The Midwesterner: Blogging the Global Midwest

Blowing Smoke on Corporate Taxes

American corporate leaders love to complain about the nation’s high corporate tax rate, one of the highest in the world. This rate, they say, is stifling business investment and encouraging U.S. corporations to move their headquarters to other countries.

It sounds logical. But it may not be true. A scholarly look at global tax payments, coupled with an on-the-ground look at the effect of taxes on business investment, suggests that these corporate leaders not only are crying wolf but may be blowing smoke.

(This may seem an odd topic for this blog this week, considering the urban crisis here in the Midwest, in the St. Louis suburb of Ferguson, where mutual distrust between black residents and white police has exploded into violence. I’m going to give this a pass for the simple reason that I haven’t been in Ferguson in years and know nothing about what’s going on there now. This hasn’t stopped a legion of pundits and tweeters from sounding off, even though they haven’t been there either. I don’t choose to add my uninformed opinion to theirs.)

Now, where were we? Oh yes, corporate taxes.

Corporate leaders have been beating the drum for corporate tax reform, by which they mean corporate tax cuts. The U.S. rate is 35 percent, which is one of the highest in the developed world – Japan’s is highest, at 38 percent – and above the average 24 percent for the 34 advanced countries that make up the Organization for Economic Cooperation and Development (OECD). The rate in France is 33 percent, in Germany 30 percent, in Britain only 21 percent.

Many of these differences aren’t huge but the corporate leaders do have a point that our nominal tax rate is higher than that of most of our global rivals. The trouble is that these rates really are nominal, which the dictionary defines as “acting or being something in name only, but not in reality.”

The reality is very different, as a new paper by a law professor at the University of Southern California, Edward D. Kleinbard, says. According to Kleinbard, the big American corporations – the global corporations which are threatening to pick up and move – actually make out like bandits at tax time.

As any sophisticated corporation knows, there are various tax loopholes to keep that nominal rate nominal. One of the biggest, Kleinbard says, is the practice of keeping much of their income overseas and out of reach of the IRS. Altogether, he said, American corporations paid an effective tax rate of 12.6 percent in 2010, the last year for which figures are available.

Kleinbard said it isn’t the tax rates themselves that are tempting American-based companies to move their headquarters, if not their operations, to relatively low-tax venues such as Switzerland or Ireland. Instead, he said, they want to be able to use that money parked abroad without having to pay taxes on it. He estimates this hoard at $2 trillion: taxed at 35 percent, this would bring in $700 billion, which is more than the total U.S. government deficit.

This discrepancy between appearance and reality is an old story in Illinois, where major corporations such as Caterpillar regularly threaten to move to other states unless the state trims its 9.5 percent corporate tax. In fact, the state’s biggest corporations pay an average 3 percent in taxes and some pay nothing at all.

Does any of make any difference to corporate investment decisions, or any difference at all except for lowering corporate taxes and putting more of the burden on individual taxpayers?

The evidence is slim. Officially, the most “business tax-friendly” states, according to the Tax Foundation, are Wyoming, South Dakota, and Nevada. None of these is exactly overwhelmed by corporate investment. The reason, of course, is that big global corporations want to be in big cities, which have the best business services, the biggest airports, the best broadband, and the most amenities. All these benefits cost money: in the end, corporations will pay what they have to pay to be where the action is.

A story by Crain’s Chicago Business underlines this. According to this story, major real estate investors are paying record prices to buy property in Chicago and Illinois. That’s the same Chicago and Illinois that are staggering under huge public deficits, including unmet pension obligations, that seem certain to bring on property tax and other tax increases, sooner rather than later.

These investors know this, and are buying into the city and state any way. Why? Because they need to be here.

“Most, if not all, of our national retailers want to be here,” a real estate executive told Crain’s. “Chicago is one of the great cities and our retailers, whether they’re local, national or international, recognize that.”

Another executive said companies are simply building these expected tax hikes into their prices, confident they can recoup them.

“Everybody, everybody, everybody is underwriting taxes going up,” he said.

This isn’t just true of Chicago, of course. Other major cities – New York, London, San Francisco - are seeing real estate and other costs soar, because so many corporations and global citizens want to invest there. These costs aren’t driving anybody away: instead, more and more people want in. 

Actually, these costs are in fact driving some people away. These are the middle class and working class citizens of these cities, who are being priced out of town. Instead of cutting taxes for corporations and giving them tax breaks and other bribes to move in, the country and its cities and states would be smart to tax the corporations, which will pay if they have to, and use the money to subsidize ordinary workers who will indeed move out if they have to. 

