Piketty crossing the Delaware

A consummation devoutly to be wished. Love the title — reminds me of a certain painting. Surprisingly easy to imagine myself as a shivering patriot on the opposite bank, waiting patiently to assist General Piketty onto dry land.

It’s all very nice to have the members of the OECD agreeing to exchange information for tax purposes, but there are credible non-members of the OECD with sophisticated banking systems who could facilitate tax minimisation – Hong Kong and Singapore, for example.

Good luck with that. Here in the States it’s more unusual for a corporation to be registered outside Delaware.

@BBA Of course, that cuts both ways. If pressure starts up (potentially from outside the US) Delaware will face a choice between tightening up on shell companies and disclosure, or risking losing the incorporation business entirely. The Caymans and other similarly placed jurisdictions have chosen to tighten up.

“Delaware will face a choice between tightening up on shell companies and disclosure, or risking losing the incorporation business entirely.”

That’s unlikely to happen in the short term, since the Vice President is from Delaware.

I think he might have just enough influence in Congress to save the day for the only industry his state has.

Plus, while unlikely, it is not impossible that he might run for, and win, the Presidency in 2016.

One has to be very careful about accusing someone of irony in this day and age, but it can’t be unintentional that a transaction under the Foreign Account Tax Compliance Act becomes at FATCAT?

As John Nance Garner said after four years as VP, “the Vice Presidency ain’t worth a bucket of warm spit.” Or words (if there are any others) to that effect.

JG

Theodore Roosevelt advocated having a real commerce department that would register and regulate all interstate businesses. That would get rid entirely of the siting and headquartering scam.
On the other hand, we are looking at the Obama administration and probably a republican dominated legislature for the next two years, and after that another neo-lib Dem, etc. I imagine the quid pro quo for any “reform” will be a radical lowering of corporate taxes and other kinds of folderol that will make it unnecessary to hide money.

There’s a rhetorical trope on the left making fun of the tendency in the law to elevate corporations as persons with rights. If corporation law were to be reformed, one element might well be to require that corporations be “citizens” with a definite domicile and limited legal capacities outside their “home”. This would be a profound change, and reversal of globalization, even if it did not extend to restrictions on who could own equity financial instruments of “citizen” corporations.

The evasion of corporate taxes through the use of tax havens has become a complex game in which legal and accounting “structures” of beneficial ownership and nominal control have evolved from slender fictions into mere wisps of smoke among the mirrors. The primary strategy is not simply to employ shells located in post office boxes and rented office suites of a few ten square feet, but to move these shells around constantly, and more swiftly than a New York hustler playing three-card monte. Audit becomes impossible, as the shell game’s dynamic complexity creates a kind of encryption.

Instinctively, I sense there’s an opportunity here to conceive of, and press a radical reform, which could address both the ability of wealth to evade taxes, but also the ability of corporations to centralize strategic control of vast sectors of the economy in networks and holding companies. The bank holding companies that combine ownership of financial sector players, which ought to be competitive opponents and checks, and the media conglomerates, which combine ownership of all kinds of publishing and communication — not to mention the medical-industrial or military-industrial complexes — are not monopolies of the classic description, but they are far more corrupting and destructive, wielding an oppressive and concentrated power.

Imposing significant constraints on the structure and scope of corporations, to dampen the evasion of taxes, will require breaking their power, but it could also open the door to addressing these other issues of overweening corporate power.

Piketty’s rhetorical tact in presenting remedieis is a clever one in some ways. There are a lot of economists, who are fixed on the idea that the economy before taxes is some natural ideal of efficiency (though perhaps a bit red of tooth and claw), but the economy after taxes can be an ideal of equity. It’s an incredibly stupid way of thinking, an artifact of a conventional style of abstraction, but it’s the prejudice of a significant part of the profession. But, such careful parsing hides the reality of wealth as power bearing down on us all.

The big business is in coporate tax avoidance that is often legal or at least in a grey area. Why bother to fight for small change and threaten that business. Truely rich people are still attracted by the offer to physically move themself for a couple of month a year to those tax havens and pay no capital gains taxes at all – completly legal.

John Garrett #15: I’ve heard that Garner’s “spit” was bowdlerised. Not sure which other bodily effluvium he spoke of.

@hix Living in a tax haven is a bit like the talking filibuster

@BBA The question isn’t so much whether the US will take positive action in response to pressure, as whether it will push back against measures by foreign jurisdictions treating the use of US (particularly Delaware) LLCs as tax evasion: Brazil took some steps in this direction a while ago. As regards the special status of Delaware, my understanding is that this isn’t a big deal for major corporations, for which transfer pricing and similar techniques are more important than disclosure, but that Delaware (along with competitors like Wyoming) is more friendly to shell companies used by wealthy individuals and small businesses.

Re J Harrison @ 20:

If your comment was intended as a response to B Wilder @ 19, I would disagree; the focus on corporations in that comment (which was not anyway intended as a grand overall solution) is not misplaced.

1) The inclusion of corporations under the term ‘person’ (use of the term to refer to corporations, understanding corporations “as” persons) was originally intended to be legitimate only in certain strictly specified legal contexts (the modified term ‘juridical/fictitious person’). Any use of the term ‘person’ to refer to a corporation outside of these specified contexts renders the category (of ‘person’) incoherent and is illegitimate. (BTW, whenever a corporation is the referent, the term used should be ‘juridical’ or ‘fictitious person’ not simply ‘person’.) This illegitimate usage includes the context of campaign finance contributions, among other areas. The whole “corporations are people, my friend” slack thinking metaphor gambit will eventually be unravelled. But the reforms in corporate law mentioned by BW can be carried out independently of the status of corporations wrt the category ‘juridical person’, and of course independently of the appropriateness of the metaphorical use.

