The First Neoliberal Tax Legislation Was the Revenue Act of 1942.

Understanding how corporations got so many tax loopholes might seem like an impossible task, but really it’s just a matter of checking the public record and the events of history.  Major General Smedley Butler (1881-1940) complained loudly about WWI profits in his pamphlet War Is a Racket.  He wrote that 21,000 new billionaires and millionaires got their wealth from the Great War while ordinary soldiers bought Liberty Bonds to help pay for the huge costs.  And Major General Smedley Butler’s complaints didn’t fall on deaf ears.  Many Americans wanted to reign in war profits during WWII.  During WWII, as most American corporations contributed to the war effort, there was an “excess profits tax” that was meant to reduce war profiteering.

But the Revenue Act of 1942, starting as a tax on corporate profits during the war, changed into a tax haven after the war.  It had carry-forward and carry-back provisions that averaged out losses and gains so that many corporations were able to get huge tax rebates from the U.S. Treasury after WWII.  It allowed corporations to escape taxation for post war profits on the one hand and on the other hand the Revenue Act of 1942 taxed individual Americans more than ever before.  Instead of four million Americans paying income taxes, forty million, or ten times more, paid income taxes after the war.

The Revenue Act of 1942 was also an example of a lengthy and complex law that was so cumbersome that most of the politicians who signed it into existence couldn’t fully understand it.  The bill filled 320 pages.  Lawyers and accountants that were hired by corporations discussed the bill favorably and they wanted those tax savings.  And like other neoliberal tax bills, The Revenue Act of 1942 provided a corporate tax subsidy and taxed the public more heavily in order to compensate.  The bill saved corporations about half the taxes they would have paid and it doubled the taxes on individuals.

The Revenue Act of 1945, a later iteration, cancelled the excess profits tax but extended the carry-back tax provision for another year.  It turned out that “The carryback of net operating losses continued indefinitely”.  There was a 15% reduction in corporation taxes paid to the federal government in the late twentieth century from carry-back and carry-forward provisions in the tax code.  WWII left this legacy to help corporations evade income taxes in peacetime, while income taxes on individuals have remained higher ever since the war.

Sources:  Brigadier General Smedley Butler, War Is a Racket, (Port Townsend, WA, Feral Publishing, 2003.)

Mark Wilson, “The Advantages of Obscurity: World War II Tax Carryback Provisions and the Normalization of Corporate Welfare,” Kim Phillips-Fein and Julian Zelizer, eds., What’s Good for Business: Business and American Politics Since World War II, (Oxford University Press, New York,  2012), 16-44.

Thank you to Danielle Kaschmitter for making me aware of the Revenue Act of 1942 in a speech she gave at the Spokane Falls Toastmasters Club.

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Financialization changed the American economy.

Remember the 1990’s?  Remember how CEO salaries bloomed ever larger while the ordinary working class guy got paid less in an inflationary economy?  Remember the CEO golden parachutes with million dollar severance packages for departing CEO’s even when they left under a black cloud?  Remember the “hostile takeovers”, what we now more euphemistically call “mergers and acquisitions” that liquidated so many American enterprises?  Remember the outsourcing and increasing job insecurity?  These events are connected to a process of change in the financial world called “financialization.”

In 2005, a sociologist named Greta Krippner wrote an essay in the Socio-Economic Review, entitled, “The Financialization of the American Economy.”  She wrote, “I define financialization as a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production…’Financialization’ here refers to activities relating to the provision (or transfer) of liquid capital in expectation of future interest, dividends, or capital gains.”

Here are some of the policy changes in the U.S. that accelerated  financialization here:

(1) The Nixon Shock (1971): when the U.S. abandoned the managed gold system and adopted a floating fiat monetary system where capital valuations would be determined by capital trades on the forex market; this change increased the money supply and expanded the potential for more debt.

(2) Securitization started with VA loans in the 1970’s.  Securitization is when a loan is turned into a tradable commodity.  That removes the risk of default from the lender and means that lenders can make riskier loans.

(3) Securitization led to the further innovation of derivative trading where a bet can be made on a change in value of an asset without owning the asset.  Derivatives have increased market risk.  The Commodities Futures Modernization Trading Act (2000) prevented the regulation of derivatives.

(4) Easy money policies of the Federal Reserve made capital loans cheap and enabled the hostile takeover environment.

(5) Government tax reprieves for debt encouraged greater debt.

(6) Finance grew; according to Terrence Casey, finance grew from making 15% of corporate profits in 1980 to making 27% of corporate profits in 2006.

(7) As finance grew, the influence of bankers on corporate boards grew and that led to even more emphasis on short-term gains in capital.

(8) The emphasis on capital growth through investment instead of through production undermined the ability of labor to negotiate for desirable outcomes like better salaries and benefits and along with hostile takeovers and outsourcing led to job losses.

(9) Financial industry deregulation led to the repeal of the Glass Steagall provision of the Banking Act of 1933 (the final step in a gradual repeal process  was The Graham Leach Bliley Act of 1999).  The repeal of Glass Steagall ended the separation between commercial and investment banks.  Re-combining investment and commercial banks led to fewer larger banks that became too big to fail and highly risk prone.

(10) The Greenspan Put (from Alan Greenspan, chairman of the Federal Reserve) promised Wall Street that the Federal Reserve would help in the case of an emergency.

