The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  The reality is that Congress created a host of subtle subsidies for moving jobs, investment and profits offshore, although many members of Congress, because they seldom read the bills they pass, probably even now have little idea what they did. Even if they do, few members understand the administrative regulations that implement these laws.

  When companies use accounting and tax tricks to report huge profits in the Cayman Islands, Bermuda and Ireland, even though they have no employees there, they both push down your wages and push up your tax burdens.

  The wage push comes from the availability of cheap labor and the free flow of goods into the United States, which in turn adds to pressure to move more jobs offshore to take advantage of cheap labor.

  The tax push comes from rules in the fine print that do not just enable moving jobs offshore, but actually subsidize doing so. This movement of jobs narrows the tax base as wages and profits move outside the United States, further weakening the economic base to which taxes are applied. Companies getting tax deals that let them bring profits home at an 85 percent discount, as Pfizer did, or tax-free, as Merck did, aren’t much concerned about American job losses. If you are an executive who gets to defer paying taxes, or a hedge fund manager who gets both deferral and a super-low 15 percent tax rate, these policies look heaven-sent.

  Your tax burdens increase even more when multinational corporations use their untaxed profits offshore as collateral for loans in America. The interest paid in the United States is tax deductible. That means a tax break for the company in the United States. And the long, steady decline in the share of taxes paid by corporations means that you, as an individual taxpayer, must make up for this through taxes, fewer government services or more government borrowing, which is really just a tax, plus interest, on your future income.

  FAUX FREE TRADE AND JOBS

  In the second decade of this century you can expect more efforts to get corporate tax holidays like the 2004 Jobs Creation Act, which was followed not by the promised 660,000 new jobs, but the destruction of more than 100,000 jobs. Pfizer, Microsoft, Dell and many other multinationals with untaxed profits offshore want another, and much bigger, Jobs Creation Act. If they get it, then expect even more Americans to be fired, which means higher tax and government debt burdens for you, if you are lucky enough to remain employed, because the burden of supporting government will be spread among fewer workers.

  The Obama administration, which is closely aligned with the global financier class, wants to expand our existing wealth-destroying faux free trade agreements. His opponent, Mitt Romney, is also a champion of these policies. The political-donor class would not have it any other way.

  People without jobs, or those forced to work for less pay, have less money to spend and save. Over time, that means slower economic growth, fewer opportunities and fewer jobs. Smaller manufacturers suffer. Some of them just do not have enough scale to justify the costs of going to China or even Mexico, so they stop investing in their enterprise and watch the family business dwindle because of government policy, not their own shortcomings.

  One crucial fact is often left unsaid: our trade with countries where we do not have so-called free trade agreements is growing faster than with countries with which we have such agreements.

  The implication is clear: free trade agreements are less about increasing trade than about lowering costs (by replacing American workers with cheap overseas labor) so owners and financiers can harvest a larger share of the economic fruits.

  So far most of the lost jobs and lowered wages have come at the expense of factory workers, but that is changing. Thanks to the Internet any job that can be done on a computer can be moved offshore. Engineers, accountants, graphic designers and millions of other workers could see their jobs sent “offshore.” A case in point? The Reuters news agency, for which I now work, fired twenty American and European journalists in 2004 and replaced them with sixty journalists who were paid such low wages in India that the company cut its labor costs by more than $200,000. Reuters said it was about saving money, but that shouldn’t have been the headline. In fact, the job exchange was about preserving fat pay for top executives. If it were about saving money, then firing the four highest-paid Reuters executives and replacing them with a dozen talented managers in Mumbai, paid on the same salary reduction scale as the journalists, would have saved the company $968,000 a year, more than four times as much.

