Special “People”, Special Countries, Special States, and Special Schools

This is a crosspost from the “Dollars & Sense Real World Economics” Blog, authored by CPEG’s Ron Baiman.

It’s been interesting following the recent press on corporate tax avoidance, and in Chicago, the ignominious public school closings. I thought it would be useful to take a minute to draw out the linkages.

The biggest revelation from Apple’s tax avoidance strategy has been it’s scheme to set up “corporate persons” who don’t reside anywhere.1 Apple set up an Irish subsidiary incorporated in Ireland (and therefore not liable for U.S. corporate taxes) but managed from California (and therefore not subject under Irish law to Irish taxation) that has rights to the income from all of the companies trademarks and patents in Asia, Africa, and Europe. Presto! This special corporate person is not legally liable for any taxes – a step up from the usual multinational “transfer pricing” and “off-shore” tax haven strategies where the poor “corporate person” still has to at least have a place of residence!

But it turns out that, toward the U.S. at least, we should be (as most of the U.S. Senate was) thankful to Apple as it is more generous than many of it’s rivals, like Microsoft, as it “…appears to be almost conservative in its approach of not trying to move any portion of profits on sales to U.S. customers into its overseas structure as some other groups of done.”2 Thank you, thank you, Apple! The funny thing is that most of us “real people” don’t have this choice to decide where “a spirit of generosity” (or political astuteness) will strike us and induce us to actually pay some taxes.

I say “most” of us “real people” as last year it became apparent that some “real people” (or maybe not so “real” people – like Mitt Romney – remember him? ) have found a way to turn all of their often obscene compensation into earnings for their special corporate “person” who can pay an extra low (15%) “capital gains” tax on this so-called “carried interest” instead subjecting it to a real “biological person’s” income tax rates.3 So these real people have found a way to turn themselves (or their tax liability anyway) into that of a corporate “person.”

Speaking of those special “people,” I learned in intro economics that one of the main advantages of a “corporate person” is that it’s “owners” i.e investors (funny I thought that we’d at least gone beyond outright slavery – that is one person “owning” another person!) were not “personally liable” if the “corporate person” went bankrupt – only the investments in the corporations were liable. In return for this and other special privileges granted to “corporate persons” but not regular persons, these legal constructions had to pay something back to the community in taxes and fees, which through the accumulation of decades of loopholes has declined from about 26% of federal revenue in 1950 to less than 10% in 2013. Instead of corporate “people,” real people have had to pay these taxes and in the most regressive way, as the federal revenue share of the payroll tax has correspondingly increased from 11% to 35% today.4

But it turns out that corporate “persons” have not just figured out a way to “live” without legally residing anywhere – they can also be “corporations” without actually being “corporations” – by becoming so-called “pass through corporations” – “sort-of corporations” that enjoy many of the benefits of the “real” corporations including “increased protection against personal liability for their businesses debts” without having to pay corporate income tax.5 Wow! These very special corporate “persons” can be “persons” when it come to privileges but “non-persons” when it comes to taxes. “Pass-through corporate ghosts” that, I imagine, reside in the same “never land” with the real corporate “people” that live no where. It turns out that beginning in the 1980s (the time when so many other glorious Neo-Liberal economic “reforms” originated) when about one quarter of net business income came from “pass-throughs,” these “ghost corporate persons” now dominate the “corporate” landscape making up 32 million of the 34 million business tax returns filed in 2009 and 70% of net business income. Many of these are “small businesses” but increasingly they are large companies as well.

Anyone up for a new religion? For a large fee the new religion would be able to transmigrate your soul from physical being to corporate “being” to an even more ephemeral “special” corporate beings with no-residence, and back again – if you so desired to a “sort-of corporate being” that is not (for legal tax purposes) a “corporate person” at all – but presto! (for tax purposes) – a “real” person again!

