Corporate Tax Cuts: More Debunking of the Claim that They Spur Growth

Originally published at Tax Justice Network

Last month Pascal Saint-Amans, head of tax for the OECD, spoke to the Wall Street Journal, in an article subtitled The argument against taxing capital income relatively more than wages is losing its force. He said:

“For the past 30 years we’ve been saying don’t try to tax capital more because you’ll lose it, you’ll lose investment. Well this argument is dead, so it’s worth revisiting the whole story,” Pascal Saint-Amans, the OECD’s tax chief, said in an interview.”

This particular article came to our attention via the Fair Skat blog, which sketches out the implications – and they are highly significant.  The usual story goes something like this:

“It’s important to cut taxes on capital because this promotes investment and growth. This is because higher taxes create incentives to shift profits overseas or into different forms, including secret forms, to escape the tax, whether legally or not. Lower taxes also put more hands in the hands of investors, which creates productive investment.”

That’s the conventional wisdom. Fair Skat goes into a bit of economese to look at the research evidence that’s being used to buttress these arguments:

“The ‘go to’ for empirical evidence on this is De Mooij & Ederveen’s 2008 “reader’s guide”. Their literature review finds that, in an average situation surveyed by the literature, the total semi-elasticity of the corporate tax base for these effects (i.e. the % change in the tax base from a 1% increase in the relevant tax, see below) is -3.1, with profit shifting (-1.2) the largest single effect.”

In short, the story goes, cut taxes, and more stuff will come into the tax net, counteracting the effect of the tax cut. And sometimes policy-makers cut taxes on the basis of these kinds of conclusions.

Now we’ve been challenging this conventional wisdom for a long time. As Fair Skat puts it:

“There are a myriad of potential arguments to question the certainty and applicability of these findings, but that is for another potential blog; suffice to note here that these figures represent the most accepted available evidence in economic literature on the behavioural effects of corporate taxation.”

For example, our Ten Reasons to Defend the Corporate Income Tax outlines a range of reasons why relentless corporate income tax-cutting is generally a bad idea.  For example there’s ‘investment’ and there’s ‘investment’ – and the good stuff that countries need is embedded in their economies, with local supply chains and managers with their kids in local schools: this stuff won’t fly away at the first whiff of tax.

And there’s a more profound reason why policy-makers shouldn’t pay much attention to the kind of evidence we’ve highlighted above. From a policy-maker’s perspective, attracting investment should not be an end goal. It is at most an intermediate target. An end goal would be to benefit your broad population, for example by sustainably raising the number of productive jobs overall. Corporate tax cuts may hurt other sectors, leaving your own economy no better off, or attract mobile investment with few local roots or benefit.

In addition, there are serious question marks over the ‘go to’ evidence on elasticities. As Clausing (2016) makes clear, the bulk of the evidence rests on data which has systematic weaknesses. Most obviously, the most common data source is the corporate balance sheet database, Orbis, which is severely limited in its coverage both of developing countries and of the major corporate havens. It seems almost inevitable that research findings using data that largely excludes the two extremes will understate the true degree of elasticity.

Researchers at the Joint Committee on Taxation of the US Congress have shown a different flaw in the elasticity literature: namely, the assumption of (log)linearity. In effect, most approaches have proceeded on the basis that profit (shifting) will be equally responsive to tax rate changes in a high tax or a low tax jurisdiction. By varying this assumption, Dowd et al. (2016) reveal that the elasticities are much higher in low tax jurisdictions.

This indicates that the effects of tax cuts are potentially powerful in attracting new profit (shifting) where the rates are 5% or below; but that they will be significantly smaller for the leading (non-haven) economies. So e.g. competition may be fierce between Luxembourg and Ireland, for example, but much less so between France and Germany. (A policy aside: this finding also lends support to the UK government’s own estimate that its substantial rate cuts to below 20% would deliver an increase in the taxable base of precisely zero. The only apparent reason for ongoing cuts has been the spurious rhetoric of ‘competitiveness’ – even as public services and the tax authority itself face continuing financial pressures.)

Fair Skat makes a further point, one that we haven’t made too much noise about before.

In the last few years, there have been a number of new global initiatives – such as the OECD’s BEPS project to crack down on corporate tax cheating, or the OECD’s Common Reporting Standard to share banking information across borders, and others. To the extent that these schemes have teeth, corporations won’t be able to find the escape routes that they used to be able to. It’s increasingly clear that BEPS has failed to meet its own ambitions, but the political appetite to go further is clear (not least in the EU).

