Corporate Tax Rates

Just watched a rerun of an interview with Paul Krugman on Up with Chris Hayes. One of the questions discussed was why corporate compensation has gone up while labor share has shrunk. Krugman says he doesn’t know why. It reminded me of the most powerful arguments of Noam Chomsky and what we do know about corporate bonus programs. The latter first.
It is well known that the incentive programs set in place for the last say fifty years have never quite given rise to the positive outcomes desired. They cost more and get less. Thus they are constantly changing in search of their holy grail. We know that employees game the system. This week teachers and administrators were arrested in a testing scandal–it isn’t just corporations. Is everyone conspiring? Certainly we live in a culture of cheating.
This brings us to Chomsky. His view of elite power is based not on overt conspiracy, despite the relatively small group involved. It is driven by the conspiracy of interests held by this group. Add to this the Bush tax cuts and we have a perfect storm of greed and opportunity.
With taxes low on income for these highly compensated employees, it became profitable to take that as actual income. Previously high taxes (actually only higher taxes) discouraged them from using this mode: the government got too much of “their” money! Other forms like stock options had been used to sidestep tax liability. The main problem has been that this replacement did not shrink with the now increased personal pay.
Thus overall compensation exploded. With the explosion of corporate profits–I believe largely from lowered labor pay coupled with increased labor productivity–it was hard to see why this shouldn’t happen. Indeed now we have further cries for more corporate tax cuts. This is both insane and further evidence of how malformed our current view of capitalism has become.
Record corporate profits in the midst of economic problems should indicate a problem, just as Bernie Madoff’s returns on investment should have warned everyone. There always was a notion of making too much money, tied to the notion that you cannot beat the market. But few actually believe in these types of markets any more. Keep taxes high on high incomes. The progressive nature of taxes is an ethical public policy. It will soon be time to raise taxes on the middle class–if it still exists.

What is Capitalism?

It is interesting that the definition of capitalism owes more to Marx than Smith.  Private ownership of the means of production comes of course from Marx.  Recent obsessions with markets is perhaps an attempt to return to Smith, though in practice Smith favored more government action (protectionism) than might be comfortable for today’s conservatives to accept.  On the face of it, there seems to be any number of quite different business approaches that all are being claimed as capitalism.  Let’s explore some of them.

Mercantilism represents perhaps the earliest form, and elements of this system still exist.  Most nations pay attention to money supply and balance of trades, though imperialism has morphed somewhat into less political and more economic forms—a distinction lost perhaps on the exploited areas.

Laissez-faire, free-market, capitalism is most closely associated with Smith and largely accepted as what we practice in the United States, though strictly speaking it isn’t even close to today’s  capitalism.

Social-market capitalism is largely associated with the Nordic and European countries.  As such it is bad, very, very bad; unless you live there.

State capitalism is the bastard child that is generally ignored by anyone who likes capitalism, except when it worked for Milton Friedman to use it to impose his economic theories.

Finance capitalism is sometimes invoked to distinguish the strange world of financial alchemists.  It still exists, independent (?) of the other forms.  Recently Matt Taibbi described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”  So presumably this would be vampire squid capitalism.  Enron and Bernie Madoff have shown us that there can be Ponzi capitalism.  Certainly there seems to have a deep misunderstanding of the concept of spreading risk in finance capitalism.  It ought not to mean that everyone ends up with a lot of risk.  Actually it is now argued all capitalism is now finance capitalism—this is probably not a good thing.

Corporate capitalism is what we most often think of and talk about today, but historically this group has been as diverse as the previously types.  Early corporations were chartered by Kings, as today they are by governments. Most early ones were granted monopolies, and later when not explicitly set up as such, they pursued monopoly.  Then we in the U.S. decided that was bad and thus corporate capitalism agreed (under force of law) to only pursue market share.  At some point corporations decided to “influence” the political system that had prevented it from monopoly and we got bribery capitalism.  Recently they have been endowed with personhood and freedom of political speech by The Supreme Court.

A lot of types, but presumably they involve capital (mostly money) and often you will hear about capital flows determined by market forces.  Being who I am, I would prefer markets forces since tend to see multiples when others see unity.  We have a number of combinations of these types of capitalism.  For better or worse, we have them all and quite a bit of things that are not capitalist at all.

I have often wondered why the private vs. public distinction is so absolute an element for many when such clear distinctions have never existed.  (As mentioned earlier the government, whether King, totalitarian or democratic state have each played their role in close coordination with capital.)  I have never understood what kind of market would exclude a party that has always been present.  Of course, governments are never actually excluded as corporations have always simply tried to avoid what they deemed unhelpful, well unprofitable.  But then what exactly does profit mean??????

Externalities 2

Historically, capitalist externalities refer to costs that could not be counted because they were assumed to be minimal and thus ignored. This is similar to what occurs in calculus. In estimating volumes of round objects, the technique creates a situation in which the inaccuracies can be ignored–though present. The problem is economics ignores our new abilities to count and maintains the intent to ignore for less flattering reasons.
Also historically there have been a number of schools of capitalism (more on this later). Today I like to refer to “ideological” capitalism which uses externalities to generate profits by offloading costs to society. Thus where ecological costs were once ignored because it was assumed that nature had the ability to endlessly absorb pollution, we now this is not true but insist corporations simply cannot absorb these costs and be profitable. It is interesting to note this same claim ignores the implications of this claim and also calls for a minimalist government and regulation. This is not the capitalism of Adam Smith.

Externalities

Capitalism uses the concept of externalities to ignore and/or hide the actual costs of any business project.  This posits those costs onto an outside (unstated) agent–usually to be discovered as costs to be born by the rest of the world.  It is time to stop this practice and require actual costs to be accounted for by the people who create them.  Environmental costs, health costs, stolen profits, political costs, job losses:  all are dismissed with impunity.  They are not minimal and thus ought not to be ignored.  They are not actually external to anything but the limited liability of the corporation that creates them.

How many blogs can one person have?

I am starting this blog not because the world is in desperate need of another, but because it may force me to write on this topic.

Some years ago I worked for a convenience store chain.  In the course of my duties there I had occasion to come in contact with the concept of cost accounting.  I was particularly taken with the differences between retail accounting and cost accounting.  I came to greatly respect this latter approach and began to apply its concepts to a great many disparate areas.  This blog will hopefully explain some of that thinking.