The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (43 page)

The Medicare tax database is valuable because it is an absolute flat tax, with no exemptions or exclusions, on every dollar of compensation paid to workers. When executives exercise stock options, when bosses pay out bonuses and when teenagers at the fast-food counter get paid, their remuneration, to the penny, goes into this database (unlike statistics from the IRS, the Census Bureau, the Bureau of Labor Statistics and other government agencies which, though they routinely issue income reports, base their numbers on surveys and statistical samples).

In 2009 total wages came to $6 trillion. Or, to be precise, $6,009,831,055,912.11.

Big as that number was, it remained virtually unchanged from 2000 and was smaller than in 2007 and 2008 when figures from those years are adjusted for inflation. Indeed, in cents compared to each dollar earned in 2007, workers in 2010 made less than ninety-five cents. Total income, median income and average income were all down in 2010 compared to 2008—and
were hardly changed from 2000. Together, these figures show how much the rigged economy, and the global economic downturn that it helped cause, damaged overall growth and spread misery widely.

Among all the big government agencies that gather and analyze data on people’s earnings, the Social Security Administration does something unique and valuable. It breaks pay down into narrow categories, with a top category of $50 million or more. Something very significant is taking place at that rarified level, which relates to how the price gouging described in the previous chapters is damaging our economy.

Until 1994, the top income category in the Social Security Administration database was $5 million of salary and bonuses. That year two new categories were added. The new top category was $20 million and higher. Just twenty-five Americans held jobs in that top category. Their average pay was more than $45 million in 2010 dollars.

In 1997 two more high-pay categories were added. The top one measured jobs that paid $50 million or more. There were thirteen of these extremely high-paying jobs in 1997. Those twenty-five super highly paid workers in 1994 had grown in just three years to 116, of whom thirteen made more than $50 million.

In 2007, the last peak year for the American economy, there were 151 Americans whose salary and bonuses totaled more than $50 million. Their average pay was $94 million. In the recession year of 2008 the number of very top jobs fell back slightly to 131, with average pay slipping to $91.2 million. In 2009, the worst year for workers since the Great Depression, just 72 workers were paid more than $50 million. They averaged $84.1 million. In 2010 this rose to 81 workers paid an average of $79.6 million.

We do not know who these highly paid workers were. We do know that very few of them were top executives at publicly traded companies. The highest paid CEO in 2009 was Larry Ellison of Oracle, who made $84.5 million. The second highest CEO made $34 million, not enough to make the top pay category tracked by Social Security.

We also know they were not hedge fund managers. Why? Because hedge fund managers get to call their share of profits “carried interest,” which is not subject to the Medicare tax (recall that Congress lets hedge fund managers defer paying their taxes for years or decades, and when they finally do pay, the rate is just 15 percent).

The seventy-two may include some Hollywood producers, assuming they, for some reason, had their share of blockbuster movies classified as ordinary income. It may include some executives who built up huge, and untaxed, deferral accounts that they cashed in. But most likely many of these seventy-two highly paid workers are Wall Street traders, whose bonuses are taxed as ordinary compensation. Those bonuses were made possible because taxpayers assumed the massive losses from Wall Street’s bad bets.

What this data shows is that, over a long period of time, the vast majority of Americans have seen little or no improvement in their wages. Millions of people have seen their real total compensation decline as employers have raised wages just enough to keep pace with inflation, while eliminating pension plans, eliminating or reducing contributions to 401(k) savings plans, as well as requiring that workers pay a growing share of health-insurance costs out of their pockets.

So what should we do about all of this?

25.
We can reverse
the pernicious public policies that are making so many worse off by taking from the many to enrich the few. If we make good choices and make our voices heard, we can get back on the path to a productive and prosperous society. What follows are solutions for specific industries, followed by an overall recommendation to get America back on the path to widespread prosperity.

COMPETITION

Nothing is more hated by big business than competition. In a competitive market with many suppliers of a good or service, the consumer shops for the best deal. That drives prices down. This pressure on prices was the great insight of Adam Smith in his 1776 book, still in print after 235 years,
An Inquiry into the Nature and Causes of the Wealth of Nations
.

Smith saw that if producers seeking profits compete against one another in a market peopled with informed consumers, the general economic improvement is akin to an invisible hand guiding the market. But the key here is competition. Simply calling a market “free” does not produce any gains; when we let one firm or a few firms capture the market, they can compete to raise prices rather than lower them.

As we saw with the telecommunications industry in Glasgow, Kentucky, and Scottsboro, Alabama, predatory pricing to keep competition at bay is all around us, but the reality has been turned on its head by big business misapplying the theory of contestable markets. The railroad industry, too, lacks competition and is today as highly concentrated as when our government first regulated corporate prices in 1887 by creating the Interstate Commerce Commission to deal with abusive railroad industry practices.

ACTION:
We need to challenge the use of the term “free” markets, which has a technical meaning for economists, and replace it with support for
competitive
markets.