  Moving jobs offshore comes with unseen costs. Subtle differences between cultures can lead to confusion and misunderstanding. In the late 1980s at Dow Jones, executives fretted over how much more it cost to have the European edition of the Wall Street Journal copyedited in Brussels than in New York. One of those who pointed out the problem of only counting costs was Fred Brock, an American copy editor then working in Brussels. “Great care was taken to ensure that the paper reflected European perspectives and European sensibilities,” Brock noted, because otherwise fewer Europeans would buy the Journal. In time the copydesk work was shifted to America and Journal sales, as Brock predicted, slumped.

  The depth of the job problem in America is often glossed over by politicians referring to new record-setting job numbers. American employment reached a new peak in 2007, for example, when the number of people who earned any wages totaled 155,570,422. In 2008 this figure slipped slightly, by 136,000. Then in 2009 the bottom fell out of the job market. Every thirty-fourth person who earned wages in 2008 went all of 2009 without earning a dollar.

  Fewer than 151 million people earned any wages at all in 2009. That’s 4.5 million people—again, one in every thirty-four Americans—who worked in 2008 but found no work during all of 2009. Add in population growth, and it means that the hands and minds of 6 million Americans were idle for the entire year. What a waste of talent.

  The job loss would have been worse but for the stimulus package passed shortly after President Obama was inaugurated in January 2009. The Congressional Budget Office and other nonpartisan experts have shown that the Obama stimulus saved or created between 2 and 4 million jobs. That prevented the Great Recession from morphing into another Great Depression. But because the stimulus was much smaller than the drop in incomes, and 40 percent of it was directed at tax cuts (which by their nature are savings and thus not stimulative), Americans still saw high unemployment.

  If Obama becomes a one-term president, historians will note his failure to insist on a bigger stimulus, to spend the money fast and that bussiness tax cuts do nothing for companies that pay little or no tax. Besides, no one hires workers to get a tax cut. Businesses hire more workers when they have customers who want their goods and services, not when someone dangles a tax cut in front of them.

  Besides, a stimulus is not a long-term solution, only a short-term means of compensating for a lack of economic activity. Real growth stems from economic policies that encourage investments and require workers of all kinds, from janitors to mathematicians. Policies that favor moving jobs to China and investing capital offshore auger fewer jobs and lower pay for all but the very skilled.

  FLAT WAGES EXCEPT AT THE TOP

  For all the talk of prosperity in America, the numbers tell another story. Prosperity resides mostly among the top 10 percent or so. A third of workers in 2010 made less than $15,000. Their average pay was just $6,000 each. The numbers are stunning, aren’t they? Let’s look at the details.

  Many of those 50 million workers only wanted part-time employment. They included students and homemakers and retirees looking for a little extra money. But also included were millions who put in forty hours a week with no paid vacation and no fringe benefits and whose gross pay never amounted to $300 a week.

  Half of those with jobs earned less than $26,364 in 2010. That’s $507 a week. The median wage, in 2010 dollars, fell back to the level of 1999. The trend is worrisome; in 12 years, incomes should rise, not fall. Will the future bring less and less income?

  The median wage—half earn more, half less—has been stuck at just about $500
a week since 1998. Since 1990—two decades ago—it’s only gone up 10 percent, or about $48 a week after adjusting for inflation.

  The average wage in 2010 was $39,959—or $768 a week. Like the median wage, the average (or mean) has also been stuck at about the same level for a decade, at around $750 a week. Back in 1998 it was $700 a week. And back in 1990 it was about $636 a week.

  But let’s look at these numbers together.

  From 1990 to 2009 the median wage went up 10 percent while the average rose almost 19 percent. In 1990 the median wage was 72 percent of the average wage. By 2009 the median wage was down to 67 percent of the average as wages for most workers stagnated or fell, while those at the top rose. The spread between the median and the mean grew over those years, $9,300 to $13,000.

  WAGES ONLY GROW AT THE TOP (IN 2012$)

  Median wages—half make more, half less—were flat from 1999 through 2010, but the average or mean grew, indicating only higher-paid workers had real wage gains, especially those making more than $1 million per year.

