Capturing the Multinational Dragons’ Gold

As medieval dragons do, the dragon in the Beowulf epic sleeps on a pile of gold. With magic sword and shield, Beowulf kills the dragon and, mortally wounded, distributes the gold to his grateful people. Today’s multinational dragons sleep not on gold, but on hoards of cash. Meanwhile little firms—the true “job creators”—perish for want of cash. We don’t need to assault the dragons; we do need to tear away the tax privileges on which they depend.

In an article appropriately titled, “Dead Money” (11/01/12), The Economist reports how major corporations trim real investment—such as new technology—while piling up cash. For example, according to Thompson Reuters, firms in the S&P 500 held about $900 billion in cash at the end of June, up 40% from 2008. The Economist dismisses the conservative claim that “meddlesome federal regulations and America’s high corporate-tax rate is locking up cash and depressing investment.” Why? For two reasons: first, all big multinational firms have been hoarding cash, not just US-based ones. Second, research cited by The Economist shows a growing trend in cash-hoarding since the 1970’s.

Small businesses are the nation’s employers. According to Census data, in 2008, the 99.7% of US firms with fewer than 500 workers accounted for 49.4% of US employees. By contrast, the 0.017% of firms with over 10,000 workers accounted for 27.3% of US employees. In 2007, comparing firms with under half a million in sales to those with over $100 million, the small firms averaged 15 employees per $100 million sales while the big ones averaged only three.

Yet today a desperate shortage of cash cripples small firms’ ability to grow and increases their risk of failure. Why so? Unlike big firms, small firms mostly operate on borrowed money. They routinely borrow to meet payroll or buy materials, repaying the loans when they collect from customers. This is the structure of businesses supplying the auto industry; failure of GM and Chrysler would have destroyed thousands of small suppliers.  During the bubble years, banks readily loaned to small businesses. But come the 2008 crisis, banks slammed the doors, refusing to roll over old loans or issue new ones, even to customers with perfect credit records.  Small businesses laid off employees, or simply folded.

Textbook economics says that banks move funds from savers—like the cash-hoarding dragons—to investors like small firms. But today, that doesn’t happen. Due to bad investments in mortgage-backed securities, banks have less money to lend. Their optimism has turned to gloom. The collapse in home values has reduced collateral small business owners can offer for loans. Finally, big banks mostly lend to big firms while little banks lend to little ones; the failure of many small banks and the consolidation of giant banks into megabanks has left fewer banks willing or able to lend to small business. With the banks not functioning, the dragons’ cash stays parked in safe government securities.

At this point a simple person might ask, can’t we just transfer some of the dragons’ spare billions to needy small businesses? Yes we can, through the tax system.

Step one: restore the taxes on corporate profits and end giveaways. Over the last 30 years, the tax system has increasingly favored the dragons and the 1% who own them. Due to accumulated loopholes, big firms like General Electric pay little or no tax on profits. Moreover, as documented by the New York Times  (12/2/2012), such firms increasingly succeed in bullying local governments into giving them tax concessions and subsidies, some $80 billion a year.

Step two: Protect small firms and low wage workers from the real job killer taxes: Social Security, Medicare, and soon, Obamacare. FDR made a devil’s bargain in financing Social Security with a highly regressive tax on the lower end of the wage scale. Lyndon Johnson added Medicare to the bargain. As part of the Reagan tax “reforms”, Alan Greenspan compounded the damage by jacking up Social Security rates in order to cut rates on high incomes. As for Obamacare, based on Romneycare, don’t forget it was originally designed by the Heritage Foundation!  A recent Tax Policy Center report estimates the regressive tax burden on low and moderate-income households may exceed 50%–a burden shared with their small business employers.

So capturing the dragons’ gold, a heroic task in itself, won’t do it. Even as we struggle to preserve social programs, we must reform the funding. Tax credits for low wage workers and small businesses would help, as would extending the Social Security tax to all income while lowering the rates. As for Medicare and Obamacare—imagine a single-payer health care system, Medicare for all, funded by dragon taxes!

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