Walmart’s Game Plan and Capitalism’s Endgame

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On tax day, when millions of American taxpayers and small businesses pay their fair
share to support critical public services and the economy, they will also get stuck with a multi-billion dollar tax bill to cover the massive subsidies and tax breaks that benefit the country’s largest employer and richest family.

[T]he American public is providing enormous tax breaks and tax subsidies to Walmart and the Walton family, further boosting corporate profits and the family’s already massive wealth at everyone else’s expense. – Americans for Tax Fairness (ATF), “Walmart on Tax Day,” April 2014, p. 3 (here).

As I have been demonstrating on this blog, capitalism is a self-destructive economic system and the vehicle of self-destruction is excessive wealth concentration occurring when regressive taxation allows rapid inequality growth.  Walmart provides what may be the best available demonstration of the mechanics of this process. Here is ATF’s description of the company and the Walton owners:

Walmart is the largest private employer in the United States, with 1.4 million employees. The company, which is number one on the Fortune 500 in 2013 and number two on the Global 500, had $16 billion in profits last year on revenues of $473 billion. The Walton family, which owns more than 50 percent of Walmart shares, reaps billions in annual dividends from the company. The six Walton heirs are the wealthiest family in America, with a net worth of $148.8 billion. Collectively, these six Waltons have more wealth than 49 million American families combined. (p. 3, footnotes omitted)  

Compare that with Walmart’s similar description of itself on its website’s “Corporate & Financial Facts” page in its “News & Views” section (here):

Walmart serves customers more than 200 million times per week at more than 11,000 retail units in 27 countries. We employ 2.2 million associates globally, including approximately 1.3 million in the United States. Walmart is one of the largest private employers in the U.S. and Canada. For the fiscal year ended January 2013, Walmart increased net sales by 5% to $466.1 billion and returned $13 billion to shareholders through dividends and share repurchases. Walmart ranked second on the 2012  FORTUNE 500 list of the world’s largest companies by revenue.

The Walmart slogan, on its “Our Story” page, is: “Saving people money so they can live better.” It is true that Walmart strives mightily to charge the lowest prices on most of the things it sells. That is the cornerstone of its game plan. But Walmart’s contribution, ironically, is to incrementally worsen the lives others live, not improve them, while the Walton family prospers astronomically at the expense of the markets and societies it dominates. In broad terms, Barry Lynn explains why:

Until we elected Ronald Reagan president, both Democrats and Republicans made sure that no chain store ever came to dominate more than a small fraction of sales in the United States as a whole, or even in any one region of the country. Between 1917 and 1979, for instance, administrations from both parties repeatedly charged the Great Atlantic and Pacific Tea Company, the chain store behemoth of the mid-twentieth century that is better know as A&P, with violations of anti-trust law, even threatening to break the firm into pieces.

Then in 1981 we stopped enforcing that law. Thus, today Wal-Mart is at least five times bigger, relative to the overall size of the U.S. economy, than A&T was at the very height of its power. Indeed, Wal-Mart exercises a de facto complete monopoly in many smaller cities, and it sells as much as half of all the groceries in many big metropolitan markets. Wal-Mart delivers at least 30 percent and sometimes more than 50 percent of the entire U.S. consumption of products ranging from soaps and detergents to compact discs and pet food. (Barry Lynn, Cornered: The New Monopoly Capitalism and the Economics of Destruction, Wiley, 2010, p. 6.)

Monopolies impose uncompensated costs on societies, which is why they were illegal for so many years in America. Providing products and services at the lowest prices is only beneficial if those prices are established through effective competition, so consumers can be assured of getting real value and high quality for their dollars. Competition, under any version of conventional economic theory, reduces profits — and perfect competition reduces profits to zero. How, therefore, if Walmart customers were actually getting their money’s worth, has the Walton family managed to accumulate a net worth of $150 billion? 

The Walmart game plan, which ranges from control of suppliers to tax avoidance to the suppression of employee wages, is well documented. From a broad perspective, we know that tax breaks for large corporations, like General Electric, have generally reduced corporate contributions to the common (social) costs of society while enhancing their profits. Consider these recent comments from J. David Cox Sr., National President, American Federation of Government Employees, AFL-CIO:

There are two main reasons why Congress should let the tax extenders package stay dead. The first is, we simply can’t afford to let tens of billions of dollars in otherwise taxable revenue go uncollected each year. Just one year of this tax revenue would fund the creation of three quarters of a million public sector jobs, including teachers, first responders, highway crews and librarians. Creating these jobs would pay dividends for the employees, their families and the communities that tax breaks for big corporations simply don’t.

And that takes me to the second reason for keeping the tax extenders package dead and buried. By far, the main beneficiaries of these tax write-offs are mega corporations and wealthy individuals — folks who do just fine without any financial assistance from the government.

Most everyone has heard of General Electric. They “bring good things to life,” or so their commercials used to say. Nowadays, the only thing GE is interested in bringing to life is the tax loophole that enables the company to avoid paying its fair share in federal income taxes. The so-called active financing tax loophole, one of the 55 tax breaks that expired at the end of 2013, enables GE and other large corporations to make it appear that profits earned in the U.S. were generated in offshore tax havens like the Cayman Islands. 

