The Fruits of Supply Side Economics

We often hear the right wing Reaganites espousing the same old supply side rhetoric that Reagan himself pushed so successfully. I suppose this is a natural response, trying to continue a lie that worked once until it is finally disproved to the point that you can no longer use it effectively is a basic strategy. While most of those using the arguments today have fallen away from some of the terminology Reagan used because it has been proven to be disastrously wrong, there is still strong sentiment for the basic idea of smaller government and more free market enterprise. Without bothering to repeat that this didn’t work in Reagan’s time and has had disastrous results ever since, I want to go a little deeper into how big business in this country really works and explode the myth that the free market has anything to do with corporate business in this country.


Of the top ten Fortune 500 companies in the United States in 2010 3 were oil companies who between the 3 of them generated some 34 billion dollars in after tax profits last year. Taking the time to add up all profits from these same top ten Fortune 500 companies and divide this total number into the oil company profits I realized that these 3 oil companies account for 36% of the total profits of the top ten corporations. The interesting connection that most people fail to make after this point is that the US government supports this industry in a very large way financially. While it is near impossible to pin down exact amounts in the form of government subsidies these companies receive in various forms the best estimates are somewhere between 15 and 35 billion a year industry wide. For arguments sake let us take the lowest number of the two and say that 15 billion a year is an accurate number.


Adding up the total oil production of the top 50 companies in the US and dividing this into the production of the big three oil companies we see that these three oil companies account for about 37% of the total oil production in the US. Assuming these top three companies get an equal share of government subsidies this comes up to some 5.5 billion dollars a year these companies receive in the form of subsidies or 16% of their total profits. While this is fairly typical of the large corporations and their working agreements with the US government it hardly makes for a level playing field for the rest of us. Talk to any small business owner in this country and ask them if a 16% subsidy would help them. The subsidies themselves come in many different forms; the following of which are just a partial list:

• Construction bonds at low interest rates or tax-free
• Research-and-development programs at low or no cost
• Assuming the legal risks of exploration and development in a company's stead
• Below-cost loans with lenient repayment conditions
• Income tax breaks, especially featuring obscure provisions in tax laws designed to receive little congressional oversight when they expire
• Sales tax breaks - taxes on petroleum products are lower than average sales tax rates for other goods
• Giving money to international financial institutions (the U.S. has given tens of billions of dollars to the World Bank and U.S. Export-Import Bank to encourage oil production internationally, according to Friends of the Earth)
• The U.S. Strategic Petroleum Reserve


Looking a little deeper into oil companies in the US and their deals with the government we come upon another set of circumstances that work differently in the US than any other industrialized nation in the world. Presently, most of the oil reserves in the US are under public lands or in publicly owned waters offshore. While this is not unique to the US the sweetheart royalty deals that US oil companies get with our government in the use of these lands most definitely is different. US oil companies typically pay some 40% of their profits on the oil from these publicly owned lands back to the government while the average in the rest of the world on such deals is 65%. This number is further reduced on offshore deepwater rigs to 18%, or in special cases where the extraction is prohibitive; eliminated entirely. What this amounts to is another 25-38% of profits that oil companies in the US get to keep as opposed to the way this business works in the rest of the world.


How any of this fits into the description of free market enterprise is beyond me; a more accurate description would be government subsidized enterprise and the dirty little secret that the Republican party and Conservative commentators don’t want you to know is that all large corporations in this country operate under a similar umbrella while usually at the same time complaining that they are taxed too high. If they actually paid the 35% tax rate they are supposed to according to the law they might have a point. As we shall see, this is not the case.


For example, oil field lease agreements and drilling equipment are taxed at 9% in this country while almost all similar equipment cost taxes are in the 25% range. What this amounts to is that government subsidized corporations not only get incentivized deals to support their industry but they also don’t pay their fair share of the taxes on the profits they make. In 2009 Exxon advertised that they paid some 15 billion on a 34.2 billion profit before taxes. What they failed to point out was that this 15 billion was paid out to foreign governments where they had set up offshore tax structures specifically to avoid paying US taxes. In actuality they paid absolutely zero in US income taxes that year but were able to receive tax credits for the taxes they paid overseas while simultaneously taking advantage of the subsidies that the US government affords them. During the same time period Chevron paid some 200 million in US income taxes on 10 billion dollars reported profits. In case you are wondering, this comes out to about a 2% tax rate which is a little high for a large US corporation as we will see.