  YEAR MEDIAN MEAN

  1999 $27,679 $40,247

  2000 $27,918 $41,091

  2001 $28,195 $40,907

  2002 $28,247 $40,675

  2003 $28,146 $40,740

  2004 $28,362 $41,528

  2005 $28,145 $41,637

  2006 $28,323 $42,190

  2007 $28,474 $42,883

  2008 $28,250 $42,248

  2009 $28,079 $41,988

  2010 $27,735 $42,036

  CHANGE $56 $1,991

  PERCENT -0.2% -4.9%

  Source: Social Security Administration, infl ation calculations by author.

  What that tells us is that we need to examine growth moving up the income ladder.

  In 2009, three out of four workers made less than $50,000. Nine out of ten made less than $80,000. Only one in sixteen made more than $100,000. Only one of 100 made more than $200,000. So the wage growth is mostly among those making at least $100,000, the top 6 percent or so.

  The real growth, in fact, is way, way, way up the ladder for salary and bonuses.

  From 1990 to 2009 the number of Americans making more than $1 million in salary, in 2009 dollars, increased at seventy times the size of the overall workforce. Million-dollar-plus jobs grew from fewer than 7,000 to 78,000. That high pay lifted the average, but it also served to distort our view of the average worker’s income because relatively few Americans saw their pay rise much, if at all, in real terms.

  These figures come from the most detailed and accurate source of jobs and pay data in the United States, the Medicare tax database. Even if you pay close attention to the official statistics on earnings, you probably have never heard or read the numbers on these pages unless you follow my work at Reuters.com. That’s because no other mainstream news organization, no professional economist who blogs and no citizen journalist has used the Medicare database to analyze what is happening to the earnings of Americans.

  The Medicare tax database is valuable because it is an absolute flat tax, with no exemptions or exclusions, on every dollar of compensation paid to workers. When executives exercise stock options, when bosses pay out bonuses and when teenagers at the fast-food counter get paid, their remuneration, to the penny, goes into this database (unlike statistics from the IRS, the Census Bureau, the Bureau of Labor Statistics and other government agencies which, though they routinely issue income reports, base their numbers on surveys and statistical samples).

  In 2009 total wages came to $6 trillion. Or, to be precise, $6,009,831,055,912.11.

  Big as that number was, it remained virtually unchanged from 2000 and was smaller than in 2007 and 2008 when figures from those years are adjusted for inflation. Indeed, in cents compared to each dollar earned in 2007, workers in 2010 made less than ninety-five cents. Total income, median income and average income were all down in 2010 compared to 2008—and were hardly changed from 2000. Together, these figures show how much the rigged economy, and the global economic downturn that it helped cause, damaged overall growth and spread misery widely.

  Among all the big government agencies that gather and analyze data on people’s earnings, the Social Security Administration does something unique and valuable. It breaks pay down into narrow categories, with a top category of $50 million or more. Something very significant is taking place at that rarified level, which relates to how the price gouging described in the previous chapters is damaging our economy.

  Until 1994, the top income category in the Social Security Administration database was $5 million of salary and bonuses. That year two new categories were added. The new top category was $20 million and higher. Just twenty-five Americans held jobs in that top category. Their average pay was more than $45 million in 2010 dollars.

  In 1997 two more high-pay categories were added. The top one measured jobs that paid $50 million or more. There were thirteen of these extremely high-paying jobs in 1997. Those twenty-five super highly paid workers in 1994 had grown in just three years to 116, of whom thirteen made more than $50 million.

  In 2007, the last peak year for the American economy, there were 151 Americans whose salary and bonuses totaled more than $50 million. Their average pay was $94 million. In the recession year of 2008 the number of very top jobs fell back slightly to 131, with average pay slipping to $91.2 million. In 2009, the worst year for workers since the Great Depression, just 72 workers were paid more than $50 million. They averaged $84.1 million. In 2010 this rose to 81 workers paid an average of $79.6 million.