OK – what about those “special” countries? These are the “shirkers,” “scabs,” “free-loaders,” “right-to-workers,” or what-ever you want to call them. Countries that undermine collective decisions by exempting themselves from the rules, or standards, set by the larger community of nations. By doing this they are effectively robbing everyone else of billions in tax revenues (and investment, employment and income). The Congressional Research Service found in 2008, for example, that the U.S. corporations operating in the top five tax havens (the Netherlands, Ireland, Bermuda, Switzerland, and Luxemburg) supposedly generated 43% of their foreign profits in these tiny countries even though they had only 4% of their foreign employees and 7 percent of their foreign investment located in them.6

Moreover this is not just an international phenomenon. It also happens right here in the good old USA as part of “competition” between states. Seven states: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, for example have no personal income tax. When I was analyzing the Illinois tax system I found that the highest income earners (with over a million dollars in federal AGI) had an effective Illinois tax rate that was about half of that of average upper income filers.7 It turns out that a key reason for this is that many of these filers are “non-resident” and therefore can be taxed only on income that originates in Illinois. By buying a condo in Florida for example and claiming residency there – presto! – no taxes on any income (especially property and financial) that is sourced from outside the state! Conveniently, Florida also offers “homestead protection” from creditors, so if you sink your ill-gotten millions into a mansion on the beach no one can take it away from you!8 Also, conveniently, many of these filers are S-Corps (Illinois’ version of “pass-through” corporations). Oh, and five of the seven including Florida (all except Alaska and Washington) are “Right to Work for Less” states as well! I guess it’s lucky that they don’t uphold the “right” of a “real person” to own a “real person slave”! Whops, I forgot for a moment! We fought a civil war to abolish at least this kind of “special-ness”!9

And what about those “special schools”? Most of you outside of Chicago have probably not heard of our Mayor’s new scheme to close scores of public schools (claiming lack of revenue) and at the same time come up with $ 55 million in public revenue to subsidize a sports arena for a private Catholic College with a less-than-stellar basketball team.10 Many of us are quite convinced that this is part of an ongoing effort to penalize the Chicago Teacher’s Union for decisively clobbering the Mayor and his Education Czar during last year’s strike and to continue the ongoing effort by, Rahm, Obama – through U.S. Education Secretary (and former Daley School Board Chief) Arne Duncan, and Penny Priztker and the “Stand for Children” crowd, to undermine public education in favor of a mostly non-union private “charter school” system. It turns out that Rahm’s children (and those of Obama, and probably Duncan and Pritzker if they have any – Duncan’s a Lab School graduate) go to private schools with small class sizes and strong teacher’s unions (at least in Rahm’s case) with generous contracts and clauses that give the teachers a large role in school administration – the opposite of the “Charter School” model.11 These schools also “cream skim” students from the highest income and most involved parents, schools that can also exclude the most-disruptive and learning challenged students. In other words, “special schools” like “special corporations,” “special states,” and “special countries” that undermine collective standards and gain special benefits by offsetting social burdens on everyone else.

I realize that none of this is “rocket science” – but it seems important to point out these connections!


1. http://www.alperlaw.com/asset-protection/florida-asset-protection/homestead-protection/.
2. http://www.nytimes.com/2013/05/24/business/making-companies-pay-taxes-the-mccain-way.html?pagewanted=all.
3. Op. cit.
4. http://www.huffingtonpost.com/2013/05/22/chart-shows-corp-taxes-grossly-unfair_n_3321737.html.
5. http://www.nytimes.com/2013/05/24/business/in-tax-overhaul-debate-its-large-vs-small-companies.html?pagewanted=all.
6. http://opinionator.blogs.nytimes.com/2013/05/23/the-corporate-tax-dodge/.
7. http://www.ctbaonline.org/New_Folder/Budget,%20Tax%20and%20Revenue/CTBA%20Graduated%20Income%20Tax%20FINAL%20Report%20Feb%202012.pdf.
8. http://www.alperlaw.com/asset-protection/florida-asset-protection/homestead-protection/.
9. http://www.cpegonline.org/2012/12/18/cpegs-ron-baiman-forget-about-right-to-work-without-paying-we-need-right-to-get-paid-without-working-laws/.
10. http://www.chicagoreader.com/chicago/mayor-spends-tax-dollars-on-sports-arena/Content?oid=9769374.
11. http://www.chicagoreader.com/chicago/uofc-university-lab-schools-respect-teachers-ucls/Content?oid=9579479.

Image: FreeDigitalPhotos.net

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