation truly believe in entrepreneurship - the very thing that made America an economic success - we need to proactively encourage and provide help and incentives to small businesses.
In the waning year of his presidency in 1932, Herbert Hoover started the Reconstruction Finance Corporation (RFC) to float loans for companies that were falling into bankruptcy because so many banks were on the edge of failing that nobody could borrow money. The RFC continued through the Republican Great Depression years of the 1930s and the war years of the 1940s and eventually inspired the Dwight Eisenhower administration in 1953 to create the Small Business Administration (SBA). The theory by that time was that the economy was solid enough that big and medium-sized businesses could stand on their own but that small businesses still needed some support.
As the Web site for the SBA itself notes, in its history of the day:
In the Small Business Act of July 30, 1953, Congress created the Small Business Administration, whose function was to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.” The charter also stipulated that the SBA would ensure small businesses a “fair proportion” of government contracts and sales of surplus property.21
Over time the definition of “small” changed over and over again, and bigger and bigger businesses figured out ways to game the SBA by spinning off new, “small” divisions or simply by lobbying to reinvent definitions. Today, while the SBA offers a wide variety of instructional materials and assistance in getting government contracts, its original mission of helping out truly small businesses-entrepreneurs and small, local companies - has been pretty much co-opted by successive administrations (particularly during the Reagan era) and their crony companies.
Now would be a great time to reinvent the SBA from the ground up, making it a place where a person who wants to start an auto repair shop or a small retail store could find the capital to get off the ground. Of course, at the moment that would mean it would be competing with very large and powerful monopolistic banks, so it’s a politically unlikely event until the economy really crashes hard, taking those banks down with it. Nonetheless, the idea is a good one and should be promoted.
As a nation, we need to get our priorities right when it comes to providing incentives or disincentives for businesses: we need to support small, local businesses, which have created most new jobs historically; we also need to discourage or ban major corporations from their mergers-and-acquisitions mania, close the tax loopholes, and stop the tax subsidies for them. These steps, enforcing the Sherman Antitrust Act, and moving our personal banking to a local credit union—all are good starts toward keeping our towns from getting eaten up by large, predatory corporations.
*Noreena Hertz notes in The Silent Takeover (London: Heinemann, 2001) that “beneficiaries of Ohio’s ‘corporate welfare’ included Spiegel, Wal-Mart, and Consolidated Stores Corporation, all of which were absolved from property taxes....As one school treasurer put it, ‘Kids get hurt and stock- holders get rich.’”
1. Thom Hartmann, Unequal Protection: How Corporations Became “People”—and How You Can Fight Back, 2nd ed. (San Francisco: Berrett-Koehler, 2010).
2. Mohan Guruswamy, Kamal Sharma, Jeevan Prakash Mohanty, and Thomas J. Korah, “FDI in India’s Retail Sector: More Bad than
208 Rebooting the American Dream Good?” Center for Policy Alternatives, http://indiafdiwatch.org/
4. Christopher Helman, “What the Top U.S. Companies Pay in Taxes: How Can It Be That You Pay More to the IRS Than General Electric?” Forbes, April 1, 2010, http://www.forbes.com/2010/04/01/ ge-exxon-walmart-business-washington-corporate-taxes.html.
5. Hawken and I had this conversation when he was working on his article “Natural Capitalism” for Mother Jones magazine (published in the March/April 1997 issue). The article was later expanded to a book of the same name; see http://www.natcap.org.
6. David Barboza, “Chicago, Offering Big Incentives, Will Be Boeing’s New Home,” New York Times, May 11, 2001, http://www.nytimes .com/2001/05/11/business/chicago-offering-big-incentives-will-be -boeing-s-new-home.html?pagewanted=1.
7. Bob McIntyre, “Bush Policies Drive Surge in Corporate Tax Freeloading: 82 Big U.S. Corporations Paid No Tax in One or More Bush Years,” Citizens for Tax Justice, September 22, 2004, http:// www.ctj.org/corpfed04pr.pdf.
8. Stephen Moore and Dean Stansel, “How Corporate Welfare Won: Clinton and Congress Retreat from Cutting Business Subsidies,” Cato Policy Analysis No. 254, May 15, 1996, http://www.cato.org/ pubs/pas/pa-254.html.
9. David C. Korten, The Post-corporate World (San Francisco: Berrett- Koehler, 1999).
10. Borden Chemicals, noted by Noreena Hertz, PhD, in The Silent Takeover (London: Heinemann, 2001).
11. New York Times, September 21, 1995.
12. Donald L. Barlett and James B. Steele, “Corporate Welfare,” Time, November 9, 1998, http://www.time.com/time/magazine/article/ 0,9171,989508,00.html.
16. Charles V. Bagli, “Companies Get Second Helping of Tax Breaks,” New York Times, October 17, 1997, http://www.nytimes.com/1997/ 10/17/nyregion/companies-get-second-helping-of-tax-breaks .html?pagewanted=1.
20. See note 16 above.
Thom Hartmann is a New York Times bestselling Project Censored Award winning author and host of a nationally syndicated progressive radio talk show. You can learn more about Thom Hartmann at his website and find out what stations broadcast his program. He is also now has a daily television program at RT Network. You can also listen to Thom over the Internet.
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