Let’s look at some other of the corporations on the Forbes ten lists for a moment. GE, which is listed as number 4 on the list with some 11 billion in profits last year, paid zero in US income taxes over that same period. As a matter of fact they have some 2.4 billion in tax credits for the same year. Hold onto your hat, it gets worse. GE, as a large corporate conglomerate, managed to relieve itself of most of its tax burden by shifting jobs overseas and hiring a small army of ex IRS examiners to help it file its taxes. Let’s look at this a little closer. GE makes a substantial amount of its profit margin in government contracting so it is a direct recipient of government funds while at the same time is steadily laying people off in the US to help its tax burden. From the US government’s point of view, this is a lot like handing someone a gun and paying them an obscene amount of money to shoot you in the foot.


Bank of America is listed at number five on the list. In 2010 Bank of America showed some 6.2 billion dollars in profits on their books. Of course this was after they received almost 1 trillion in interest free bailout money from the government so it isn’t hard to see how good their business acumen is to start with. Nevertheless, they also paid zero in income taxes while at the same time receiving a 1.9 billion dollar tax refund; not a bad way to make a living if you ask me.


Conoco-Phillips is next at number six on the list. As an oil company they also receive the same subsidy treatment that Exxon listed above does. The best figures available show them receiving some 16 billion in profits in the last three years while paying 450 million in income taxes. Obviously they need to hire better accountants because they paid in to the US coffers at an astounding 2.8% while Exxon paid zilch. Of course this is probably because of their less effective use of money spent lobbying Congress. They only spent 19 million dollars in that effort in 2009.


Ford Motor Company comes in at number eight on the list. They only reported 3 billion in profits in 2010. To their credit Ford didn’t take a government bailout last year. To the discredit of their accountants they actually paid in some income tax as well, some 69 million for a whopping 2.3% tax rate. Try to keep in mind as you read this that the unfair tax rate that all conservatives regularly complain about for business interests is 35%.


Earning honorable mention is Citi Group at number 12 on the list. While they didn’t manage to crack the top ten last year in total revenue they did manage to make some 4.4 billion in profits while paying exactly zero in income taxes. I don’t suppose their board of directors is too despondent about those two slots out of the top ten because they also managed to garner 2.5 trillion in federal money in the recent bailout.


Let’s see if we can make sense of all of this. Of the 8 corporations I have listed (all within the top 12 on the Forbes 500 list) they took in some 63.9 billion in reported profits last year. From these profits they paid in a total of 283 million in income tax over that same period. Wait a minute, I almost forgot; they also received 4.3 billion in tax credits over that same period. In actuality that means on 63.9 billion dollars in profits they paid in a -4.27 billion dollars in taxes (or made an extra 4.27 billion in refunds). Yet the American public is somehow supposed to believe that we live in country that is not business friendly.


Our government in actuality has evolved into a bunch of well paid cheerleaders for large corporations and the wealthiest one percent of Americans. Not only is our foreign policy built around supporting large business interests; much of the legislation bought and paid for by lobbyist from these same interests in Washington is specifically designed to help them line their pockets with subsidies. Our tax structure is an abysmal joke and if you are by any chance wondering who is the butt of the joke look at your pay stub next week to figure out where these subsidies come from. They are listed under income tax withholding.


The beginning of the deficit issues we are currently smothering under in this country occurred when Ronald Reagan came into office and began drastically cutting the tax rates on corporations and the wealthiest Americans. The truth of the matter is that we would not be in a deficit situation if we had not been handing out free passes in the form of subsidies and tax loopholes to the wealthiest among us for the last thirty years while steadily shifting the burden for paying for everything to payroll deductions on the middle class.