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Chuck Collins

While the US establishment is pushing for reduction of welfare for the poor and for developing countries to cut government subsidies, the US government is giving hundreds of billions of dollars of subsidies and tax breaks to its companies and individuals.

In 1992 rancher J R Simplot of Grandview, Idaho paid the US government $US87,000 for grazing rights on federal lands, about one-quarter the rate charged by private landowners. Simplot's implicit subsidy from US taxpayers, $US261,000, would have covered the welfare costs of about 60 poor families. With a net worth exceeding $US500 million, it's hard to argue that Simplot needed the money.

Since 1987, American Barrick Resources Corporation has pocketed $US 8.75 billion by extracting gold from a Nevada mine owned by the US government. But Barrick has paid only minimal rent to the Department of the Interior. In 1992 Barrick's founder was rewarded for his business acumen with a $US32 million annual salary. Such discounts are only one form of corporate welfare, dubbed 'wealthfare' by some activists, that US taxpayers fund. At a time when Congress is attempting to slash or eliminate the meagre benefits received by the poor, we are spending far more to subsidise wealthy corporatins and individuals. Wealthfare comes in five main varieties:

  • Discounted user fees for public resources
  • Direct grants
  • Corporate tax reductions and loopholes
  • Giveaways of publicly funded research and development (R&D) to private profit-making companies
  • Tax breaks for wealthy individuals

Within the Clinton administration, Secretary of Labour Robert Reich and Budget Director Alice Rivlin have attacked 'welfare for the rich'. Armed with a study from the Progressive Policy Institute, Reich floated the notion that over $US200 billion in corporate wealthfare could be trimmed over the next five years. Clinton discouraged Reich from taking this campaign further, for fear of alienating big Democratic Party funders.

Tax Breaks

The largest, yet most invisible, part of wealthfare is tax breaks for corporations and wealthy individuals. The federal Office of Management and Budget (OMB) estimates that these credits, deductions and exemptions, called 'tax expenditures', will cost $US440 billion in fiscal 1996. This compares, for example, to the $US 16 billion annual federal cost of child support programmes. Due both to lower basic tax rates and to myriad loopholes, corporate taxes fell from one-third of total federal revenues in 1953 to less than 10% today. Were corporations paying as much tax now as they did in the 1950s, the government would take in another $US250 billion a year - more than the entire budget deficit.

The tax code is riddled with tax breaks for corporations. Some serve legitimate purposes, or did at one time. Others have been distorted to create tax shelters and perpetuate bad business practises. During the 1993 budget battle, New Jersey Senator Bill Bradley attacked the 'loophole writing' industry in Washington, where inserting a single sentence into the tax laws can save millions, even billions, in taxes for a corporate client. Depreciatin on equipment and buildings, for example, is a legitimate expense. But the 'accelerated depreciation' rule allows corporations to take this deduction far faster than their assets are wearing out. This simply lets businesses make billions of dollars in untaxed profits. One estimate is that this loophole will cost $US 164 billion over the next five years.

One particularly generous tax break is the foreign tax credit, which allows US-based multinational corporations to deduct from their US taxes the income taxes they pay to other nations. Donald Bartlett and James Steele, authors of America: Who Really Pays the Taxes, say that by 1990 this write-off was worth $US25 billion a year. While in many cases this credit is a valid method of preventing double taxation on profits earned overseas, the oil companies have used it to avoid most of their US tax obligations.

Many corporate executive salaries should not be counted as deductible expenses. These salaries and bonuses are often so large today that they contribute disguised profits. Twenty years ago the average top executive made 34 times the wages of the firm's lowest paid workers. Today the ratio is 140 to 1. The Hospital Corporation of America, for example, paid its chairman $US127 million in 1992 - $61,000 an hour! In 1993 the Clinton administration capped the deductibility of salaries at $1 million, but the law has several loopholes that allow for easy evasion.

Subsidised use of public resources

Taxes are but one form of welfare. Subsidised use of public resources, such as with J R Simplot's grazing and American Barrick's mining, is also widespread. The US Forest Service undercharges timber companies for the logs they take from publicly-owned land. The Forest Service also builds roads and other infrastructure needed by the timber industry, investing $US140 million in 1994.

Many corporations also receive direct payments from the federal government. The Libertarian Cato Institute argues that every cabinet department 'has become a conduit for government funding of private industry. Within some cabinet agencies, such as the US Department of Agriculture and the Department of Commerce, almost every spending programme underwrites private business.'

Agriculture subsidies typically flow in greater quantities, the larger the recipient firm. The Agriculture Department also spends $US110 million a year to help US companies advertise abroad. In 1992 Sunkist Growers got $10 million and McDonalds $466,000 to promote Chicken McNuggets.

The Progressive Policy Institute estimates that taxpayers could save $US114 billion over five years by eliminiating or restricting such direct subsidies. Farm subsidies, for example, could be limited to only small farmers.

The government also pays for scientific research and development, then allows the benefits to be reaped by private firms. This occurs commonly in medical research. One product, the anti-cancer drug Taxol, cost the US government $US32 million to develop as part of a joint venture with private industry. But in the end the government gave its share to Bristol-Meyers Squibb, which now charges cancer patients almost $US1000 for a three-week supply of the drug.

Who is entitled?

Beyond corporate subsidies, the government also spends far more than necessary to help support the lifestyles of wealthy individuals. This largesse pertains to several of the most expensive and popular "entitlements" in the federal budget, such as Social Security, Medicare, and the deductibility of interest on home mortgages. Billions of dollars could be saved by restricting the degree to which the wealthy benefit from universal programmes. If Social Security and Medicare payments were denied to just the richest 3% of households this would reduce federal spending by $US30 to $40 billion a year - more than the total federal cost of food stamps. Citizen groups have mounted a renewed focus on the handouts. One effort is the Green Scissors coalition, an unusual alliance of environmental groups such as Friends of the Earth, and conservative tax-cutters such as the National Taxpayers Union. Last January Green Scissors proposed cutting $US33 billion over the next 10 years in subsidies that they contend are wasteful and environmentally damaging.

Another new organisation, Share the Wealth, is a coalition of labour, religious, and economic justice organisations. It recently launched the "Campaign for Wealth-Fare Reform", whose initial proposal targets over $US35 billion in annual subsidies that benefit the wealthiest 3% of the population.

A few of the many subsidies received by the wealthy are:

  • The Mansion Subsidy. Home mortgage interest is deductible up to $1 million per year. Reducing the limit to $250,000 would save the government $10 billion a year.
  • The Accelerated Depreciation Subsidy. Companies get to depreciate their equipment much faster than it wears out. The cost: $32 billion a year.
  • The Advertising Subsidy. Corporations fully deduct the cost of their advertising. If only one-fifth of advertising expenses were considered a capital cost of building brand name recognition, and so deductible gradually over time, taxpayers would save $3.5 billion a year.
  • McSubsidies. $110 million a year goes directly to companies that advertise their products abroad. Beneficiaries include Sunkist, McDonalds, and M&M / Mars.
  • Wealthfare of Mining Companies. The US lets big mining companies pay peanuts for the use of federally-owned lands - our lands. An 8% royalty would earn $200 million a year.
  • Corporate Agri-Business Subsidy. The federal government gives $200 million a year to corporate farms that each have incomes over $5 million a year.

Chuck Collins is Co-co-ordinator of the Share the Wealth Project

Source: Third World Economics 16-31 August 1995; reproduced from Dollars and Sense, May/June 1995. For more information, contact Dollars and Sense at: Dollars & Sense, One Summer Street, Somerville, MA 02143, USA or fax (617) 628 2025.

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