Ethical Confusion

I've been reading commentary on the recent U.S. supreme court decision (full text) that the government can't ban corporate spending on candidate elections because this is a violation of corporations' constitutionally protected right to free speech.

Aside from the (in my opinion) craziness of the decision itself, what I've noticed in the commentary is a striking inability of commenters to distinguish between the commercial and the government (guardian) realm.

Most clearly, here is Glenn Greenwald,

"So I'll ask again -- of you and anyone who claims that since corporations are not persons, they have no rights under the Constitution:

Do you believe the FBI has the right to enter and search the offices of the ACLU without probable cause or warrants, and seize whatever they want?

Do they have the right to do that to the offices of labor unions?

How about your local business on the corner which is incorporated?

The only thing stopping them from doing this is the Fourth Amendment. If you believe that corporations have no constitutional rights because they're not persons, what possible objections could you voice if Congress empowered the FBI to do these things?

Can they seize the property (the buildings and cars and bank accounts) of those entities without due process or just compensation? If you believe that corporations have no Constitutional rights, what possible constitutional objections could you have to such laws and actions?

Could Congress pass a law tomorrow providing that any corporation - including non-profit advocacy groups -- which criticize American wars shall be fined $100,000 for each criticism? What possible constitutional objection could you have to that?"

Notice that all the question Greenwald asks relate to commercial matters. He doesn't ask if corporations should be eligible to vote, to hold office, to serve as judges, or to lead the army.

Or take Julian Sanchez,

Why is it that so many people who clearly do think books and magazines and talk radio shows enjoy unambiguous constitutional protection, despite being corporate funded or operated, are simultaneously absolutely sure that paid broadcast spots are in an utterly different category? ... My hunch is that it has something to do with the imagined audience.

No, it's because the first group falls under the category of art, whereas commercials, much like corporations, are under the category of commercial activity - which should be kept separate from the political world as much as possible.

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Very rarely in what I've read on the case (and then only in the comments to posts) has anyone made the simple point that a corporation is a commercial entity, created for a solely commercial purpose. Therefore it makes perfect sense that this commercial entity should be kept out of the political world as much as possible. Yes, a corporation should have property rights, and be protected from theft, but that doesn't mean it should have full political rights as well, there's no slippery slope and there is a clear line to be drawn.

Even if people haven't read and been persuaded by Jane Jacobs' argument that systematic corruption is the inevitable result of mixing commerce and politics, I feel that we used to have a stronger intuitive moral sense about these things.


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Update: Here's an honourable exception, Justin Fox.

Books

As Justin at Flash Point Canada says,

"If this doesn't give you a chuckle, nothing will. The "Ten Most Harmful Books of the 19th and 20th Centuries," as selected by several staunch conservatives."

I think my favourite honourable mention is "On Liberty" by J.S. Mill - who knows how much better off the world would be if not for that fearsome work.

In other book news, apparently, I've been 'tagged' by Greg over at Sinister Thoughts, to answer a few questions about me and books. The alternative would be writing something about the latest shenanigans on parliament hill, so I think I'll talk about books as the less grewalling (sorry¹) of the two options.

Number of Books I Own

I've moved over 20 times in the last 10 years or so, so any item I consider purchasing is automatically screened for its impact on my total encumbrance², which tends to keep down my total number of books owned (especially hardcover books). I'd guess that I own around a couple hundred (Note: before any family members protest, this excludes books I own which are sitting somewhere in my parent's house).

Last Book I Bought

'City of Ember' by Jeanne Duprau. Starts well, with an intriguing premise but the ending is rushed and disappointing (not to mention not really an ending).

Last book I read

'Whisper of Glocken' by Carol Kendall. A follow-up to the Newberry Award winning Gammage Cup, it's not quite at the same level but is still a good read.

5 Books That Mean A Lot To Me

1) Systems of Survival - Jane Jacobs

I remember reading in some book (I don't remember which) a discussion of trying to meaningfully analyze the weather. If one looks too closely, trying to analyze individual drops of rain, air molecules etc., analysis is impossible because there is too much data and there are no discernible patterns to it. If you look from too far away, treating the skies around the globe as a single entity, analysis is again impossible since the changes in that one entity will appear random. Only by focussing your attention at the right level, and on the right characteristics, (tracking high and low pressure 'systems' for example) is it possible to extract any meaning or order from the skies.

