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"...And Justice For All...": The Case for Fiscal Equity and Equality

An End to "Them That Has, Keeps"
Institute Bulletin No.48 20.January.2003

Corporate Accountability: Concentration and Combination

The current spate of corporate theft in North America can be traced to one overriding element in continental corporate culture. Concentration. While the debate about concentration rages, the fact of concentration continues. The only end served is not efficiency but greed. While 80% of our new jobs are produced by small business, bank credit and tax breaks go to the conglomerates. While the top 20% of our corporations and citizenry exploit the levers of legislation for their own fiscal benefits, 80% of our total taxes are collected from small businesses and workingmen and women 45% of who have no more than two weeks of cash flow in savings. In the midst of an already inequitable environment we now hear calls from the banks to allow mergers.

It is incumbent upon a progressive administration to impose a two-year moratorium on all combinations involving any of Canada’s 200 top corporations. At the same time a Royal Commission on Corporate Concentration should be empowered to consider the social and political effects of mergers and monopolies, not just the economic edge that big business seeks in order to pursue its worldwide activities. This Commission would also be mandated to force the pro-merger advocates to demonstrate how increased combinations would flow through benefits to the public at large. Today, many firms merge not merely because it is efficient, but because our tax laws permit the sheltering of profits in the financial structure of the acquired firm. The techniques of accountancy make firms look more profitable than they really are, causing massive over investment and subsequent rapid divestment thereby destabilizing working men and women’s futures and security while executives get golden parachutes. Recommendations on reforms of our fiscal codes would be part of this Commission’s mandate as well.

We have had wage freezes and price freezes in the past. A merger freeze would at least give us time to think before these combinations destroy whatever is left of a supposed competitive economy. The absurdity of the very people who demand a free market devising constructs of monopoly accompanied by unyielding demands on government cash and credit cannot be lost on any rational, thinking citizen.


Corporate Governance:  Institutional Intimacies and  Unnatural Profits

Several decades ago, in the midst of an economic downturn, a commentator wrote, "the money changers have fled from their high seats in the temple." Today it may well be said "the money managers have tumbled from their high perches on the tower." The intimate relationship between the funny-money specialists on the Street and the corporate titans in the boardrooms has already destroyed the financial economy of the securities markets and now threatens the real economy of the job market. We are living through a time of elimination of permanent jobs unprecedented, in gross numbers, since the Depression. It is commonplace to hear, almost daily, of corporations eliminating twenty, thirty and even forty thousand jobs in one cut.

This malaise cuts across all sectors and all industries. In part, this is due to recessionary business cycles, the negative effects of which government can only seek to cushion the public from. But this is also due to mismanagement by many corporate chieftains characterized by the arrogance of avarice and a cynical smugness stemming from the incestuous intimacies between supposed competitors in the exchange of goods and services and supposed lenders and borrowers in the exchange of capital. All may be fair in a strictly private enterprise environment. But there is not one industrial or financial giant that does not benefit from government largesse. It is time to bring the behemoths to account and reduce the burdens on the ordinary citizen.

A six point plan should be undertaken to reform the current climate that makes it all to easy for the irresponsible, the unethical and the greedy to undermine the stability and security of this country and the lives of the ordinary working men and women that are its foundation:

1.Prohibit all interlocking directorates in the financial services sectors. We may finally see the return of competition and an end to the lock-step approach we have today that shuts credit. and facilities to small business and the individual. We may even get better service for customers.

2.Prohibit directors of competing businesses from sitting on the board of the same bank. This would close one ready forum for collusive or anti-competitive "off-the-record" discussions between corporations and their financiers. Supposed competitors may not tell all to each other, but they do say hello far too often.

3.Open up directorships to wider groups. By legislation if necessary. The adoption of policies at the board level in return for similar corporate favors is rampant, particularly in the financial services industries. Financial decisions critical to a community are undertaken with no reference to the people these decisions affect. Banks and insurance companies are chartered, serviced, protected and regulated by government. They cannot continue to collect obscenely unnatural profits made possible by public policy and political persuasion and still demand the autonomy of a purely private operation.

4.Close the tax loopholes protecting bank profits. Excess bad debt reserves, favored capital gains treatment—such breaks simply add to the tax burden of the wage earner.

5.Require bank investments in community and socially useful purposes. Our model should be the U.S. Community Reinvestment Act. Using federal funds to insure against high risks, federal law should require that a set percentage of profits be used for community reinvestment. Particularly in poorer areas where Canadian banks have been known to close six branches in one county because the people were not wealthy enough to make it worth their while. Banks like to claim that they are in the business of "wealth management". In fact, for the past thirty years, they have been in the business of debt creation. They cannot simply be allowed to cut costs, grab fees and abandon communities where their own created debtors make it less profitable for them to operate.

6.Tax the profits hidden by life insurance companies in tax-free reserves. By using outdated actuarial tables and underestimated investment income, insurance reserve funds are swollen by tens of billions. Taxing this hidden profit could produce billions in tax revenues.Few hold protest rallies against the over-all economic practices of corporate Canada. Only about their investments abroad or their participation in globalization policies. Yet corporate Canada’s domestic policies, particularly those of banks and insurance companies, are among the most important forces behind the unfair distribution of wealth and power in our land. Protected by law (including a largely unreconstructed Bank Act from 1895), given dozens of tax breaks, permitted to hold degrees of concentrated economic power long outlawed in other areas of economic life, they have used their power to deliberately and systematically redistribute wealth, power and, more importantly, equality of opportunity, away from working people and the poor and towards the rich.

