The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (40 page)

Here is how it works. A company sets up a subsidiary in a tax-free jurisdiction, nothing more than a corporate shell in, say, the Cayman Islands for a multinational or in Delaware for a domestic company. This
shell then owns the parent company’s patents, copyrights, brand names, logos and other intellectual property. The shell company charges royalties for the use of the intellectual property it owns. Those royalties are tax-deductible expenses at one end and untaxed profits at the other.

Another shell company acts as an internal bank. Each day all the revenue taken in at stores or factories is paid to the shell company, which then lends back whatever cash is needed at a stiff interest rate. The factory or store, burdened with debt, earns little or no profit for tax purposes, while the profits accumulate in a different jurisdiction, where they may be lightly taxed or not taxed at all.

Then there are excise and property taxes. State economic development agencies, together with local governments, routinely wipe out these levies. In Delaware, companies can get a refund on half their utility taxes. Other states give companies “green” tax credits for using renewable energy or building in areas once abandoned because of toxic spills. In many states, companies can get refunds on any sales or excise taxes they paid.

Donald Trump began his career in the 1970s with a deal to rebuild the rundown Commodore Hotel over Grand Central Station in New York, remaking it into a Grand Hyatt. He got a twenty-year property tax abatement and said his only mistake was not asking for forty. That seemed preposterous to some at the time. Now it seems prescient.

Deals to wipe out all property taxes for half a century are now common—not for your home, of course, but for property owned by big companies. Verizon, the biggest company in the immensely profitable telecommunications oligopoly, made such a deal in Lockport, New York. The deal was worth $611 million, a tax giveback in return for about 200 jobs. That’s $3 million per job. Invest that amount at 5 percent and you get $150,000 annually. The Verizon jobs were going to pay at most $85,000, with many under $50,000. Yahoo made a similar deal in the same town for 125 jobs, but its subsidy was only $2.1 million per job. Still, those jobs were also worth less than the interest on the subsidy.

Then Verizon walked away from the $611 million subsidy. Why? It got a better deal elsewhere.

So many states have tax credits and giveaways that chronicling them supports a publication called
Tax Incentives Alert
that reports every bit of the fine print, together with articles critical of any reductions in these gifts, showing an especially vigorous entitlement philosophy. It provides real and useful news for those who make money off taxes, not those who pay taxes. The monthly publication costs $517 a year for both print and electronic versions, but you can save $40 by taking one or the other.

Even the myriad abatements, credits and outright gifts detailed in
Tax Incentives Alert
are not always enough to wipe out taxable profits at prosperous firms. Luckily for these companies, the politicians they help keep in office have another technique to help corporations escape taxation: laying off state tax auditors. In many states, notably South Carolina and Wisconsin, governors slashed the number of corporate tax auditors, claiming the state could no longer afford them. It is a preposterous argument. These auditors routinely bring in many times their salaries, which would seem to argue for keeping them working.

Firing auditors makes as much sense as a hospital firing doctors; in a real sense, doctors are the source of a hospital’s patients and, like auditors, both amount to a sales force. But when politicians fire auditors, plenty of people cheer because their hatred of taxes or government overwhelms logic and reason. How many politicians have you heard saying we need more tax auditors? Would that change if we called them what they are—financial detectives?

At the federal level, the highest paid IRS corporate auditors, with years of experience and advanced degrees, make less than $75 an hour in pay and benefits. According to IRS data analyzed by the Transactional Records Access Clearinghouse at Syracuse University, each hour spent auditing the biggest companies produced an average of more than $9,300 of taxes owed. So firing one of these auditors saves taxpayers less than $150,000 annually while costing taxpayers more than $19 million annually in forgone tax revenue.

Once state politicians have enacted laws reducing or even wiping out income, sales, excise, utility, fuel and other miscellaneous taxes, the demands for more of the same continue. Remember the corporation is, by nature, amoral, immortal and entirely money motivated; that means the corporation is so constituted as to do anything and everything lawful to get more money. Pocketing tax dollars is an easy source of profits.

“Profits” is the right word here because no product or service is produced in return for these payments. And the companies bear no expense that they would not face without the giveaways. Taxes siphoned from workers drop right to the bottom line. Some consultants, according to
Tax Incentives Alert
, charge companies 30 percent of the take to shepherd tax giveaways through the process, presumably on small-bore deals. But on huge multimillion-dollar deals like the ones in Illinois, the rules are not that complicated and each of the companies already has experts on staff to fill out the relatively minimal paperwork.

These laws were passed with so little attention, some of them going
back two decades, that I was unaware of them until the summer of 2011. David Brunori, a prominent authority on state taxes as the executive editor of the weekly state, federal and international
Tax Notes
magazines, was also in the dark. So were several tax law and accounting professors I contacted. The story was not entirely untold, however. Once I knew about these diversions I started searching the news clips. I found little items here and there, often on the inside back pages or, if prominently played, topped by vague and celebratory headlines along the lines of “Jobs Saved Thanks to State Senator So-and-So.” D-list celebrities get more coverage with more telling details.

Now the essential underlying question here is:
How probable was it in the first place that these companies would close up shop and move across state lines?
Under Illinois Public Act 97-2, the justification for such tax deals is a “credible” threat that a company will leave the state. But would these companies really go, abandoning their existing investment and disrupting their operations? And furthermore, does it make sense to institutionalize threats to leave a state as the legal basis for getting tax dollars?