And the implication is this: those academic numbers, even if you were able to take them at face value, may no longer be relevant. Gone is the era in which corporate tax behaviour went largely unscrutinised – the era when the Guardian ran the first major frontpage splash on the subject, with a headline that read simply, ‘Revealed: how multinational companies avoid the taxman‘. 2007 seems a long time ago now, and the numbers don’t apply any more.

Policy makers are going to need new numbers.  Fair Skat puts it like this, in a review of Peter Dietsch’s book on tax competition:

“Dietsch argues there is no reason to assume today’s elasticities for tomorrow – they can be modified through policies and thus we can change the factors in the optimal tax calculation. For instance, by introducing stronger international cooperation on capital tax evasion, it is possible to limit the tax evasion elasticity, and thus make tax systems more progressive by increasing the optimal levels of capital taxation, shifting the tax burden back on to mobile capital factors.”

And indeed, a new OECD report, entitled Tax Design for Inclusive Growth, underlines the point, in polite OECD-speak:

“The arguments in favour of reduced capital taxation are not as clear-cut as previously thought.”

And (with emphasis added):

“The empirical research on corporate tax incentives (e.g. S. Van Parys, 2012/3) shows that in some cases they may be successful in attracting more investment but fails to confirm that they are beneficial overall.”

As we said, the implications here could be profound. If BEPS is followed by serious progress, for example in requiring the publication of multinationals’ country-by-country reporting, then taxes on capital in the new world are much less likely to be undermined than before. One result of that will be that there is even less justification for policymakers to go for corporate tax cuts. And of course if countries are less likely to feel the pressure to ‘compete’, then the global co-operative measures are likely to be all the stronger for it.

There’s a virtuous circle in there. And it is a big one…

Endnote: the author of the Fair Skat blog is Rasmus Christensen, a Danish political economist (no relation of TJN Director John Christensen).

 

 

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29 comments

  1. Warren

    Why tax corporate income at all? Corporations are nothing but collections of people — owners and employees. Tax the owners when they get dividends and capital gains, just like we tax the employees when they get their wages and at the same rates, too.

    Corporations spend a lot of brainpower figuring out what they have to pay in taxes, and how to lower that number. Without corporate income taxes, that brainpower could go to productive purposes.

    1. Benedict@Large

      Why tax corporate income at all?

      Have you missed the last 40 years or something?

      A couple of items to consider:

      (1) Corporations can hold money apart from their owners, and with no corporate taxes, would do so simply to avoid the taxes the owners would pay if they did not.

      (2) Taxes would be shifted onto poorer owners and away from richer owners, as the poorer owner would need to be paid a greater portion of the corporations’ profits.

      (3) Money is unused power. By not taxing corporations, they would gain power explicitly for doing nothing except holding money. There would be no price that the corporation had to pay for doing this.

      (4) It is exactly the same period where we aggressively dropped corporate taxes and where inequality soared.

      1. Warren

        (1) Why would companies do that? If the money does not get to the owners, the owners do not benefit.

        (2) How is that? Poorer owners would have lower tax rates. As it is now, corporate income taxes are regressive or flat no matter how you look at them. If you look at them as paid by the owners, then the poor owners and the rich pay the same rates (flat). If you look at them as paid by the customers, then poor customers, who tend to buy from bigger companies with higher tax rates, pay a higher percentage (regressive). My proposal would be progressive. Richer owners would have a higher tax rate on their dividends and capital gains, being taxed as ordinary income, while poorer owners would have lower tax rates on their dividends and capital gains.

        (3) They can do that now with money after taxes. Yet they still pay dividends anyway.

        (4) Correlation is not causation. We now have the highest corporate income taxes in the world, AND high inequality. That does not fit your theory.

        1. pretzelattack

          re (4), they aren’t effectively the highest corporate taxes in the world, from what i’ve read.

        2. templar555510

          (1) Why ? Because the owners don’t control the company , the executives do . They don’t give a damn about the owners – we passed that point a long time ago – even the worn out mantra of shareholder value counts for nought ; the execs are guaranteed a big payout win or loose .

          (2) Completely irrelevant because the game is rigged . Unless government changes the entire tax system in favour of the have-nots ALL the gains will go to the top .

          ( 3) A correction : money is USED power . The big stash wherever it is , however ill-gotten is all that matters. Politicians are seduced by it , easily . Why ? Because they don’t know how to make it themselves, but they rub alongside the very wealthy frequently and want some of that fairy dust to shower their way.

          (4) Wrong . It does fit and it isn’t a theory . The big four accounting firms have seen to it .

