Even with Tax Day in the rear-view mirror, many are still agog that General Electric is paying hardly any corporate income taxes, despite reporting a profit of $14.2 billion. As though GE hit the jackpot, many politicians claim to be shocked, shocked that gambling is going on here!
Lest you think Corporate America is at it again, sticking it to the little guy, please Think Again. While it's cathartic to rail against multi-nationals that legally finagle lower tax burdens, doing so misses the real culprits. If you want to censure someone for shipping jobs and capital overseas, blame our elected leaders who made the rules.
The problem isn't that companies exercise their fiduciary duty to maximize shareholder profits through creative tax avoidance. That's the symptom. The cause is the political system that incentivizes GE to conduct its business in a way that is detrimental. One should read the story of GE as a cautionary tale of perverse incentives and adverse consequences caused by intrusive government.
Whenever government intervenes in the economy, it rarely considers the law of unintended consequences, which warns that many of our problems derive from solutions to other problems we face. Well-intended policies can hurt those they were designed to help. Trade protectionism increases prices and weakens economic growth; welfare provokes dependency; and policies that deem banks “too big to fail” lead to moral hazards, and more bail-outs.
So, considering that U.S. corporate tax rates are among the highest in the world, it shouldn't surprise when U.S. corporations move operations, jobs and profits to countries with lower tax rates. Since 2002, GE eliminated 20 percent of its U.S. workforce while increasing accumulated off-shore profits from $15 billion to $92 billion.
California, previously a bastion of entrepreneurialism, opportunity and prosperity, is suffering because of high state tax rates, onerous regulations and adverse labor arrangements. According to Chief Executive Magazine, California is the worst state in America for job and business growth, which is why its unemployment rate is one-third higher than the national average as companies abandon California at a rate of 4.7 per week.
But the biggest reason for GE's negligible income tax bill is its “striking ability to lobby for, win and take advantage of tax breaks,” as noted by The New York Times. Last year alone, GE spent $39 million (that's $73,000 for each U.S. representative and senator) lobbying Congress for billions in tax breaks.
It's “crony capitalism,” not a free market, when government favors the politically connected — whether big business or big labor. This isn't the limited government our Founders crafted to secure our inalienable rights. They purposefully circumscribed (and enumerated) the powers and authority of the federal government in order to reflect the will of the people, not powerful elites. We severed ties with that other type of government on July 4, 1776.
Our Founders would be distressed today, for when our government tinkers, or worse, commands the free market, it creates dangerous conflicts of interest and moral hazards — Petri dishes for adverse consequences. Why did Wall Street banks make and sell synthetic sub-prime loans that ultimately helped precipitate the financial crisis? Because federal housing policies and government-sponsored entities like Fannie Mae and Freddie Mac spawned a seemingly profitable market in loans to people with bad credit.
Though increasing home ownership was a worthy goal, our elected leaders ignored the risks (and their duties) in order to cater to the housing and finance lobbies. Crony capitalism jeopardizes our economic futures because elected officials are motivated to govern in a way that is best for those who got them elected. This unholy alliance between politicians and their patrons undermines everyone's economic security because today's winners can be tomorrow's losers, depending on the political favors due.
Al Gore admirably conceded conflicts of interest when he announced he no longer supported corn-ethanol saying, “I had a certain fondness for the farmers in the state of Iowa because I was about to run for president.” If only elected leaders would abandon crony capitalism, it would bolster the free-enterprise system and the common good.
But first we need to abandon our unrealistic expectations of government. Next time you hear a politician exclaim, “Vote for us for free ice cream,” I hope you'll Think Again. Assume the ice cream has never been free, has actually cost us a fortune, and eating it in excess has caused our dangerously unhealthy state.
If we stop expecting government to solve all problems and meet our every need, political incentives will change. Then, not only will government serve us better, our democracy and economy will be better served.