A Falling Star in Chicago

Few politicians have seen their reputations dive so far and so fast as Richard M. Daley, the former mayor of Chicago and the symbol of what’s great and what’s grim about the city he ruled for 22 years.

Daley is in the news right now because of the 10^th anniversary of his greatest achievement, Millennium Park, the splendid lakefront spread that crowned the city’s rebirth from the depths of its Rust Belt squalor.

Millennium Park sparkles, no question about it. It’s a huge tourist draw. It’s given the city a central meeting place, Chicago’s own Tuileries. It’s a dazzling assembly of sculpture, art, fountains, music, gardens, fun, and culture. It also ran way over budget, created debts that the city is still paying, and included allegedly corrupt sweetheart deals that may yet land Daley in court.

In a way, Millennium Park sums up much of Daley’s reign, the longest in the city’s history.

He achieved much. The Loop revived. Tourism soared. Middle-class families and young people moved back into the city in droves. Navy Pier was renovated and became the city’s biggest tourist draw, even bigger than Millennium Park. Flowers bloomed along the city streets. A coalition of businesses and City Hall ran the city, and got things done.

Mostly, Daley understood that his old factory town was evolving into a global city, and sped the process, seeking foreign investment, supporting the city’s universities, even traveling to China and other foreign points to give Chicago a new global reputation to replace the old stereotype of a gang-ridden City of the Big Shoulders.

The Economist magazine anointed Chicago as a “success story.” Daley was hailed as one of the world’s most effective mayors. Around the Midwest, I got used to hearing officials in other clapped-out industrial cities say they couldn’t compete with Chicago “because you’ve got Richie Daley.”

All this is true. So is the downside of the Daley era, much of it broadcast by his critics during the tenure but only now becoming part of the general public assessment of post-Daley Chicago. Much of it isn’t pretty.

Again, Millennium Park is symbolic. Daley had promised it wouldn’t cost taxpayers a cent. By the time it opened, four years later and hugely over budget, the park cost taxpayers $95 million, plus $30 million to run it, plus $58 million for the lease of its parking garages, which were supposed to have helped pay the bill.

That’s just a starter. Chicago faces an annual structural deficit of $1.2 billion, including payments on under-funded pensions, the worst in the nation: Chicago isn’t Detroit but budget-watchers here are talking seriously about the possibility of civic bankruptcy.

Daley’s successor, Rahm Emanuel, faces the worst budget crisis of any major city, except Detroit, and knows he has to both slash services and increase income – possibly through higher property taxes – to begin to balance the books. The crisis, plus Emanuel’s abrasive personality, have eroded his popularity to the point that it will be hard for him to do what needs to be done and still win re-election next year.

The good and the bad – the global stature and the crushing debt – go together. Being a global city is expensive. The city needs to spend big money on infrastructure, transport, schools, especially policing. But because of the Daley debt, the money isn’t there.

Other chickens are roosting. Chicago remains one of America’s most segregated cities, a problem that Daley inherited but failed to solve. As a result, one-third of Chicago, including the businesses that Daley supported, occupy a booming global city, while many African-Americans and Hispanics live in a third world ghetto, stripped of jobs and battered by the resultant violence that is giving the city a new title – America’s murder capital.

In an attempt to draw middle-class families into Chicago, Daley persuaded the state to give him control over the city’s schools. The result has been a true improvement in public schools, including charter schools, in better neighborhoods, and the decline of many schools in black neighborhoods into dropout factories. Chicago, always a divided city, became more so in Daley’s time.

But debt and deficit remain the legacy that Daley’s critics most often cite. Two examples stand out:

In 2007, as part of his misbegotten bid for the 2016 Olympics, Daley bought a decade of labor peace with a lavish 10-year contract with public employee unions. The city didn’t get the Olympics but it must live with this contract for another two years.

Most egregiously, Daley leased the city’s parking meter system to a private firm for 75 years for a total upfront payment of $1.16 billion. The complex contract was rammed through his rubber-stamp city council in two days, guaranteeing that no alderman even read it, much less understood it. The money was gone in three years, used to pay the city’s bills. It’s clear that the city got a stupendously bad deal. Emanuel has tried to break or modify the contract, with very little luck.

A big children’s park, named after Daley’s late wife Maggie, is being built next to Millennium Park. Experts who’ve seen the plans say it looks first-rate, but another expensive project bearing the Daley name is unlikely to help the former mayor’s reputation.

Since he left office two years ago, Daley has largely dropped out of sight. Emanuel almost never refers to him by name. Daley is a fellow at the University of Chicago’s Harris School and is chairman of a Brookings Institution project on global cities, but keeps a low profile in both roles.