The GE tax loophole alone costs taxpayers about $63 billion over 10 years. (“Congress Should Keep Lights Off on Tax Package That Nets GE Billions in Tax Breaks,” The Blog, Huff Post, April 2, 2014, here.)

The point is that tax avoidance by big corporations and their wealthy owners either robs society of public benefits (services and infrastructure) enjoyed by everyone or imposes the costs of those things more heavily on everyone else. In popular parlance these days, that amounts to the wealthy and the corporations not paying their “fair share.” Over time, this leads to depression. 

Here, our primary interest is in the narrower claim that Walmart enhances its profits still more by by imposing some of its operating (labor) costs on taxpayers and society when it pays wages that fall below the poverty level.

Walmart and taxation

ATF estimated that Walmart and the Waltons receive taxpayer subsidies and tax breaks estimated at more than $7.8 billion per year, enough to hire 105,000 new public school teachers:

  • $6.2 billion in federal taxpayer subsidies: “Walmart pays its employees so little that many of them rely on food stamps, health care and other taxpayer-funded programs” (p. 3);
  • $1 billion in federal tax avoidance through tax breaks and loopholes, including accelerated depreciation;
  • $607 million in personal FIT avoided by the Waltons through distribution of Walmart dividends.

The second and third elements point to ubiquitous aspects of the inequality problem: The low tax rates on corporate dividends and capital gains are at the heart of the income tax regressivity that is causing inequality and decline throughout the economy. Accelerated depreciation is a more subtle problem: When I was regulating utility rates, I would occasionally get an argument for lower rates through “economic depreciation,” a form of decelerated depreciation. The longer it takes to depreciate large capital items, however, the more interest and equity costs are accrued, adding to total cost reflected in rates, so we depreciated plant as quickly as feasible to keep costs and rates down. Walmart, however, presumably does not reduce its prices to reflect the tax savings from using accelerated depreciation. 

The recently controversial point here is the first one, that Walmart through wage suppression has paid so little that many of its employees are living in poverty and are forced to rely on public assistance to survive. This point has become a national scandal: Yesterday (5/21/14) ED Schultz reported (here) on the City of Portland, Oregon’s decision to divest all its Walmart investments because of the company’s perceived anti-social policies, including especially its refusal to pay its employees a living wage.

Schultz covered several points, including job losses in the U.S. from exportation of Walmart jobs to China, but focused mainly on Walmart’s low wages. According to Schultz, Walmart’s low wages cost taxpayers $5,815 annually per Walmart employee. Using Walmart’s figure for its total U.S. employment, that works out to about $7.6 billion of total subsidies, higher than the ATF estimate of $6.2 billion.  Schultz pointed out, as did Barry Lynn in his book, that this abuse of its monopoly market power enables Walmart to effectively undermine small businesses, destroying their potential competition.

In 2007, a grass roots public interest group “Good Jobs First” published a “Wal-Mart Subsidy Watch” on the internet (here) providing state-by-state estimates of Walmart’s “use of public money”:

This includes more than $1.2 billion in tax breaks, free land, infrastructure assistance, low-cost financing and outright grants from state and local governments around the country. In addition, taxpayers indirectly subsidize the company by paying the healthcare costs of Wal-Mart employees who don’t receive coverage on the job and instead turn to public programs such as Medicaid.         

The issue has blossomed in the last five years, as Walmart employee reliance on public assistance has grown. Good Jobs First promised to continue its efforts, but apparently has not done so. (My call to its Washington, D.C. number accessed an answering machine, but no one was available to take my call.) Thus, it appears, Portland, Oregon’s stand has been the first major development in a few years to attract attention to Walmart’s game plan.

Rebuttal

In a recent Forbes Op-ed (“Fantastical Nonsense About WalMart, The Waltons And $7.8 Billion In Tax Breaks,” April 14, 2014, here), contributor Tim Worstall offered the following responsive arguments:

  • The ATF report is “full of the most fantastical nonsense”;
  • The writers of the report misunderstand “how taxes and benefits work” and came up with a nonsensical ($7.8 billion) total;
  • Americans for Tax Fairness “appear to me to be rebels without a clue”;
  • With respect to the argument that “Walmart pays its employees so little that many of them rely on food stamps, health care and other taxpayer-funded programs,” Worstall argues that “much of that $6.2 billion is actually a cost to WalMart, not a benefit;”  
  • With respect to the other two points about tax-avoidance, Walmart and the Waltons are simply obeying the law.