Motorola has three thousand highly paid workers around Schaumburg, a quick drive from the cultural amenities of Chicago. Their skills are not easily replaced. It is unlikely many of them are eager to give up their suburban enclave with easy access to museums, theater and big-time sports teams to live out their lives in, say, rural Iowa or Alabama. Moving them, especially if the company offered to pay their entire household moving costs, would impose huge costs on the company, as well as disruptions to its business. By staying put not only are these costs and disruptions avoided, but, when the current deal ends in 2021, the company can renew the flow of tax dollars by threatening—in a “credible” way, of course—to move its operations to another state.

The fine print protects.

23.
By now your
blood may be boiling at the conduct laid bare in these pages, but what you have read is not the half of it. Researching this book for more than four years has opened my eyes to still more abuses beyond the scope of this book, which is the third volume in my series examining the American economy, following
Perfectly Legal
(the subject was taxes) and
Free Lunch
(subsidies).

To despair and think the economy is doomed, however, would be a mistake. We can recover from the trend of permitting big business to use our government as a shield from the economic discipline of competition. We need not sink further into debt as individuals or as a nation. We do not have to fall further behind our competitors, and we do not have to endure a government that is hostile to the well-being of the vast majority. We can end the privatized system of wealth and income redistribution that uses monopolies and oligopolies to take from the many to unjustly enrich the politically connected few. We can reduce cronyism and promote success based on merit.

Yet to return to the best path to prosperity and stability, we must recognize the deep forces at work that brought about our economic woes. The core problem is with oligopolies and monopolies and their excessive prices, lower quality services and reduced innovation. They are the principal means, enabled by government, to redistribute income and wealth from the many to the politically connected few.

Solving problems usually begins with acknowledging them, so let’s look at our most fundamental problem, a school of economic philosophy that has become the accepted truth, or rather dogma that is now treated as truth. Let me explain.

NEOCLASSICAL ECONOMICS, CHICAGO STYLE

The dogma is neoclassical economics, which, despite what we’ve been told, is but one way to view the production and distribution of goods and services (and, as our present circumstances demonstrate, is a highly imperfect way of doing so). The sect that promotes the dominant antitax, “deregulation” worship of this false god is the Chicago School, which assumes good behavior by people and has unquestioned faith in markets to correct themselves without any interference by government.

On paper, everything works out in neoclassical economics. In the real world, however, leaders face a less-than-ideal environment, and they must manage and compete against firms run by charlatans, incompetents and crooks, some of them aided by dishonest accounting schemes.

To the Chicago School, whose adherents seem to sit at every lever of power in Washington, regulation is regarded as a drag on the economy. The damage done by the poseurs and thieves, we are told, are anomalies that should not shape policy. One of the Chicago School’s most influential figures, chief judge Frank Easterbrook of the Seventh Circuit Court of Appeals in Chicago, does not even believe in fraud laws for securities markets. (Tell that to all of the people whose savings were wiped out by the parade of accounting scandals at MCI and Enron and by the derivatives sold on Wall Street, which brought the whole economy down in 2008. The damage from those and other like events may linger for a decade or more.)

The dominant law and economics text on corporate law has for years been one by Easterbrook and Daniel Fischel, who was for a time dean of the University of Chicago’s law school. They assert that “a rule against fraud is not an essential or even necessarily an important ingredient of securities markets.” Their book was written after Professor Fischel worked as a consultant to three of the people at the top of America’s most notorious corporate control frauds, corporations, including Enron; Charles Keating’s corrupt Lincoln savings and loan empire; and Centrust, the crooked Miami banking firm. Fischel also maintains that junk bond financier Michael Milken should not have gone to prison for securities fraud. That these and other cases tested their theories—and found
that they failed catastrophically in the real world—has not changed the opinions of Judge Easterbrook or Fischel. Their destructive ideas should be swept into the dustbin of history.

To assume that bad behavior does not exist or is anomalous is sheer folly. But that assumption underlies neoclassical economics and the push for “deregulation,” or so-called deregulation, since the changes tend toward new rules that wipe out protections for the powerless.

Judge Easterbrook and others who share his view are, ultimately, correct that markets can be self-correcting. But how much damage will it take for self-correction to work? Should the entire economy collapse? Or would smart regulation based on principles that date to the Code of Hammurabi serve us better than the wishful thinking of the likes of Easterbrook and Fischel? Rules have long existed to rein in bad behavior through penalties and other remedies for misconduct. We also need them to promote good conduct, fair play and reasonable pricing while providing penalties and other remedies for misconduct. We don’t need more of the massive securities and accounting frauds that occur when rules are dismantled.

We also need to get two words at the center of our discussion of the corruption in banking and mortgages: control fraud. That is when the CEO is a crook who uses his control of the company to run a fraud to enrich himself. We saw that William Black’s diligent public service helped bring more than a thousand felony convictions of high-level insiders in the savings and loan scandals; in comparison, hardly any bankers have been indicted in the mortgage-market meltdown. That an FBI deputy director parrots the language of the banking industry—
banks are the victims of dishonest customers—
shows how blinded our government is to the obvious criminal activity of bankers, brokers and bailed-out Wall Street traders.

That our government isn’t seeing what’s before its eyes illustrates a much deeper problem about crony capitalism, corruption and Chicago School theories.

We have become a society where commas (it takes three to be a billionaire) count more than character. At the core of this bias in favor of the already rich is something economists call a
Pareto improvement
. It is named for Vilfredo Pareto, a brilliant Italian economist of the nineteenth century. A Pareto improvement means that when the distribution of goods or income changes, at least one person is better off, but no one is worse off.

Taken to its logical conclusion, it would be a Pareto improvement if the American economy doubled and one person enjoyed all of the gains. In fact, something not unlike that has happened in America since
Reagan’s presidency, with the gains going entirely to the top 20 percent and very heavily to the top tenth of one percent.