        3. James Kroeger

          My proposal would be progressive. Richer owners would have a higher tax rate on their dividends and capital gains, being taxed as ordinary income, while poorer owners would have lower tax rates on their dividends and capital gains.

          I actually don’t have a problem with what you are proposing, so long as the loss of tax revenue is compensated for by making the top marginal tax rates on personal incomes much more steeply progressive (and the special treatment of capital gains and dividends is eliminated).

          Add a sales tax on all financial transactions in secondary markets and I would happily sign on to such a ‘compromise.’

          I suspect the popularity of the corporate income tax all along has been it’s perceived political appeal…

          1. Warren

            I think that, since dividends and capital gains would be taxed the same as ordinary income, there would be little, if any, “lost” revenue.

    2. vlade

      I’d agree to no tax on corporate income as long as you institute tax on cash (or equivalent high liquidity assets) holdings and withholding tax on any distributions (including stock buybacks).

      1. Warren

        Certainly taxes should be withheld on distributions, just as with any other income.

        But why tax the holding of cash?

    3. Vatch

      Corporations are nothing but collections of people — owners and employees.

      I’m glad someone acknowledges the falsehood of corporate personhood. Now if we can just get the Supreme Court and Mitt “Corporations are people, my friend” Romney to understand this. . . .

      1. Warren

        The Supreme Court only ruled that the law means what it says:

        Title 52 Federal Election Campaigns
        § 30101 Definitions
        When used in this Act:
        (11) The term “person” includes an individual, partnership,
        committee, association, corporation, labor organization, or any other
        organization or group of persons, but such term does not include the
        Federal Government or any authority of the Federal Government
        http://www.fec.gov/law/feca/feca.pdf

          1. Warren

            Non sequitur much?

            I was only pointing out the error of blaming the Supreme Court for saying that the law says what it says.

  2. Alex

    If you click through to the linked Tax Justice article, it notes:

    “Less well understood is the fact that the corporate tax helps hold the whole tax system together: without it, people will stash their money in zero-tax corporate structures and defer or even escape tax entirely.”

    That’s what happened in Kansas when they drastically lowered business taxes; a lot of people started filing as businesses, despite not being businesses in any real sense, just to avoid taxes. And in turn, tax revenues plummeted.

    1. blert

      That was ZAPPED generations ago with the Tax Law on Personal Holding Companies.

      I’d be shocked if Kansas politicians skipped that over.

      BTW, the average Joe has never heard of PHC tax law — so it’d be no surprise to me if the reporters on such stats are unaware that such ruses don’t fly in court.

      They just look great on paper — to folks that don’t know tax law.

    2. vlade

      Up until 1989 there were rules in the UK which prevented that I believe, and there were noises to do the same now. There are now rules in place where if the cash distributed after the company was liquidated is substantial (more than the company needed for its operations, whatever that means), it is treated as income, not capital gain.

      That said, as I wrote above, if you taxed cash holdings and distributions, the problem would go away.

  3. L

    Great post. I think, however that there is one additional reason that you don’t make explicit.

    Correlation is not causation

    The models cited in this work, like all economic models, it seems are based almost entirely by finding prior correlations between two variables, postulating some causal relationship, and then assuming that it holds in the real world.

    But in any real science they make clear that correlation is not causation and that any model is only valid if it makes testable predictions in the real world. At best economists are mathematically-inclined scholars of a prior age but their prognostications are often no more useful than the Bible Code.

  4. James Kroeger

    When do firms need special incentives to motivate them to invest in new capital goods? The answer is never. In modern market economies, competition provides firm managers with the most powerful motivation to continually invest that they will ever need: FEAR.

    They ultimately face both the fear of bankruptcy and the fear of lost opportunity. If your competition lowers its costs by investing in new equipment, or improves the appeal of its products by incorporating new innovations, then you’d better do the same or you will soon find yourself driven out of business. With only a few exceptions, additional government-provided financial incentives are nothing more than an unnecessary waste of tax dollars.

    Entrepreneurs do not need special additional incentives provided by the government to encourage them to assume the risks of creating a new business. True risk takers believe that their ideas will succeed in the market and have so much of their identities invested in them, they really don’t care if they receive any return at all on their invested time and money, sometimes for several years, as long as they have hope of eventual success.

    The problem for them is not that they lack motivation; it’s that they can’t find someone who is willing to provide them with a loan that banks, venture capitalists, and angel investors find too risky. If the government wants to help these individuals out, it has a couple of options that are far more sane than simply increasing the net profitability of all corporations.

