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The Social State is Affordable

That "we" can no longer afford the social state is gossip. Thinking this gossip will end is wishful thinking. In truth, we cannot afford the prevailing financial policy.

Mammoth corporations pay less and less taxes. Ernst Schmiederer and Hans Weiss show the tricks they use and how our tax laws help them.

Book Review of Ernst Schmiederer/ Hans Weiss "Asocial Market Economy. Insiders from Politics and the Economy Reveal how Conglomerates Plunder the State" (Asozial Marktwirtschaft), Koln 2004

By Robert Misik

[This book review originally published in: die tageszeitung, 10/9/2004 is translated from the German on the World Wide Web,  http://www.taz.de/pt/2004/10/09/a0392.nf/textdruck.]

Agreement resounds from industrial bosses to commentators: taxes are too high. The social state cannot be financed. The state grows rampantly. All of us are the mourners. "Tax and spend- liberals" are the greatest danger. The "Drive-down taxes"-ideologues are largely immune to empirical reality.

Still help is available. In their book "Asocial Market Economy", the journalists Ernst Schmiederer and Hans Weiss meticulously show "how conglomerates plundered the state". In short, the social state may be bankrupt but the money is not far away. The money is in the pockets of big business.

Well-researched and written smoothly, the report deserves a prize. Hans Weiss has had experience with the trade. From the "Bitter Pill" to the "Black Book on Brand-Name Firms", he has concentrated on this kind of research. Ernst Schmiederer who made a name for himself as New York correspondent of the Vienna newsmagazine profil is the co-author. All over Europe, the authors sought to uncover the tax tricks of the multinationals.

Weiss posed as a rich heir and flew to Jersey to advise the local subsidiary of Deutsche Bank. Like a few other offshore tax havens, this British channel island is notorious as a contact address for all who want to multiply their millions in overdrive. Ernst Schmiederer disguised himself as a representative of a Slovenia-American investor group and set out on an office search in a North German hole Nordfriederichskoog whose trade tax rate was exactly zero for years. The place had a magical attraction for German and international corporations that established post-office subsidiary firms there.

The trade taxes saved by the firms were missing elsewhere - in this case in the communities where these firms resided and paid taxes in the past. According to estimates, 800 million Euro were lost every year through the Nordfriederichskoog case alone.

The transfer of the corporate headquarters to an attic roo9m over a stinking hole is one of the most bizarre and amusing examples for the very individual tax savings models of large corporations. Internationally active businesses like their relations between parent companies and local subsidiary firms to be completely private so that only "losses" occur year after year in high tax countries and all their "profits" are heaped up in low tax countries. Another variant is in the mathematical indebtedness of the subsidiary with the parent company so that no profit arises any more as a result of high interest estimates. The profit is transferred effortlessly and completely legally to tax havens in Switzerland, the islands or at best Mauritius.

The consequences of these operations have long been dramatic since the governments - hectically striving to stop corporations from migration - have lowered business taxes for years or structured the tax laws so they offered good possibilities for creative organization. Many German communities face bankruptcy. Forty years ago 20 percent of the tax revenue came from profit- and property taxes. Today the amount is only 6 percent. In 1983 the corporation tax amounted to 14 percent of German tax revenue. Today it is a weak 2.3 percent.

The examples compiled by Weiss and Schmiederer are incredible. For years, Deutsche Bank did not pay any profit taxes but instead received tax refunds. Siemens, a showpiece corporation, received 119 million Euro in tax refunds from 2001 to 2003. For over a decade, DaimlerChrysler did not pay a cent in trade taxes in Stuttgart or Sindelfingen. The food multinational Unilever likes to channel Euros so that scandalously little comes to the authorities.

That "we" can no longer afford the social state is gossip. Thinking this gossip will end is wishful thinking. In truth, we cannot afford the prevailing financial policy.

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Oregon too 03.Mar.2005 12:36

George Bender

According to the folks who put on a local workshop on state taxes, the tax burden in Oregon has been shifted from businesses to individuals. We need to shift it back, but there seems to be no leadership.

The workshop organizers... 03.Mar.2005 13:58


...need to take a workshop in economics. There is no difference between taxing businesses and individuals. Businesses earn income by charging individuals for goods and services. When you tax the earnings of all businesses equally, the market has not been fundamentally altered. Work unit prices are still the same for all the businesses. Competition is unaltered. There are only two possible aggregate results:

a) Prices will rise and profits will remain the same, or
b) If the product or service is available elsewhere, especially from a free-trade zone, consumers will purchase the cheaper foreign product or service, destroying the local company.

The effect of corporate taxes then are roughly equivalent to the effects of a sales tax: rather regressive. Corporate taxes are something cynical politicians invented to tax the people without their knowledge of it.

There are no free lunches. You have to follow the dollars. Businesses don't create dollars -- they earn them from individuals.

James 03.Mar.2005 18:54

George Bender

No business is guaranteed any certain level of profit, and many can thrive on less profit.

