We’re Not Broke is launches outrage at the multinational corporations that engage in offshore banking and other tax avoidance strategies. At a time of strained state and Federal budgets, it is not a stretch to assume that lost tax revenue is at least partially to blame for mounting deficits. However, the argument that offshore corporate tax loopholes are a major cause of the nation’s fiscal troubles is unconvincing. For fiscal year 2013, the projected budget deficit is orders of magnitude larger than revenue estimated to be lost to offshoring, and is around five times larger than anticipated corporate tax receipts in their entirety.
The documentary is far more compelling when it focuses on the public mistrust of the close relationship between corporations and the officials who create and enforce our laws and regulations. In particular, We’re Not Broke elaborates on examples of nepotism and influence peddling. But why now? Why does America feel more susceptible than ever to the influence of the corporate lobby?
Some may point to recent changes in campaign finance, but the public backlash has been building since well before then. The answer does lie in our budget deficits, though not as much in our tax policy as We’re Not Broke would have us believe. Our country’s decision to significantly increase our indebtedness, though perhaps driven by good intentions, has led to a credit addiction not easily shaken, and has created more incentives than ever for corporations to seek economic rent rather than compete in the free market. With the current access to easy money, our state and Federal balance sheets are in disarray, and the American public’s belief in a land of fairness and opportunity has eroded.
The film argues that the United States is a wealthy nation, and that if corporations paid more taxes, our fiscal situation would improve considerably. It estimates that offshore tax shelters account for $70 billion in lost tax receipts each year. To put this in context, the United States Office of Management and Budget expects $237 billion in corporate tax revenue in fiscal year 2013. However, even if all $70 billion were to be recovered and added to the total haul, it would still be dwarfed by the projected mismatch between revenues of $2.47 trillion and outlays of $3.8 trillion. An additional $70 billion in corporate tax receipts would result in a mere 5% decrease in the $1 trillion-plus annual budget deficit.
Corporate practices that violate the spirit of the tax code should be addressed. But it’s a pernicious idea that we are not broke, and that realignment of the United States’ assets and liabilities will not require sacrifices from individual Americans in addition to corporations. The United States derives more than five times as much tax revenue from individual income tax from corporate income tax. If social security and payroll taxes are added into this figure, the ratio jumps to nearly ten to one.
The reality is that government spending is too high and tax rates for individuals and corporations are too low. The United States has addressed this imbalance through extraordinary amounts of borrowing. To many Americans, the country’s ability to issue debt may seem a bit like patriotic hand-waving, but it’s certainly not arbitrary; that ability is based on world supply and demand.
In the past several decades, there has been a great demand for credit, in large part due to Asia’s structural savings rate. For both cultural and economic reasons—like the large Asian economies’ tendencies to be driven through export rather than import—Asia had a great ability and willingness to provide credit. There are worrisome signs, however, that this demand may ease. As Asian economies continue to shift orientation from export to consumption, their structural savings rate will likely decrease, and along with it, the need to provide credit. And as the debt crises in Europe indicate, creditors around the world are more sensitive than ever about taking on risky investments.
It’s likely, then, that the rates at which the U.S. Treasury can fund debt will rise over the long term. Currently, the amount of Federal debt held by investors is $11.3 trillion. Even a moderate increase in debt servicing costs would be highly punitive. The only solution is to spend less and tax more. And as the math indicates, this fiscal rebalancing extends far beyond offshore, or even total corporate tax receipts.
Much popular discourse holds that the credit boom was recklessly helped along by the financial industry for the sake of profit. Though there is certainly truth to this, banks were hardly the only interested parties. Beyond the Federal government’s obvious need to borrow, given its budget deficit, we had significant increases in personal indebtedness even during years of high economic growth.
As globalization transformed and at times devastated portions of the U.S. economy, politicians were happy to obscure stagnant real wages and rising social inequality by offering easy access to leverage and promising a generous income and social services in retirement. The increased indebtedness was very notable in the housing sector, but similar bubbles occurred in credit card debt and student loan debt as well.
In recent years, the ability for individuals to borrow has been sharply curtailed, especially for those with less than stellar credit scores. A decline in the market value of assets has also exposed public and private pensions to be vastly underfunded. The inevitable economic and social stresses have arrived all the stronger for having been postponed by the credit boom. Though the United States is far from the scenes of riots in central Athens or the massive protests in Spain, public indignation is strong and rising in multiple political and social spheres. In September alone, battles to renegotiate retirement entitlements have affected arenas as diverse as public schools in Chicago and the National Football League.
Given the enormous scope of these problems, it’s unconvincing that corporate tax offshoring is a major contributor to our fiscal woes. But We’re Not Broke documents well the cozy relationship between politicians and special interest groups. Corporations actively attempt to capture regulatory agencies and are increasingly shifting resources from competing honestly in the marketplace toward seeking to derive the most economic rent from government.
Why has this trend become so pronounced in recent years? Though We’re Not Broke touches on the politicians’ increased need to raise more and more money for election campaigns, it is just as relevant to consider why corporations think their donations are a worthwhile investment. After all, if the free market were indeed free, the public sector should play a minor role in profit-making.
A key factor is the enormous increase in U.S. government spending as a percentage of GDP. In the early 1900s, local, state and Federal governments spent less than 10 percent of GDP. By 2000, this number was 32 percent. And in 2012, government spending reached 40 percent of GDP. Put another way, the ratio of private to public dollars fell from 9 to 1 to 3 to 2. When public spending is so dominant, a corporation would be crippled without an aggressive lobbying force.
The public has developed a deep mistrust about how tax dollars are collected and spent because it senses that the government, not the free market, is overtly determining winners and losers. There’s no satisfying answer to many of the questions about corporate loopholes in We’re Not Broke. Nor is there an easy answer to why the Federal government subsidizes ethanol or solar power, for example. Or why the shareholders of Freddie Mac and Fannie Mae collected private profits while receiving a government-secured backstop.
As a country, we made a conscious choice to use cheap credit to accelerate economic growth. Unfortunately, we used those gains to paper over the effects of structural inequality and failed to address underinvestment in education and infrastructure. We created economic incentives for corporations to lobby rather than compete. And as our ability to further leverage diminishes, we are left with a booming deficit and the fierce resentment of a public that feels robbed of the prosperous future it once believed in.