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Sunday, February 17, 2013

What Is Behind Corporate Tax Loopholes?

A company in the U.S. wants a tax loophole to apply. Starbucks, for example, wanted to be able to use the manufacturing deduction by stretching manufacturing to include the roasting of coffee beans. So in 2004 the company hired Michael Evans, a lobbyist at K&L Gates who had just a year before worked as a top lawyer on the U.S. Senate Finance Committee, which writes tax law. Evans was able to urge his former colleagues in the Senate to expand the definition of manufacturing to include roasting in a clause added to a 243-page tax bill called the American Jobs Creation Act.  As you might imagine, Starbucks was not the only company to get a tax break written into that law.
By 2013, the manufacturing deduction had saved Starbucks $88 million that it would otherwise have had to pay in corporate income tax. In 2012, corporate tax breaks and loopholes added $150 billion in lost revenue for the federal government, hence increasing the deficit by that amount.  The provisions are typically not ended, for the lobbyists hired to insert them could simply be hired again to protect them.
To main lessons can be gleamed from this case. First, the damage done to the U.S. debt by corporate loopholes is significant. While dwarfed by having financed the Iraq and Afghanistan wars and the Bush tax cuts on credit ($2.4 trillion added to the debt altogether), $150 billion added on due to corporate tax benefits is nonetheless significant. Moreover, the “insider influence” itself violates the principle of fairness, at least in a democracy, and thus is unethical politically.
Second, the nexus enabling the efficacious lobbying on behalf of corporations seems to be the contacts that lobbyists have in government by virtue of having worked there themselves not long before lobbying. A law prohibiting former legislators and Congressional staffers from lobbying for at least ten years might make a dent in the inordinate insider influence of corporations in Congress.

To be sure, it could be maintained that it would be more difficult to get quality people to work as staffers on the Hill (or in regulatory agencies). However, with a sustained unemployment rate and people attracted to government without any intention of “cashing it in” by lobbying , the fear is likely spurious.  

A more serious objection is the point that power will inevitably find its maker. That is to say, members of Congress will get to the corporate cash one way or another. Looked at from the other direction, power flows down hill. Like water, pent-up power naturally seeks its way around an obstruction with the objective of securing a use. According to Nietzsche, the will to power seeks the pleasure in overcoming an obstacle. Even the eventual exercise of power thus has to do with an obstacle. The difference is that power turns that obstacle to its way. There is pleasure in that, according to Nietzsche.

Therefore, even though more daylight is needed between those in government and corporations, it is in the nature of power to work around obstacles that cannot be overcome in order to find others that can be turned around. Whether capturing members of Congress or entire regulatory agencies, corporate public affairs divisions are oriented to just that. Putting greater social distance between having been a staffer in Congress or even an elected representative or senator and lobbying for corporations would likely only make it marginally more difficult for corporate influence to find its way into the halls of power. The question is whether circumventing the water only slightly is worth the time and energy of passing the law. In the end, the threat to the democracy is the inordinate power, and thus wealth, of large corporations. Besides being at odds with Adam Smith's notion of perfect competition, a capitalist system populated with huge concentrations of private wealth is a threat to democracy.  


Ben Hallman and Chris Kirkham, “As Obama Confronts Corporate Tax Reform, Past Lessons Suggest Lobbyists Will Fight For Loopholes,” The Huffington Post, February 15, 2013.