I intended a (2), a more substantive defence of BW’s focus, but I’ll have to do that later; I have to go now.

Corporations go back quite a ways, and the general notion of artificial persons is older still. I find it hard to believe that these legal forms are the real problem. I don’t doubt that corporations can be problematic in various ways, but my point was simply that the current situation has less to do with the privilege of limited liability firms than the way that corporations have been captured by individuals, especially managerial types who leverage their control of corporations to secure enormous rents and become absurdly rich.

What’s the land value of a PO Box in Delaware?

Jim Harrison @ 29

For what it’s worth, I agree that the legal personality of the limited liability corporation is not a root problem.

I think we need to put a low ceiling on the ability of C-suite executives to extract income and wealth from their positions of enormous power. Being able to make millions in a short time from being at the head of a great corporation tempts sociopaths to compete for these positions and to behave irresponsibly and in a parasitic or predatory fashion, to realize quick gains.

The other reason Delaware is popular is that its Chancery Court judges have a deserved reputation for high technical competence. Business lawyers like judicial competence, once the important thing–overall friendliness–is assured.

Martin Bento @ 36

You touch on the basic concept of Ricardian rents. Quoting Wikipedia:

Ricardo noticed that the bargaining power of laborers can never dip below the produce obtainable on the best available rent-free land, because whenever rent leaves them with less than they could get on that free land, they can simply move to the new location. The produce obtainable on the best available rent-free land is known as the margin of production. Since landlords have a monopoly over a given location, the only limiting factor for rent is the margin of production. Thus, rent is a differential between the productive capacity of the land and the margin of production.

This law has a number of important implications, perhaps the most important being its implication for wages. The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by the productive capacity of marginal land,[3] as all production in excess of that amount will be appropriated by landowners in rent.

This is not the notorious iron law of wages, which predated Ricardo and is most commonly associated with the writings of Thomas Malthus. Indeed, Ricardo was an intellectual rival of Malthus on this point. The law of rent explains why the iron law of wages consistently fails to predict actual wages: if there are highly productive land sites available free, wages will tend to be high, all things else being the same; if the only available free land yields little, wages will tend to be lower.
In contrast to Malthus’s hypothesis of overpopulation, Ricardo explains mass poverty using deductive logic by noting that when there is no rent-free land, subsistence becomes the effective margin of production. Landlords will not charge more than this amount because it would entail no production at all, and thus no rent.

What you experienced might be called, enclosure. It is cutting people off from access to the means of production and everything else — a kind of helplessness, which does not have to be learned.

I had wanted, in response to Mr. Harrison above (@20), to pick up on a point in BW’s comment that I think deserves emphasis and focus. BW notes, “… the reality of wealth as power bearing down on us all.” And, “… the ability of corporations to centralize strategic control of vast sectors of the economy in networks and holding companies. The bank holding companies … and the media conglomerates …not to mention the medical-industrial or military-industrial complexes– are not monopolies of the classic description, but they are far more corrupting and destructive, wielding an oppressive and concentrated power.” One could add here as an example the petroleum industry (used to be called the “7 sisters” cartel) and their influence on the decision on the Keystone XL pipeline and climate change/ alternative energy policy in general.

The point is that big money (control of very large financial resources) represents a potential to influence human decision making akin to a physical force in causing physical events. Big money has the potential to corrupt the political decision making process. (E.g., decisions about the Keystone XL pipeline) I.e., concentrations of big money can be brought to bear on policy decisions to favour the aims of the money interests and override the operation of ethical principles, which would preclude the suffering of the many. Thus big money should not be allowed free rein to do whatever it wants in the hands of “sociopaths” (and indeed the conventional mentality of the corporate boardroom is sociopathic.), but should be governed by ethical and rational principles, ideally through government “by the people”. Taxation is one way to reduce or limit these large concentrations of uncontrolled money.

Liberals have long regarded government (“big government”) as an essential, popularly controlled counterweight to the uncontrollable and financially powerful private business sector. But government does not necessarily need to be opposed to business interests as such; they are after all one set of interests among many. Rather, it should be opposed to the potentially malignant influence of big money on the policy making process, and aim to bring it under ethical control. In the past people thought of things, as a practical matter, in the relatively concrete terms of class interests (capital vs. workers, etc.), but the problem is to deal with the existence of uncontrolled big money. The problems of imbalances of wealth are not confined to capitalist systems. (Look at the evolution of the Chinese and Russian systems.) The question is, why do all the political-economic systems we’ve tried so far tend toward plutocracy? We need to determine what are the pathways by which big money influences the political decision making process, and then block them.

For individuals, there is a point beyond which the pursuit of money becomes excessive, unnecessary and illegitimate (and not “deserved”). For corporations, the thinking of the managerial class is completely governed by limited and sociopathic conventions; there is no ability for independent thinking. (Mitt Romney’s 47% confessional) Left to their own devices, we see the results today. This connects, I think, to Ingrid Robeyns’s project: we need to recognize limits on concentrations of uncontrolled money. Individuals can still continue to pursue their puerile indulgence of self-regard, but they don’t need such excessive amounts of money to do it.