Much of the needed reforms can be accomplished through existing financial and consumer legislation. Some will require radically new definitions of what corporate citizens may do, may not do and must do. But at the end of the day, Canadians will be able to eye a great prize---an equitable redistribution of power and profit, preference and privilege; and a generous redefinition of the dignity and debt owed to worker and depositor not just to stockholder and investor.


Taxes: Pruning Privilege and Preference

Someone making $25,000 a year spends almost all of it on the things they need to live. Food, shelter, clothing. Someone making $125,000 has a far wider range of choices. A fair tax system understands this and that is why a tax on incomes is graduated. It takes not just more, but a higher percentage of the income of the wealthy because they need a much smaller share of their incomes for necessities. A progressive tax system acts as a balance. Our system says to the wealthy, you have your wealth, but you will help pay for the schools to give all an equal chance at opportunity; and you will help finance the hospitals to give all equal and quality medical care; and you will help pay for the costs of solutions to pollution and disease caused by your industrial plants and their products.

This, at least, is the theory behind our tax system. In fact however, it has been so manipulated by the legal and political hired guns that it reinforces inequality rather than forcing equity. Middle income Canadians, those earning between $50,000 and $75,000 annually, pay a higher percentage of their incomes in taxes than the richest 1% of our population. As mentioned earlier, 80% of our total taxes are collected from small businesses and working people even though they control less than 20% of national wealth.

The source of these inequities flows from the special privileges granted to corporate Canada and its beneficiaries. In dozens of different ways the tax law says "All Canadians are equal, but the rich are more equal than others." The pattern of unfair tax advantage is total. The plush business lunch of executives in restaurants is deductible, but the soup and sandwich of the worker in the cafeteria is not. The cost of tax lawyers is deductible for the corporation, the cost of H&R Block for the individual is not. The truth is that money earned by the wealthy is taxed less severely than money earned by the average Canadian.

The damage to our political system spawned by this pattern of privilege cannot be overstated. A $500 a week employee may not know the details of the capital gains law, but if he knows that he pays a greater percentage of his income in taxes than the people who own the plant do, that is enough to breed cynicism into the most patriotic of citizens. And when he hears politicians defend our social security programs for the poor, he knows the rich will not be paying their fair share. Low and middle income working Canadians feel squeezed from the very rich and the very poor, and as much as they may intuitively support programs fostering social justice, they rightly feel that they are carrying too much of the load.

Despite the Byzantine complexities of the tax system, which by it itself amounts to a full employment program for the nation’s tax lawyers, its defenders insist that the tax code is not an instrument of social policy but merely a method of raising revenue. In fact this is total nonsense. Every exemption, deduction, credit and surcharge amounts to a statement of policy. Our system subsidizes trains, planes, and factories much more than it does people. The result that is produced is an encouragement of concentration. The use of capital to make maximum advantage of tax breaks. An economy driven not so much to start new enterprises and create new jobs, but one driven to absorb old enterprises and cut jobs. While our competition policies ostensibly encourage diversity our tax laws promote exactly the reverse.

The path to reform through the thicket of tax breaks for the rich may be politically difficult but is conceptually simple. The root principle is to stop treating money earned through prior wealth more favorably than that earned through hard work. It is time to tax the real earnings of our wealthiest corporate and individual citizens.

The following five initiatives are vital to core reform:

1. A drastic reduction of the favored treatment given to profits from securities. However much admiration may be due to someone with the initiative to invest inherited money into stocks and bonds, it is doubtful that they have worked harder to acquire profit than someone who operates a punch press or waits on retail customers eight hours a day. The twenty thousand dollars earned when a stock is sold should be counted and taxed the same as the twenty thousand that represents someone’s 1,000 hours of work.

2.Taxation of income no matter what the institution. If a religious institution operates a parking lot for its members on Saturday or Sunday and runs it as a commercial operation the other six days of the week it is entitled to make a profit on that operation. But it is not entitled to keep that income free of taxation. If it seeks to finance itself by running enterprises, it should do so under the same rules that apply to any other enterprise. When the religious vestments are removed and the sales apron is donned, the special privileges should not remain. When a professional association earns money from advertising placed in its journal, before that revenue is added to its lobbying budget, it ought to be taxed under the same rules as any other publication. If social clubs, universities, associations, foundations and charities maintain plush real estate holdings, they should pay the same taxes as any ordinary businessperson.

3. An end to charitable contributions that enrich the wealthy. Donations of securities, artwork and other possessions should not be deductible on their appreciated value. This is merely a method of avoiding tax that should fall on the earnings, which is the appreciation. These and other venerable dodges should be eliminated.

4. An end to depreciation and other intangibles write-offs. These kinds of deductions are given without any relation to the actual costs incurred by the company. Allowance for nonexistent "costs" should end and we should allow only true "out of pocket" expenses.

5. A flat limit on deductions for business travel and entertainment. If an executive wants to spend hundreds on a bottle of Chateau Margaux, his stock clerks should not pay more taxes because of that exercise in good taste. These expenses, and indeed the whole "expense account" form of compensation for the wealthy, are nothing but disguised income and should be treated as such.We need a conscious shaping of a tax policy that will discourage concentration of economic power, reduce the stifling tax burden on working Canadians 45% of whom have only two weeks of salary in the bank, and cripple socially disadvantageous programs. Since all tax decisions promote economic and social policies—whether intentional or not—a fair tax system should consciously promote the dispersion of economic power.

Beryl P. Wajsmann


Institute for Public Affairs of Montreal


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