  We do not know who these highly paid workers were. We do know that very few of them were top executives at publicly traded companies. The highest paid CEO in 2009 was Larry Ellison of Oracle, who made $84.5 million. The second highest CEO made $34 million, not enough to make the top pay category tracked by Social Security.

  We also know they were not hedge fund managers. Why? Because hedge fund managers get to call their share of profits “carried interest,” which is not subject to the Medicare tax (recall that Congress lets hedge fund managers defer paying their taxes for years or decades, and when they finally do pay, the rate is just 15 percent).

  The seventy-two may include some Hollywood producers, assuming they, for some reason, had their share of blockbuster movies classified as ordinary income. It may include some executives who built up huge, and untaxed, deferral accounts that they cashed in. But most likely many of these seventy-two highly paid workers are Wall Street traders, whose bonuses are taxed as ordinary compensation. Those bonuses were made possible because taxpayers assumed the massive losses from Wall Street’s bad bets.

  What this data shows is that, over a long period of time, the vast majority of Americans have seen little or no improvement in their wages. Millions of people have seen their real total compensation decline as employers have raised wages just enough to keep pace with inflation, while eliminating pension plans, eliminating or reducing contributions to 401(k) savings plans, as well as requiring that workers pay a growing share of health-insurance costs out of their pockets.

  So what should we do about all of this?

  25…

  Solutions

  Failure is impossible.

  —Susan B. Anthony

  25. We can reverse the pernicious public policies that are making so many worse off by taking from the many to enrich the few. If we make good choices and make our voices heard, we can get back on the path to a productive and prosperous society. What follows are solutions for specific industries, followed by an overall recommendation to get America back on the path to widespread prosperity.

  COMPETITION

  Nothing is more hated by big business than competition. In a competitive market with many suppliers of a good or service, the consumer shops for the best deal. That drives prices down. This pressure on prices was the great insight of Adam Smith in his 1776 book, still in print after 235 years, An Inquiry into the Nature and Causes of the Wealth of Nations.

  Smith saw that if producers seeking profits compe
te against one another in a market peopled with informed consumers, the general economic improvement is akin to an invisible hand guiding the market. But the key here is competition. Simply calling a market “free” does not produce any gains; when we let one firm or a few firms capture the market, they can compete to raise prices rather than lower them.

  As we saw with the telecommunications industry in Glasgow, Kentucky, and Scottsboro, Alabama, predatory pricing to keep competition at bay is all around us, but the reality has been turned on its head by big business misapplying the theory of contestable markets. The railroad industry, too, lacks competition and is today as highly concentrated as when our government first regulated corporate prices in 1887 by creating the Interstate Commerce Commission to deal with abusive railroad industry practices.

  ACTION: We need to challenge the use of the term “free” markets, which has a technical meaning for economists, and replace it with support for competitive markets.

  UTILITIES

  If ever there was an industry where organized and concentrated action can bring reform it is in the regulated monopolies—utilities, railroads and pipelines. These enterprises cannot get up and leave for cheap labor in China. They have no choice but to invest and operate where they provide service. The problem is to get them to be servants of the economy, not pillagers of it.

  State legislatures have repeatedly cut funding for regulatory commissions and, notably in California, have appointed industry-friendly commissioners. Meanwhile, funding for the Federal Energy Regulatory Commission grows because fees from the industry finance the commission and FERC has proven eager to enable price gouging and impose fake taxes through rigged proceedings. The process has become heavily weighted toward the utilities.

  Simple and obvious reforms would improve the economy by restoring the crucial concept of just and reasonable prices, while also ensuring that assets are not sucked out of monopolies by holding companies. Reforms would have the virtue of ending the tax games that force you to pay taxes that never get to the government, as shown in earlier chapters concerning electric and pipeline industries (see pages 77 and 90), which amounts to nothing more than legalized theft.