As mayor, Daley presided over a culture of casual civic corruption but there is no evidence he enriched himself in office. Now, though, he is making money as a Coca-Cola director, an advisor to JP Morgan Chase and as Of Counsel to the law firm of Katten Muchin Rosenman. It’s escaped nobody’s notice that Katten Muchin negotiated the disastrous parking meter deal.

So far, Daley has stayed out of court himself, even as a witness. At the moment, his lawyers are arguing that unexplained health problems will keep him from testifying in a city lawsuit involving a clout-heavy deal for a restaurant in Millennium Park. The suit alleges that Daley’s administration – specifically the city’s Park District – gave the sweetheart lease on the Park Grill to a firm headed by one Matthew O’Malley. O’Malley was the lover of a Park District official, Laura Foxgrover, who gave birth to O’Malley’s baby while the negotiations were going on.

In a deposition, Daley said he didn’t remember much of this. Lawyers would love to get him on the stand. Daley isn’t charged with anything, but he is fighting to stay off the stand, perhaps all too aware that what’s left of his reputation could be gone by the time his testimony ends.

A Grab Bag of Good Reading

Once upon a recent time, most of what we read appeared in our local newspapers, or maybe the Time magazine we bought at the corner drugstore. Now the web delivers a daily blizzard of articles, op-eds, blogs, think pieces, and other journalism. One blog leads to another. Friends send email with interesting links. Every day, I read something new and think, “Gee, everybody should read this.”

So, in lieu of a blog this week, here’s a reading list of recent items that caught my eye. Most deal with the economy, or jobs, or globalization. Some are Midwestern, others national. Each deserves a few minutes of your time.

(And if you've got some suggestions of your own, please let us hear about them.)

• John McCarron, Chicago Tribune, on Wandering Corporations
  John McCarron, the Chicago journalist and teacher, writes on The Great Vamoose of so-called American corporations, like Walgreen's, exploring moves to overseas tax havens to save their shareholders a few bucks, and never mind the damage to the country where they were born and grew.
  
  
• William Galston, The Wall Street Journal, on Jobs for Young People
  William Galston, a senior fellow at Brookings, wrote in The Wall Street Journal on what this economy is doing to young people who just want a good job, and why so many educated young adults have fetched up as baristas. 
  
  
• Two Pieces on the Middle Class
  Once the US had the world’s largest middle class. We even had the world wealthiest poor people. No longer. A New York Times article reported the news, and Thomas Edsall, one of our best economics journalists, gives one reason why.
  
  
• Harold Meyerson and Thomas Edsall on Liberal Cities
  American Prospect magazine has a piece by its editor-at-large, Harold Meyerson, on how liberal mayors in some cities—not only New York City but Minneapolis, Pittsburgh, Seattle, and Boston—are following new policies to close the income and wealth gaps between the classes in their towns. It’s an intriguing idea but Edsall, once again, has his doubts.
  
  
• Brookings on Technology and Cities
  One new wrinkle is the use of technology and big data to deal with the problems of cities. Brookings did a seminar on this and came up with some thoughts. 
  
  
• The Economist and Bloomberg on Technology and Jobs
  Some other articles look at the impact of technology on our standard of living with a more skeptical eye. These include The Economist magazine, usually a drum-beater for open markets and technology, and Bloomberg here and here.
  
  
• Chicago Tribune on the Image of Cities
  When it comes to polishing an image and drawing in foreign investment, some unlikely places could teach Midwestern cities, such as Chicago, a thing or so. So says Alex Rodriguez in the Chicago Tribune, after a visit to Bogota. 
  
  
• The Buzz About Piketty
  Have you read Capital in the 21^st Century, that Thomas Piketty book yet? If not, you’ll have to wait a while. Harvard Press, to its delighted amazement, has a blockbuster on its hands, and is scurrying around to print more copies—a lot more copies—than it had planned. In the meantime, Amazon says it’s out of stock and my local Barnes and Noble says it won’t have any copies for at least a week. In the meantime, there have been some rapturous reviews: a review by Branko Milanovic at the World Bank. Or by the excellent John Cassidy in The New Yorker. Or Paul Krugman’s review from The New York Review of Books.
  
  There will be dissidents a-plenty on this, mostly the classical economists whom Piketty scorns, but most of them have yet to chime in. Tyler Cowan is one of the first, but even he admits that Piketty’s book is a landmark event.

A Report from a Vanished World

Forty years ago this month, Studs Terkel published his epic oral history, Working: People Talk About What They Do all Day and How they Feel About What They Do. Today, the book reads like dispatches from a lost world.