Businesses cannot always pass on a tax increase -- or a restoration of the tax rates they used to pay -- to customers, because customers often resist price increases and refuse to buy the product or service at the price asked. Which tells the business that they have to come down on their price, and accept less profit. This is actually the way capitalism is supposed to work.

Business has bought politicians and rigged the rules in its favor. There is no reason we should accept this. It is simply a contest of our interests against theirs. I'm not going to help people get rich at my expense. If a business isn't serving my interests, and the interests of people like me, that I have no reason to keep it going.

Businesses get many services from the government, such as education for their workers, maintenance of transportation networks, law enforcement, etc., and they should pay for those services in taxes. Otherwise it shifts the burden onto the rest of us. It costs money to run a society. Pay up.

Or I can just listen to Rush Limbaugh. 03.Mar.2005 20:23

Red neck

There's nothing we can do we're all captives of the market. Whatever the market dictates we must obey. Sorry about Oregon's economy. I know they promised a gleaming high-tech future, but the market decreed bust, not much you can do about that 10% employment, 1/8 without health coverage, it's structural, you're screwed... Its all just immutable laws of the business cycle. The physics of the ebb and flow of trade. No, Businesses don't create dollars, banks and speculators do. Efficiency is waste. Progress is regression. Prosperity is poverty.

James, have you filed your schedule d yet? 03.Mar.2005 22:28

White Lilac

Of course there's a difference between taxing businesses and individuals. Mere mortals like us can't create foreign shell corporations to avoid tax, write off our dinners (or half of them) as business expenses, or help ourselves to a new SUV as a business deduction. Don't forget about that corporate trip to the slopes, I mean the conference room in Aspen, or the training course in Bermuda.

Want to tell me again why I pay more taxes than Coca-Cola?

You're missing the point 04.Mar.2005 00:17


It doesn't matter whether corporations can create devices to shelter their earnings from taxes. I never claimed that individuals and corporations are taxed equally. What I said was that corporate taxes ultimately tax individuals, not business. The amount of the taxes paid isn't relevant. What is relevant is where those taxes come from.

Just look at the history. Corporate tax changes do not affect corporate profits in anything beyond the fleeting. They affect product prices, or trade.

Also, I'm not sure what you mean about Coca-Cola. I just read their Form 8-K filed with the SEC, and they paid 1.375 billion dollars in taxes for the year ending Dec. 31. Under Sarbanes-Oxley, their CEO and CFO are going to prison if that's not accurate. Did you pay more than 1.375 billion dollars in taxes?


While it's true that some companies do escape income taxes entirely, they usually do so by way of expensing stock options, which really isn't so egregious. They're giving away a portion of the company as compensation, so that should rightfully be expensed.

Also, it's the individual that writes-off the cost of a business dinner. To the business, that's simply an expense which isn't taxable for obvious reasons.

I guess I shouldn't go too far and say there is zero difference between individual taxes and business taxes. But there is much less difference than people imagine. Most people have the impression that corporate taxes result in lower corporate profits, but that's just not true. In the long term, they always result in higher prices -- the exact same effect as a sales tax.

Somewhat similarly, the government could easily print money to pay for its services. The effect would hardly be different. The money supply would be inflated, causing prices to rise, causing individuals to afford less.

It's not even necessary to make the argument that we need to tax corporations to prevent them from acquiring too much power. If they have acquired too much power and are wielding it improperly -- as, say, Microsoft is -- we need only apply anti-trust laws. Sure, sometimes the company skates -- as did Microsoft. (And the walls came tumbling down). But other times they're splintered, as AT&T was.

Not that I care terribly whether corporations are taxed or they aren't. The root of the problem is our runaway, out-of-control spending, on war and destruction, and on frivolities like the Federal Department of Education. I don't care so much what the source of the taxation is so much as the degree.

I think the tax scheme which would strike the greatest balance between human freedom and equity would be a graduated negative income tax (Such as the Earned Income Tax Credit) for those making less than $30,000/year, no income taxes for those making below $50,000/year, and a flat, single tax-rate for those making over $50,000/year.

Thanks for the reality check James 06.Mar.2005 18:55

Dud w/puter

I agree with you that corporate taxes often turn into taxes on individuals just as sales tax does. I think that the Graduated Negative Income tax would be a far more efficient, decentralized and dignified solution to poverty than our current system is, as long as the basic guaranteed level is high enough. For those of you who don't know, the graduated negative income tax would grant cash to everyone below a certain level of income. The less someone earned, the higher the grant they would get. When their income rises, the subsidy system is structured so that their total earnings are more than their previous subsidy provided, so it does not completely destroy the "incentive" system. If implemented correctly, this would cut out the high administrative expenses of having to run governmental programs. It is a much more flexible system to give cash grants to poor people so they can spend according to their needs rather than making them adhere to government-dictated guidelines regarding what their needs are. I am wondering how feasible this all is, however. Do you have any specific sources or numbers about how much this would cost and what kind of tax rates would be required to implement this?

Where I disagree with you is on flat taxes. There is a huge difference in economic power between someone making 50k a year and 50 million a year, and it doesn't really make sense to arbitrarily draw the line at that level.