Wednesday, March 03, 2010

The following, from the Progressive Economics Forum, certainly is grist to the mill of my long held contention that we no longer live in a society that could be styled "capitalist" (whatever the title of the article). I have termed our present society as "managerial rule" for decades, and I have yet to see convincing evidence that the traditional use of the c-word gives any greater insight. Usually it obscures very important phenomena. In my view We live in a society far removed from the "free market" that should be a defining aspect of "capitalism". Yes, I know that there has been over a century of leftist modification to the crude theory that Marx first presented in the 1800s, but as the years drag on this seems more and more to be like the addition of epicycles to try and correct the failings of the Ptolemaic model of the universe.
Understanding that most of the economy is now and has been for years outside of the simple supply/demand situation that would define pure capitalism is essential to understanding things like what is described below. No doubt our economy still retains some elements of capitalism. Even the most tyrannical Stalinist command economy had to have such elements, even if only as in the black market, simply to survive and function. Yet, both the theoretical owners of corporations ie the stockholders and the public in general are obviously defrauded by practices like those described below. If the "state" is an institution that operates "on behalf of the ruling class" then what the problem described below shows is that the managers of the corporations are the ruling class.
But enough of my theorizing. Here's the article.
Stock options, the buyback boondoggle and the crisis of capitalism
As if there weren’t already enough reasons to eliminate the egregious stock option tax loophole, a column by Eric Reguly in this month’s Report on Business magazine highlights yet another. This reason helps to explain why we had such a booming stock market up to 2008, but little growth in real investment and productivity. ( One of the chronic and perhaps growing problems of managerial society- Molly )

First of all, the stock option deduction, which allows those recipients of stock options to only pay half the statutory rate of income tax on their gains is:
#Expensive, costing Canada’s federal government an average of almost $1 billion a year in foregone tax revenues annually during the past five year, according to Finance Canada’s tax expenditure accounts.
#Unfair, with the benefits going overwhelming to those with the highest incomes, including CEOs, as Hugh Mackenzie has outlined in his annual CEO pay report for the CCPA. For example as I showed a few years ago, this tax loophole saved Robert Gratton, former CEO of Power Corp over $24 million in federal income taxes, just on one year’s income. This is a major reason why some of the highest paid people in our society pay tax at a lower rate than ordinary workers.
#Distortionary and destabilizing, creating the misaligned incentives and pay structures that reward short-term risk taking that Bank of Canada governor Mark Carney identified as one of the key reasons for turbulence in the financial markets in a speech he gave two years ago.

But there’s an even more devastating reason why the tax loophole for stock options should be eliminated: it has been very damaging for the economy.

Research by William Lazonick, director of the Centre for Industrial Competitiveness at the University of Massachusetts, shows that stock buybacks–using a company’s funds to buyback its own shares–has swallowed up an enormous amount of the income of major US companies. Canadian companies have also put increasing amounts of their income into stock buybacks and not into more productive investments, as I outlined a few years ago.

The stock buybacks have resulted in pretty blatant stock price manipulation, boosting stock price value for these companies, and paying off very handsomely for those who hold shares, which includes most CEOs and senior executives, especially since they only pay half the rate of tax on these gains. It’s been great for shareholders and other employees who also own shares, at least in the short-term. ( But they pay off most handsomely for those who can control and anticipate the movements ie management - Molly )

The problem is that in the long-term it has bled the economy of real investment in the economy. As Reguly writes:
Every dollar spent on buybacks means one less dollar spent elsewhere-on R&D, on training, on equipment, on creating employment, on innovation. Ultimately, competitiveness and economic growth suffer.

This issue is related to the broader discussion we’ve recently had on this blog about the ineffectiveness of corporate tax cuts.

Lazonick ties this to a broader crisis of US capitalism’s “New Economy business model”, says we should ban stock buybacks where they are used to manipulate prices, and writes that the:
The government also needs to enact legislation that drastically reins in top executive pay, which means placing restrictions on stock-based remuneration, especially stock options.

We will soon see in the federal Throne Speech and budget what Canada’s federal government has planned to revitalize Canada’s economy coming out of this recession.
But if it is just more faith in the same old simplistic laissez-faire Advantage Canada framework without fixing any of these problems, it will have very little success.

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