Chicagoans knew Terkel, who was 96 when he died in 2008, as a legendary broadcaster and master interviewer. Nationally, his reputation rested on his oral histories – books of edited interviews, mostly with unsung Americans, about their lives during the Depression, in World War II, or in old age. One of them, “The Good War,” won a Pulitzer Prize.

Working was probably Terkel’s best and best-known book. It includes interviews with 137 persons, from steelworkers to truckers to stewardesses (as they were called then) to jockeys to bosses. Recurring themes run through the book, and it is these themes that make it ancient history. There's no better way to gauge the changes in working life than to re-read how it seemed then.

A Big Win for Chicago

Chicagoans are justifiably ga-ga over the news that their city has been awarded a $320 million digital manufacturing institute with a mandate to invent the future.

At first glance, here’s what it means:  

It’s a big deal, all right. The Digital Manufacturing and Design Institute, backed by $70 million in federal money, is to be an idea factory for advanced manufacturing. It could make Chicago a global center for industrial research and restore the city’s status as a global center of manufacturing.

But this is not to say that Chicago is about to be, once again, the City of the Big Shoulders. Its days of powerhouse mass manufacturing are over. The institute should spin off new companies, create good jobs, bring in serious money and contribute to the city’s wealth through exports. But the jobs that were lost when the smokestack industries closed aren’t coming back.

The False Promise of Eds and Meds

Much of their manufacturing has disappeared, but many old industrial towns in the Midwest still have two things going for them. These are colleges and hospitals, or eds and meds, as they’re called. Most of these towns are counting on these industries to support them in the way that factories once did.

This always sounded a little desperate, even when both education and medicine were fast-growing parts of the economy. That’s stopping now, and towns that have staked their future on teaching young people and treating old people may be in for a disappointment.

Basically, both eds and meds depend heavily on government financing. In an era of tight government budgets at all levels, that financing just isn’t going to be there.

The Political/Economic Divide

You’ve heard the debate about the shortage of good jobs, the stagnation of wages, the collapse of the middle class – all the problems that ail the U.S. in general and the Midwest in particular. Actually, there’s not one debate but two, and that’s one reason why the problem isn’t getting solved.

Simply put, one debate is economic and the other is political. The real problem is both economic and political, but you’d never know it from listening to the two debates.

Farmers Fighting Back

It will be news to most Midwestern farmers that they should turn an unused corner of their barns into a public relations department. But they do, and it looks like this may be happening.

At the moment, the farming debate in this country has been seized by a handful of city-based ideologues who have never been on a real farm and scorn farmers who till more than 20 acres and actually try to turn a profit.

The result is that the people who produce most of America’s food have been losing the debate. Now they’re fighting back.

Talking About Immigration in Madison

As we've reported earlier, The Chicago Council on Global Affairs sponsored a major report on comprehensive reforms in immigration law, acknowledging the moral component of reform but stressing the economic benefits -- that rational reform would bring a huge economic payoff to the Midwest and its people.

My colleague, Juliana Kerr, organized this project. She went to Madison, Wisconsin, recently to speak to different groups there on immigration law reform. She has turned what she said and heard in Madison into a report on her trip, and she agreed to let me reprint it here. 

Old Jobs, New Jobs: Do They Match Up?

“To simply measure manufacturing health based on the number of jobs, that’s not fair.”

                                 Todd Teske, CEO, Briggs & Stratton

The transformation of Midwestern manufacturing, from its powerhouse past to its uncertain future, continues to play itself out. Here are some capsule insights into what’s happening now:

• Manufacturing in the Midwest is vigorous, even growing. But the number of jobs on factory floors continues to fall, with no end in sight. The reason is automation.
• High-end or advanced manufacturing is cited by most experts as the wave of the future. But no one knows how many jobs it will create.
• Solid statistics on the number of manufacturing-related jobs are hard to find. If the old-line assembly line jobs on factory floors are vanishing, companies require a new breed of “indirect employees,” high-skill engineers or IT specialists, who don’t show up in the manufacturing jobs figures, as the government counts them.
• Presumably, these “indirect” jobs will pay well. This presumption may be right or wrong. Earnings for college graduates are falling and it’s logical to assume that jobs in a fiercely competitive field such as industry are part of this slide.

I’ve long argued that the only measure of an economy is the well-being of the people who live within it. The quote at the top of this posting says that manufacturing is doing fine but the people who depend on manufacturing for their living aren’t – and that’s OK.

If this is our economic future, we’ve got a problem.