A Windfall for the Forbes 400 and the Fortune 500

We now know who it was Donald Trump was really addressing in his convention speech last summer when he declared “I am your voice”: the Forbes 400 and others in the upper reaches of the 1 Percent.

The one-page tax outline just released by the Trump Administration — with its pass-through scheme, its radical reduction in statutory corporate tax rates, and its elimination of the alternative minimum tax, the estate tax and taxation of overseas business profits — provides an unrestrained windfall for Trump’s own billionaire class.

In defiance of all evidence, Treasury Secretary Mnuchin is insisting that this is not a giveaway to the rich but instead is “all about jobs, jobs, jobs.” This is the same official who, harking back to the snake oil of the Reagan Administration, insists that the tax cuts will “pay for themselves.”

The claim that the corporate tax cuts will boost the economy and job creation is based on the widely promoted but largely baseless claim that U.S. business is burdened with excessively high rates. As groups such as the Institute on Taxation and Economic Policy have repeatedly shown over the years and which ITEP documents once again in a recent report, many large corporations pay effective tax rates far below the 35 percent statutory rate. And through the aggressive use of tax avoidance techniques, quite a few of those manage to bring their effective rate down to zero or less.

Even if one accepts the questionable connection between taxes and job creation, Trump’s proposal would have no effect on employment in sectors such as utilities, industrial machinery, telecommunications and oil & gas, which ITEP shows are already paying effective rates below 15 percent.

There are sectors currently paying rates well above 15 percent, but it is not clear that lower taxes would do much to create jobs — and even less so, good jobs. One of the highest effective rates can be found in the retail sector, which despite this supposed burden, has over the year added millions of jobs. Unfortunately, most of those positions are substandard. The typical retail wage is about a third lower than the average for the private sector as a whole.

Recently, retail employment has been falling, but this has nothing to do with taxes; it’s the result of the increasing number of people buying stuff online rather than from brick-and-mortar stores. Giving big tax cuts to Wal-Mart and Dollar General will not reverse the job loss nor will it improve the wages of their remaining workers.

It’s also unclear what benefits will come from reducing taxes on health care companies, which also pay effective rates close to the statutory level. Taxes have not stood in the way of massive employment growth in this sector, which on the whole pays better than retail but has a substantial number of low-wage jobs. The future of this sector depends not on taxes but instead on whether Trump and Congressional Republicans succeed in dismantling the Affordable Care Act.

Another part of the Trump outline that will do little to create good jobs is the call for the repatriation and light taxation of foreign profits that corporations have been parking overseas. Business apologists have long made extravagant claims for this policy, but previous experiments with repatriation holidays did not boost jobs or even investment and instead simply fattened profits and dividends.

Those who put together the Trump tax outline are either oblivious to the discussion in recent years about growing income and wealth inequality or they deliberately set out to make the problem much worse. In either event, the plutocrats are rejoicing.

Uncle Sam’s Favorite Billionaires

william-erbey_416x416Inequality is becoming so pronounced that presidential hopefuls of all ideological persuasions are acknowledging that something needs to be done. One issue they should consider is the extent to which the federal government itself contributes to the problem.

It’s clear that the federal tax code is structured in a way that favors wealthy individuals and corporations. But it turns out that Uncle Sam is also providing direct financial assistance to the billionaire class. The extent of that assistance can be estimated from the data my colleagues and I at Good Jobs First assembled for Subsidy Tracker 3.0, which we released recently.

We compiled 164,000 company-specific entries for federal grants, allocated tax credits, loans, loan guarantees and bailout assistance provided through 137 programs overseen by 11 cabinet departments and six independent agencies. These were added to 277,00 state and local awards in the database. Since 2000 the grants and allocated tax credits have amounted to $68 billion; the face value of the loans and bailouts, which we tally separately, have run into the trillions.

Along with the release of Tracker 3.0, we published a report called Uncle Sam’s Favorite Corporations that described the extent to which large corporations dominate federal subsidies. Some of those companies are owned in whole or in part by the country’s wealthiest individuals and families.

I subsequently matched the big federal subsidy recipients to the companies linked to members of the Forbes 400 list of the richest Americans. This exercise was an extension of an analysis my colleagues and I performed on state and local data for our December 2014 report Tax Breaks and Inequality.

Of the 258 companies controlled by a member of the Forbes 400, 39 have received federal grants and allocated tax credits. Their awards total $1.3 billion. The richest of the billionaires linked to these firms is Warren Buffett, whose Berkshire Hathaway conglomerate accounts for $178 million of the subsidies.

Two of the other companies are worth examining more closely, because they have also been embroiled in controversies over their business practices.

At the top of the list is Ocwen Financial, which received $434 million in subsidies through a provision of the Home Affordable Modification Program (a part of the TARP bailout) that provided incentives to mortgage servicers to revamp loans to homeowners whose properties were underwater or otherwise unsustainable.

Ocwen, which made extensive use of that program, was founded by William Erbey (photo), whose net worth was estimated at $1.8 billion in the most recent Forbes list, published when he was still chairman of the company. Subsequently, Erbey had to step down as part of a settlement the company reached with New York State financial regulators to resolve allegations of improper foreclosures and other abusive practices. Ocwen also had to provide $150 million in assistance to those whose homes had been foreclosed. It is also paying a smaller amount under a settlement with California regulators.

While Erbey is no longer running Ocwen, he may still be a major shareholder. As of last year’s proxy statement, he held the largest stake in the company (15 percent); this year’s proxy is not out yet.

The second largest subsidy recipient linked to a member of the Forbes 400 is SolarCity, which has received $326 million in grants and allocated tax credits, mostly through Section 1603 of the Recovery Act, which provides cash payments to companies installing renewable energy equipment. The chairman of SolarCity is Elon Musk, better known for his role in the electric car company Tesla Motors (which, by the way, got a $465 million federal loan and later repaid it). Musk, whose cousins Lyndon and Peter Rive are the top executives at SolarCity, has a net worth estimated by Forbes at $11.6 billion. Tesla Motors has business dealings with SolarCity.

It was recently reported that SolarCity is being investigated by Oregon prosecutors in connection with allegations that it used solar panels made by federal prisoners in renewable energy projects at two state university campuses for which it received $11.8 million in state tax credits designed to promote local employment.

Assuming the allegations turn out to be accurate, it is difficult to know where to begin in stating all that is wrong with this situation. A company chaired by the 44th richest person in the country that has received hundreds of millions of dollars in federal subsidies used prisoners paid less than a dollar an hour to install solar panels so that it can collect millions more in state subsidies.

Subsidies, whether federal or state, are by no means the largest contributor to inequality, but policymakers should try to find some way to limit their use by billionaires, especially those linked to shady business practices.