Similarly, I've spent much of my time reading non-fiction trying to make sense of society and economics and politics by finding some appropriate level of analysis which lies in between the rational economic dream of constructing a tower of axiom-based mathematical knowledge on a foundation of obviously untrue assumptions and the anti rational assertion that there is no systematic analysis of human affairs possible and all we can really do to convey meaning in human affairs is to tell stories.

Jane Jacobs 'Systems of Survival' is one of my favourites because it is one of the few books I know which does in fact convincingly stake out a theory on one such source of meaning. I remember being fascinated by Nietzsche's idea of digging into the roots of why it is humans have the 'ethics' that they do and constructing a 'genealogy of morals' which he talked about in 'Human, All too Human' and how disappointed I was when I bought his later work 'Genealogy of Morals' and it didn't really seem (to me anyway, maybe I missed the point) to answer that question at all. Systems of Survival does attempt to provide a genealogy of our morals and I recommend it highly.

2) Godel Escher Bach by Douglas Hofstadter. I can't possibly hope to summarize this book (although the linked review does a pretty good job) but aside from the content which in itself it amazing, just the way the book is written helped me realize that writing non-fiction imposes a lot fewer artistic limitations on how you write than you might think.

3) Bridge to Terabithia by Katherine Paterson
As you might have been able to guess from my answers to 'last book bought' and 'last book read', I read a fair bit of young adult (or old children) literature. If I was ever to get my act together and write something more substantial than half finished stories and long winded blog posts, it would most likely be in this genre.

I read lots of adult fiction too, but whether it's just because the more innocent writing of children's books has an easier time piercing my cynical shell or just me being emotionally immature, I find that books aimed at a younger audience often have a more powerful impact on me. Case in point is Bridge to Terabithia, a deserving winner of the Newberry Medal for best children's book of 1978 (Paterson won again in 1981 for Jacob Have I Loved which is also a great book). I won't say anything more about the plot, but I really think anyone of any age would do well to read this book.


4) When Corporations Rule the World - David Korten

I talked about this book recently in this post. Aside from being extremely well written and well argued, one of the ways this book changed my thinking was to change my internal definition of species, or if not species, perhaps organism. Previously, I had only considered biological, cellular life forms as active agents in the world (allowing for artificial intelligence via computers of course). But this book made me realize that there are potentially many other active organisms (or organizations if you prefer) out there which act according to their own logic and their own agenda, perhaps somewhat but not entirely under the direction of people.

Now in a sense, this is not that different from the common wisdom that systems take on a life of their own or, as Marshall McLuhan said, that the medium is the message. But it hits home a lot more when you think of a corporation (for example) as an organism which will never die, which holds many of the same rights as people do, which can exist simultaneously all over the world, which can mobilize resources on the scale of a small country (in the case of the biggest corporations), and which lives or dies, not according to the complex set of physical, emotional and spiritual needs which humans have, but through a never-ending single minded drive to earn a return for investors (in order to grow) or at the very least earn enough money to satisfy creditors (in order to avoid dying).

Seeing the corporation as an active agent in its own right: co-existing, relying on and yet at the same time competing with people for the resources necessary for our survival, is seeing things with another dimension added.

5) Voltaire's Bastards - John Ralston Saul

There's lots I don't agree with in this book, including (possibly) the main premise that the world is suffering due to people taking an overly 'rational' approach to things and disregarding other more humanist elements of our decision making process, but there's a ton of stuff packed in here and a lot that seems dead on, from the culture of celebrity, to the climate of secrecy, to the foolishness of economic dogma, to the stubbornness of outdated methods of waging war and on and on. More than anything, this book shook me out of a phase of somewhat ideological thinking and reminded me to take a critical, questioning approach to everything, never trusting that the conventional wisdom could safely be applied in any area of human activity.


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OK, who hasn't been tagged by this yet. How about Trish, Justin, Ainge, Greg (sure his blog is about his baseball pool team not books, but what's blogging if not the freedom to write about whatever you want, whenever you want - and besides, if I recall correctly (which I'm not sure of) he was the one giving me a hard time about liking 'Life of Pi' and not making it more than a quarter of the way into 'A Prayer For Owen Meany' before giving up in boredom) and Andrew Spicer.