I’ll give Worstall a pass for his name-calling and posturing; it’s par for the course in political Op-ed writing. When it comes to trying to figure out the truth, however, we need to look past appearances and authoritative posturing. For example, the argument that Walmart is simply obeying the “law” is far too facile:

(1) That claim overlooks the fact that corporations like GE, Mobil/Exxon, and Walmart (created in 1963) were part of the political movement that created tax laws favorable to them after 1980;  

(2) The ATF report does not argue that Walmart has violated the these tax laws. Beyond receiving inherently favorable tax treatment, moreover, Walmart, like most big corporations, has tried to take advantage of any available loophole to minimize its taxes. In some cases, it has arguably ignored the spirit and intent of the law — for example, by deducting rent it pays to itself on state level tax returns (Wall Street Journal, February 1, 2007, here). Unlike ordinary households, big corporations can and do typically litigate unfavorable tax rulings aggressively in the courts, even in support of unsound positions.

Still, I’ll give Worstall a pass on this one too – ATF can properly be characterized as arguing that Walmart and the Waltons are getting unfair, not illegal, tax treatment.

With respect to the $6.2 billion estimate, the core point, Worstell relied on obfuscation: He first explained how ATF estimated the nationwide cost to taxpayers of Walmart employees use of public assistance programs, then pointed out that programs included in this estimate “include the National School Lunch Program, School Breakfast Program, Section 8 Housing Program, Earned Income Tax Credit, Medicaid, Low Income Home Energy Assistance Program, and the Supplemental Nutrition Assistance Program (SNAP, commonly known as food stamps).” Then he argued:

The problem with this is that only one of those programs is a subsidy to WalMart: all of the others are subsidies to the workers and thus are, in fact, costs to WalMart.  * * * Benefits that you get out of work are not benefits to potential employers. They are costs to them, for they raise your reservation wage.

Worstell’s arguments, however, are insensible. The argument is not that Walmart is receiving subsidies, but that its failure to pay a living wage forces taxpayers to provide assistance to Walmart employees, by an estimated $6.2 billion annually. The argument that these programs impose additional costs on Walmart is the actual “fantastical nonsense”: The “reservation wage” — which is the theoretically lowest wage rate at which a worker would be willing to accept a particular type of job (here) — does not go up just because the wage already accepted by Walmart workers is supplemented through public assistance. There isn’t even a hint from Worstell that Walmart might somehow be forced to pay more because its workers are receiving public benefits.

This was quickly followed by two even more ridiculous arguments:

  • First, imagine Walmart didn’t even exist – its employees would still be getting these payments, so they cannot be construed as subsidies to Walmart. (Or, they might not be unemployed – they might be working for employers that are actually paying a living wage);
  • Second, they would actually be receiving more taxpayer money without their Walmart jobs. (So what’s the point? That Walmart is actually saving taxpayer dollars by existing and hiring people who would otherwise be unemployed?)

Worstell presumes, then rationalizes, his own conclusion — that Walmart benefits society. His arguments, however, reveal a cynical contempt for the very idea that American workers should make enough money to live on. He apparently won’t accept that big corporations could have a responsibility to pay American workers a living wage, but he does appear to believe he can disguise that antisocial view behind rhetoric suggesting that Walmart’s policies can somehow be seen in a socially favorable light.       

The Capitalist Endgame

Walmart’s game plan for maximizing its profits shows how heartless capitalism can be in practice. Ed Schultz pointed out that Walmart could pay all of its employees a living wage by raising its prices less than 2%. But that might reduce somewhat Walmart’s stranglehold on retail markets. There seems to be no room in Walmart’s game plan for manufacturing or even for retail staff at American wage scales.  

To me, like the minimum wage issue discussed in my last post, understanding the Walmart game plan is crucial to understanding what kind of a society we have become. But the economic consequences of Walmart’s profiteering go way beyond these details. It was Tim Worstall who made the now-famous observation in December of 2011 that six Waltons had more wealth than the bottom 30% of Americans (here) . In itself, however, that is not a particularly useful piece of information. What we need to know is how much the Walton wealth is increasing each year, together with all of the wealth held by the rest of the top 1%, top 0.1% and top 0.01% of wealth-holding households. With that information we can compute how quickly the wealth of the bottom 99% is being sucked out of the active economy.

Walmart had a profit of $16 billion in 2013, money that is not trickling back down.  For the entire U.S. economy, however, total U.S. corporate profits had continued to rise sharply, reaching a record high of $1.7 trillion in 2013.  At the same time, workers’ share of national income had fallen to the lowest level since WW II (here).  These figures reflect the ever-widening income inequality that directly results in the accelerating concentration of wealth. About 25-30% of that, evidently, results in more wealth for the top 1% — its net worth is increasing, I estimate, by $400-700 billion per year — with devastating consequences for the bottom 99% economy. Much of that is extracted ultimately from new money borrowed by the federal government each year, but much of it still comes from the increasingly impoverished middle class.

Walmart provides a useful object lesson, a useful template for the many levels of corporate malfeasance that in more prosperous times were against the law.  Sadly, “saving people money so they can live better” is not the contribution Walmart is making to America. But to better understand how, and how much, big corporations collectively are hurting the economy we must shift our attention to the big picture. The inequality growth spiral has gone on way too long and, I fear, we have now reached capitalism’s endgame.   

JMH – 5/22/2014 (ed. 5/23/2014)

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