Social Security/Medicare vs Corporate Welfare

by Linda Beale

Social Security/Medicare vs Corporate Welfare

The denouement of the fiscal cliff debate behind us (and not, I regret, with the best results–more on that later) we now face the next stage, in which we can expect the right-side extremists to threaten to hold the government hostage unless spending is cut (meaning, to the right-side, spending for people-oriented projects like the safety net but not extending generally to spending on the military or the corporate welfare with which the tax code was reinforced through the fiscal cliff deal that extended or made permanent many of the notorious giveaways from the Bush years) and debt is limited.

All of this will be pushed by those in the “tea party” and Koch-funded right-wing as so-called “fiscal conservatism.”

It isn’t.  The agenda on the right is about as far from fiscal conservatism as anything can be.  The right is quite happy to take a “no tax increases forever” position, at that same time as gleefully opting for more and more expansive defense and defense-related spending.  Similarly, the fiscal cliff deal with its reinforcement of corporate welfare in the extension or making permanent of the Bush year corporate tax giveaways demonstrates that there is hardly a corporate tax expenditure that this gang doesn’t like.  Take two examples:  the R&D credit and the “active financing” exception to Subpart F.

  • The R&D credit allows companies to understate their corporate income by giving a dollar-for-dollar credit for R&D expenditures.  The purported objective is to encourage more R&D.  But this credit was examined closely ages ago and came up short–it really is just a subsidy to corporations (like Big Pharm) that do considerable research.  And those companies happen to be companies that HAVE to do considerable research to stay competitive.  The subsidy just comes along for the ride; it doesn’t drive the research.  This is evidenced by the fact that several times the temporary subsidy was extended after the year of the research had closed–there is no way that a retroactive subsidy can incentivize additional research in a past year!
  • The “active financing” exception lets banks forego immediate Subpart F taxation on their international interest and dividend income, because, they say, that’s their “active” business.  But then of course they are encouraged to locate as much passive income in those active financing subsidiaries as possible, to be able to exempt as much as possible from Subpart F immediate taxation.  It is just one of the many crutches we give multinational banks, yet they continue to be a genuine risk for the US economy and a genuine risk for again requiring US bailouts.

Other corporate welfare examples include everything from the continuing subsidy (after more than a 100 years of profits) to Big Oil and other natural resource extraction, to Big Pharm and Big IT from inadequate rules against the so-called sales of critical IT property to offshore affiliates, to companies that set up captive insurance companies, and to companies that use the vastly frontloaded “expensing” of equipment purchases through the accelerated depreciation system and the more recently added separate expensing provisions.  (On the latter:  The benefit of frontloading is considerable deferral of taxes, which means higher profits to the companies and lower revenues to the government.  It might arguably make sense as a temporary stimulus from time to time, but it has been a permanent part of our system now for more than a decade and is not justifiable in that framework.)

So corporate welfare should be what is cut, not Social Security or Medicare benefits, when we start looking at areas where cash is senselessly flowing in ways that don’t further the quality of life of typical Americans.  See Carl Gibson, Cut Corporate Welfare, Not the Safety Net, HuffPost Politics (Jan. 7, 2013). 

As Gibson notes,

In Congress’ latest “fiscal cliff” deal that supposedly had to be passed in order to avoid economic calamity, we spent $30 billion on extending unemployment benefits for a year, and $205 billion in corporate tax breaks, subsidies and excessive tax loopholes. Most of these Christmas gifts for corporate America are benefiting major, multi-billion dollar corporations that haven’t paid a dime of U.S. income taxes in years, like GE and Boeing. In other words, taxpayers spent six times more on giving free money to companies making record profits than we did to making sure the people who were laid off by these corporations can still feed their families. $205 billion in corporate goodies was okay with Speaker Boehner, but $60 billion in Hurricane Sandy relief apparently wasn’t.

And the New York Times today hit on another of the absurd subsidies that crept into our Code in a well-intentioned provision to help small farmers but has resulted in most real estate investors seldom paying taxes on their gains and many corporations using the device to avoid millions in taxes annually.  That’s the “section 1031” like-kind exchange.  There’s really no normative policy justification for allowing this kind of exchange to avoid taxation of the realized gain whereas other exchanges (non-like-kind) do not.  There is even less justification for the avoidance of taxation for the kinds of intermediary exchanges that have evolved over time, allowing actual sales to occur, so long as the seller ensures that the money is put into an escrow account until it is used to buy “replacement” property.  While it is hard to see any real justification for any of the like-kind exchange provisions, and certainly not for the intermediated sales + replacement regimes, it is especially problematic when the intermediated regimes become subject to abuse–where intermediaries allow the exchanging taxpayer full access to the cash, e.g., as collateral for loans, etc. during the period when no use is permitted.  The New York Times covered that issue today.  See David Kocieniewski, Major Companies Push the Limits of a Tax Break, New York Times (Jan. 6, 2013).

The federal government now allows more than $1.1 trillion a year in this and other tax expenditures. Each of those incentives — which include hundreds of exemptions, exclusions, deferrals and preferential rates — either adds to the budget deficit or shifts the cost of government to other taxpayers.
Some are narrowly targeted and offer aid to specific industries like Nascar owners, asparagus farmers, oil companies, yacht makers or solar panel producers. Others, like accelerated depreciation or the tax code’s preference for debt financing over equity, provide tax benefits for wide swaths of businesses.
“Tax expenditures are very similar to an entitlement program, so they’re easy to start,” said George K. Yin, former chief of staff of the Congressional Joint Committee on Taxation, and now a professor at the University of Virginia School of Law. “But once a tax break gets started, people think they’re entitled to it, so they are very difficult to end.”

Professor Yin has it exactly right–those tax breaks are very “easy to start” and very lucrative for corporations.  Once they get them, they will say (as the real estate people do here) that jobs depend on keeping them going.  That is usually not true, or much less of an impact than claimed.  But Congress caves easily on those items, and we go on with a giveaway code for Big Business.

Cross posted with ataxingmatter