Don't worry if you want to dispute the tag, I won't send the meme police after you.



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¹ I'm not really sorry.

² I wonder if using the word encumbrance marks me as either a) someone in the financial/credit industry or b) someone who played Dungeons & Dragons as a kid.

Corporate Taxes

The topic of corporate tax rates has come up a lot here lately so I thought I'd take a look at corporate taxes from a (somewhat) theoretical perspective. Specifically, I want to look at what happens to taxation as a whole when corporate tax rates are cut and think about whether we need corporate taxes at all.

Right now in Canada, the (federal) corporate tax rate is 21% (down from 28% a few years ago). So if a company made a profit of $100 million (and didn't have any previous losses stored up¹) it would owe $21 million in federal taxes. Now, say the tax rate was 15% instead. That would mean a tax bill of $15 million, a savings of $6 million for the company.

What would happen to this $6 million? I see three possibilities: 1) The money could be distributed to shareholders in the form of a dividend, 2) The money could be invested/saved by the company, increasing the value of the company accordingly or 3) the money could be 'wasted' on items like massive stock option grants to senior management, travel costs for corporate meetings in the Bahamas, ego-stroking diversification/expansion plans and so on. I'm not taking the time to do serious research here, so I have no idea what the exact breakdown would be, but for reference, this paper (which is excellent and deserves a post of its own) suggests that about 20% of total corporate profits goes to dividends in Canada (if you know the exact figure, please let me know, I looked for it but couldn't find it).

Money given out in dividends would be taxed at the dividend rate which has been constructed to roughly approximate personal tax rates (that is, when you combine the corporate tax with the tax on dividends the effect is the same as if the money had just been personal income to begin with - for an idea of the theory of how this works, see here).

If we assume that the government wants to maintain this 'neutral' taxation of dividends, then a cut in the corporate tax rate would be matched by an increase in the dividend tax rate so to the extent that lower corporate taxes leads to more dividends, there would be no impact on the federal tax take or it's distribution (progressiveness). Of course if the government cut corporate tax rates and didn't increase the dividend tax rate then the tax rate for dividends would fall below taxes for personal income and the government would suffer a loss in tax revenue.

Money kept by the corporation would, on average, be recovered as a capital gain by shareholders and eventually taxed at 1/2 the personal rate of tax (since income from capital gains is taxed at a 50% of the normal personal income rate).

Money wasted on various bad ideas would go all over the place but seems likely to generally end up in the hands of management and friends.

So to sum up, there are three potential sources of lost tax revenue for the government: dividend tax rates falling below personal income rates, more money going to capital gains which are only taxed at 50% the rate of personal income (likely to be lower than the 21% charged against corporations) and money wasted which never shows up as income at all.

Given that the vast majority of shares are owned by wealthy individuals and that the wealthy would likely be the beneficiaries of most wasteful corporate spending as well, it seems clear that the change would be regressive in that the poor would see very little benefit from this reduction in taxes.


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OK, let's look at this from another angle. Consider the following from the 1997 Canadian federal budget:

"A key element of a fair tax system is that corporations should pay their fair share of tax. Some have argued that corporations should not pay taxes at all since, sooner or later, corporate income ends up in the hands of individuals and is taxed under personal income tax. This view is inaccurate and corporations should pay tax for three key reasons. First, businesses benefit from public services in many of the same ways that individuals do. Second, in the absence of tax on corporations, it would be possible for individuals to postpone tax on income or capital gains indefinitely by placing income-producing assets in a corporation and thereby having the income or gains accrue within the corporation. Corporate income tax addresses this problem by imposing a tax on profits and capital gains prior to their distribution to individuals in the form of dividends. Third, corporate taxes allow the taxation of income accruing to foreigners and ensure that foreign-based corporations operating in Canada pay tax on income earned in Canada."

Now, the first reason doesn't make a lot of sense to me. OK, businesses benefit from public services, but to the extent that they benefit, this is reflected in the gains made by the owners of the corporation. I don't see how this refutes the argument that we should just tax profits as personal income when they end up in the hands of the owners.

The second reason, avoiding an indefinite delay of taxes, makes more sense to me, although if the owners never get any profit out of the corporation, one wonders why they invest in it.