UTILITIES

If ever there was an industry where organized and concentrated action can bring reform it is in the regulated monopolies—utilities, railroads and pipelines. These enterprises cannot get up and leave for cheap labor in China. They have no choice but to invest and operate where they provide service. The problem is to get them to be servants of the economy, not pillagers of it.

State legislatures have repeatedly cut funding for regulatory commissions and, notably in California, have appointed industry-friendly commissioners. Meanwhile, funding for the Federal Energy Regulatory Commission grows because fees from the industry finance the commission and FERC has proven eager to enable price gouging and impose fake taxes through rigged proceedings. The process has become heavily weighted toward the utilities.

Simple and obvious reforms would improve the economy by restoring the crucial concept of just and reasonable prices, while also ensuring that assets are not sucked out of monopolies by holding companies. Reforms would have the virtue of ending the tax games that force you to pay taxes that never get to the government, as shown in earlier chapters concerning electric and pipeline industries (see
pages 77
and
90
), which amounts to nothing more than legalized theft.

Reform, needless to say, is conceptually easy but politically difficult. But these are problems where the interests of consumers, small business and even big business align. If these groups can work cooperatively on utility regulation, all will benefit.

Action One

Congress should require that all legal monopolies be stand-alone companies with no holding company as a parent. That was a lesson we learned back in the 1930s but conveniently forgot.

Eliminating holding-company structures would end many of the financial games that benefit Wall Street and its clients. No longer would the reliability of your electric service depend on decisions made in Bilbao or London or even Omaha. Instead, local management would mean a vested interest in local concerns. Having utility company directors whose lives and financial interests are the same as those of the local inhabitants will make them much more likely to be concerned about the reliability and quality of service today, as well as a decade or three in the future.

Many of the problems identified in this book concern legal monopolies controlled by holding companies where no market exists to discipline economic predators. When regulators reward predators, as both the FERC and the California commission have done, the economic damage is like a chronic debilitating illness that makes the host lethargic.

Holding companies are highly effective tools to shift costs and risks on to captive customers. The extensive expansion of the holding company structure in the past three decades has brought us overpriced electricity, natural gas, telecommunications, water and bulk rail freight. Electricity has become less reliable even though we live in an era when computers and extraordinarily sensitive manufacturing processes and medical procedures demand significant improvements in the reliability and quality of electric power. The pipeline industry operates in ways that put your life unnecessarily at risk, and safety problems are also built into the ways we currently regulate electric and gas utilities and railroads.

Almost eight decades ago, James C. Bonbright and Gardiner C. Means published what has become the classic text on how holding companies thwart effective price regulation, enabling abuses of railroad and utility customers. Bonbright and Means showed how holding companies could charge subsidiaries excessive fees and overcharge for services and equipment they provide the operating utilities, all the while underpaying for anything they get from the utilities. Their mundanely titled book,
The Holding Company: Its Public Significance and Its Regulation
, was an instruction manual for smart regulation to control economic predators—but it was also a field guide for executives and Wall Street on how to manipulate the system to earn unwarranted profits by foiling regulation.
Unfortunately, utility executives have read the fine print more closely than regulators.

However, by returning to the stand-alone utility model, energy suppliers and users in each market would share an interest in the other’s prosperity. The utility needs a healthy local economy to sell into, at prices that sustain maintenance of existing gear and investment in new equipment; the local business and residential customers need reliable utilities that charge fair prices and plan for needs decades into the future. The holding company structure with its distant owners destroys this mutually beneficial relationship.

Action Two

Congress and each state should exempt rate-regulated monopolies from corporate income taxes.

Exempting legal monopolies from the corporate income tax will eliminate paperwork and accounting expense for the utilities, thereby improving efficiency. It will also simplify regulatory proceedings.

Remember, Congress requires companies to keep two sets of books, one for investors (and regulators) and another for the Internal Revenue Service. This reform would get utilities to use a single set of books.

As we have seen, the taxes embedded in corporate utility rates add to customer costs, but often never reach government coffers. And when fake taxes are included in rates, as with master limited partnership pipelines, tax rules are used to conceal unjust and unreasonable rates that let some investors pocket $1.75 for each dollar they are entitled to.

Eliminating the corporate income tax on utilities will end the blatant, legalized theft of billions of dollars from customers of PSEG and other electric utilities that sold their power plants (sometimes to sister companies), pocketed the taxes that had been collected from customers but not yet turned over to government, and then got a second helping of tax dollars that may also have never gotten to government.

A campaign to exempt rate-regulated monopolies from the corporate income tax will force one of two outcomes, either of which is a good deal for customers. It will either end the tax or wake people up to what has become a backdoor way to earn unjust and unreasonable profits.

While eliminating the corporate income tax for legal monopolies would save them time and effort, we must expect them to resist the idea. They will say it is unfair to others and that it will distort investment decisions. If they do fight it, the ensuing discussion will create a terrific teachable moment
through which to educate the public about how our tax system takes money from the many to concentrate it in the hands of the few through dishonest policies that big business has sold to government. Imagine those politicians who rail against taxes trying to justify keeping the corporate income tax on monopolies when customers are asking for an exemption. The lesson? Taxes should finance government, not inflate corporate profits.