(11) These changes and even lower interest rates (easy money) led to enormous corporate and bank debts and a fragile economy that produces mal-investment bubbles routinely, wasting economic resources.

Sources: Greta Krippner, The Socio-Economic Review (2005) 3, 173-208, “The Financialization of the American Economy,” Sociology Department, University of California, Los Angeles, cad.wnkc.edu/econ/economics/faculty/ wray/631Wray/Week%207/Krippner.pdf, accessed 2013.

Terrence Casey, “Financialization and the Future of the Neoliberal Growth Model,” Rose-Hulman Institute of Technology, Paper presented at the Political Studies Association Annual Conference, April 2011, http//www.psa.ac.uk/journals/pdf/5/2011/6_5.pdf, accessed 2013.

Bethany McLean and Joe Nocera, All the Devils Are Here: the Hidden History of the Financial Crisis, (Penguin Books Ltd., New York, 2010), 5, 109.

Other references cited can be found in: Mel Scanlan Stahl, Political Catsup with Economy Fries: Liberalism, Pragmatism, Opportunism, (Fast Car Publishing, Spokane, 2015).

All text on this blog is copyrighted to Mel Scanlan Stahl and it is subject to fair use standards. If you should refer to my blog posts or blog pages please acknowledge me as the source.  Please leave a comment if you find that the writing here interests you.

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Political power rests firmly upon declarations about life that are true.

A lot of negative press coverage has failed to dislodge Donald Trump from his political ascent.  How does he succeed so well in politics while other more experienced politicians fail to garner the public’s interest?  Here’s a quote from Hannah Arendt’s book published in 1958 entitled The Human Condition, “Where power is not actualized, it passes away, and history is full of examples that the greatest material riches cannot compensate for this loss.  Power is actualized only where word and deed have not parted company, where words are not empty and deeds not brutal, where words are not used to veil intentions but to disclose realities, and deeds are not used to violate and destroy but to establish relations and create new realities.”

Her discussion began by recognizing how important words and actions are to the power that resides in politics.  An establishment politician that tailors his political rhetoric to suit political views or political propaganda nested in the past can’t gain the power needed to do anything new and a politician can’t recruit new supporters without being ready to acknowledge changes and to suggest a game plan that deals with change.

The neoliberal economy isn’t providing opportunities for small capital holders, the working class, even the middle class.  When President Obama said that, “Anyone claiming that America’s economy is in decline is peddling fiction,” it didn’t sound true to the long-term unemployed that have been ignored in the frequently cited 5.5% unemployment statistic .  It worries Americans that there aren’t enough jobs and there’s fewer good jobs.  President Obama knows that there’s a lot of unemployed working age people.  When President Obama failed in his speech to pair his mention of a squeeze on labor with a plan of action, he destroyed his opportunity to suggest a way to improve a domestic economy that once had enough jobs.  Mr. Obama’s nod to those being squeezed didn’t mention particulars and his declarations denying economic decline didn’t convince anyone that opportunity or prosperity is growing in America.

Donald Trump’s secret political sauce is just saying that he sees an economy that’s falling short of its potential for greatness.  And he says that he sees an opportunity to get the economy moving again.  We all see that the economy is not providing opportunities for most Americans.  Recognizing economic problems and advocating policy changes is where Trump’s political power comes from.  You or I may not agree with some of his political positions but he gains power whenever he acknowledges economic harms and worries in the United States.  Economic insecurity grows bigger everyday because the economy is shrinking.  Policy reform could change that.  Right now, there are economic policy threats to each American’s economic security.  For example, under Dodd Frank, banks can use a “bail in” to steal deposits if there’s another financial emergency that would cause a bank failure; so much for FDIC.  And banks that are too big have monopoly effects in how they use money; this warps prices and values for goods and services.  Deregulated banks don’t protect their own solvency by keeping an adequate equity backstop compared to the risks that they take, and Wall Street gambles with derivatives instead of following a more prudent course by investing in production.

It turns out that political power comes from recognizing harms.  And political action starts with a conversation about harms.  A politician who wants more power should try to address harms that have happened because of bad policies.  He should identify which policies are bad and say why we should change them.  And he can offer suggestions about how to strengthen our economy with better policies for the benefit of more people.

Source: Hannah Arendt, The Human Condition, Second Edition, (The University of Chicago Press, Chicago, 1958), 200.

All text on this blog is copyrighted to Mel Scanlan Stahl. It is subject to fair use standards.  If you should refer to my blog posts or blog pages please acknowledge me as the source.  And please leave a comment to let me know what you think about what you read here.

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Time has passed since I wrote the content above.  Since then, Donald Trump scored more delegates on Super Tuesday (Mar 1st, 2016) than any other Republican frontrunner.  I have been amazed at the intensity of attacks against Donald Trump from the Republican leadership (even though he’s their leading Republican candidate).  And I wondered why the Republican establishment would oppose his candidacy for President when he is in the lead.  To discover more, I found this article on The Economic Populist.  It explains strategic reasons that the author would vote for Donald Trump.  He sees Donald Trump as genuinely Conservative in his nationalist trade agenda (as compared to a post-nationalist neoliberal trade agenda) and in his desire to restrict immigration (a desire to protect national security).  See what you think about these arguments.