The third reason, lost government revenue from taxing foreigner's investments in Canada is valid as well, but more of a technical concern which could probably be worked around.

Personally, I have a different concern, which is that by delaying tax until shares change hands or a dividend is paid, the corporation will have more money on hand with which to exert an influence on society. Ideally, any profits a corporation makes would either be invested if deemed necessary by the shareholders (represented by management) or returned to the shareholders. But in reality, corporate profits might well be spent frivolously and, more perniciously, used to lobby the public / government to change the social/legislative framework in their favour.

In this view, corporations are a danger to society which need strong oversight in order to be kept to their beneficial role of providing goods and services efficiently without overstepping into trying to buy legislation/influence to create artificial monopolies, exclude competitors from the market, get subsidies for their operations, etc. etc.

Clearly, taxation of corporations is not a substitute for regulation and citizen vigilance in trying to keep corporations out of politics but it's something to consider when thinking about big changes to corporate taxes.

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Putting the pieces together, the logical solution, which I personally first saw recommended in David Korten's brilliant, "When Corporations Rule the World²", is to reduce the corporate tax rate to 0, but mandate automatic 100% dividends on all profits.

This would address our earlier concerns about lost tax revenue in that dividends would now be taxed exactly the same as personal income (a nice side effect of this change is the simplification of the tax code) so we don't have to worry about a discrepancy between dividend tax rates and personal tax rates. Furthermore, profits will be taxed as personal income not as capital gains which would only be taxed at half the personal rate. Finally, companies would have to make a case for needing money for investment and being able to spend it wisely to entice shareholders to reinvest their (post-tax) dividends back in the company.

Similarly, this addresses the budget's concern about people indefinitely postponing their taxes by leaving the profits in a corporation. As for foreigners, I'm sure the government could withhold an equivalent amount of taxes to foreign countries as those countries withhold on money which would go to Canadian shareholders.

Another benefit is that this change would remove the perverse incentives which are often created when corporations pursue specific strategies because they are tax-optimal rather than market-optimal. Furthermore, it would shift the balance of power from management to shareholders by leaving the decision of how much of the profit should remain with the organization in the hands of shareholders. This change would also serve to delegitimize corporate interference in our legislatures. Right now, given that they pay tax, it is logical for the corporations to feel they have a right to influence government. Taxing people instead of corporations would be a reminder of where legitimacy and power should reside. It would also act as a brake the growth of corporations where the shareholders themselves don't support that growth explicitly. Finally, the income, now taxed as personal income, would be subject to the same progressive rates of taxation as all other income.

I should note that this change would probably be much less radical in it's impact on corporate finances than you might think at first glance. For one thing it's not that different from the income trust³ model which has spread rapidly in Canada over the last few years. For another, I imagine that most shareholders would sign up with plans to have their post-tax share of the corporate income automatically re-invested in the company.

Anyway, I make no claims to have thought this through fully and there are likely any number of technical details which would be tough to work out - even if there aren't any big theoretical obstacles. I'm really just thinking out loud (so to speaktype) and inviting thoughts from anyone who may see flaws in my thinking. I ran it by a friend who's a tax accountant and we basically had a philosophical difference. He felt that the decision of whether profits should be reinvested or given out as dividends should be left in the hands of management since it was part of managing. I felt that this is an important enough decision that it, like the election of the board of directors, should be left in the hands of the shareholders directly. What do you think?



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¹ The big difference between corporate taxes and personal taxes is that corporations are taxed on profit (net income) whereas people are taxed on revenue (i.e. your tax bill is unaffected by your expenses - except specific expenses which generate tax credits like tuition). So when corporations suffer net losses they can save those losses to offset against a profit made in a future year.

² Don't let the title fool you into thinking this is just some mindless anti-corporate rant. The author lays out his extensive conservative credentials in the prologue and the book is a very fair and well reasoned look at what corporations are and the reasons why and manner in which their influence has grown in our society. It's a good read.

³ For an introduction to income trusts, see here (or here) In a nutshell, an income trust is an extra layer on top of an existing company which focusses on extracting wealth from the company and distributing it to the trust's owners (unitholders). The primary purpose is to avoid corporate taxes and just pay personal income taxes on the received income.