    First, it can choose to do nothing and simply allow the marketplace to reward firms-that-make-wise-investments with the market share of firms-that-do-not.

    The other option would be for lawmakers to help entrepreneurs [and certain firms that financiers see as ‘too-risky’] to obtain the funding they need in the hope that they might then become competitive with better established firms.

    The rational way to do this would be to provide these marginal firms with targeted investment tax credits or perhaps with guarantees on private loans. These initiatives put money directly into the hands of those who will be investing the money.

    Compare this to the insane idea of giving tremendous amounts of extra disposable dollars to (A) the richest corporations & (B) the top 5% of income earners in the hope that some small fraction of those extra dollars might eventually find their way into the hands of true economic investors (after private banks have already rejected their borrowing plans as too risky).

    Very little, if any, of those billions of tax-cut dollars/pounds/euros end up in the hands of needy entrepreneurs or firm managers…

    1. Warren

      “When do firms need special incentives to motivate them to invest in new capital goods?”

      When it is cheaper to hire people to do the work.

      1. James Kroeger

        When it is cheaper to hire people to do the work.

        It’s in the textbooks, I know; but I’d be interested in any anecdotal evidence you might have of firms actually doing this…choosing labor over capital goods…

        1. Warren

          Sure — any McDonald’s that does not have an order kiosk like Sheets and Wawa have. Where Minimum Wage laws drive up the price of labor, people are being replaced with such kiosks.

          1. James Kroeger

            Sounds like you are giving an example of a firm that is choosing capital goods over labor.

            If the investment in kiosks actually does reduce costs, and is not simply a marketing move, then I’m quite certain that all competitors will soon be copying it.

            Kind of underscores my point…

            With or without minimum wage legislation, the reasons/incentives for investing in new equipment/methods remain as compelling as ever. If you want to compete, you will invest…

            1. Warren

              It is “an example of a firm that is choosing capital goods over labor” only when the cost of that labor exceeds the cost of the kiosks.

              Where it does not, it is an example of a firm that is choosing labor over capital goods.

              Every firm does that. There are garbage trucks that pick up the cans and dump them into the trunk. Not all businesses choose to buy them. Some do. Some don’t. Why? Because they cost more than trucks that don’t. So when the labor costs go up, the balance tilts toward buying the trucks.

  5. inode_buddha

    I’m no economist or even well-read in the field, so take this with a large grain of salt. BUT I would like some opinions and ideas about this from those in the know, just for the heck of it:

    I’ve been saying for years that we should harmonize capital gains with labor a’ la the 1986 tax reform, and permanently. It would also be great if we could close the carried interest loophole.

    BUT what if we took away the main thing so that they couldn’t whine about it anymore? What if we could eliminate corporate taxes altogether and replace that with tarriffs much like we had in 1912?

    THAT would solve a whole raft of problems IMHO. and shoot a big hole right through the trade agreements. My gut feeling is that they would never go for it because even if we eliminated the tax, they would try to dodge the tarriff.

  6. Greg

    OK, NO Corp tax no corporate citizenship. But, a condition would make a criminal offense for corporations that petition the Government or Citizens for legislative or political issues,ie no lobbying or political contributions. Essentially quid pro quo no taxes , no Citizens United

    1. Warren

      Indeed, the only entities that should be allowed to contribute to a political campaign are those who can vote in the election. No corporations, unions, special-interest groups, etc. They should only be allowed to send campaign literature to their own members.

      One of the biggest problems with corporate income taxes is that they give the corporations incentive to lobby for tax breaks. The big, well-connected, lobbying corporations and industries get those breaks.

  7. Christina Marlowe

    As for Corporations, here is an extract:

    “When American colonists declared independence from England in 1776, they also freed themselves from control by English corporations that extracted their wealth and dominated trade. After fighting a revolution to end this exploitation, our country’s founders retained a healthy fear of corporate power and wisely limited corporations exclusively to a business role. Corporations were forbidden from attempting to influence elections, public policy, and other realms of civic society.

    Initially, the privilege of incorporation was granted selectively to enable activities that benefited the public, such as construction of roads or canals. Enabling shareholders to profit was seen as a means to that end.
    The states also imposed conditions (some of which remain on the books, though unused) like these:
    * Corporate charters (licenses to exist) were granted for a limited time and could be revoked promptly for violating laws.
    * Corporations could engage only in activities necessary to fulfill their chartered purpose.
    * Corporations could not own stock in other corporations nor own any property that was not essential to fulfilling their chartered purpose.
    * Corporations were often terminated if they exceeded their authority or caused public harm.
    * Owners and managers were responsible for criminal acts committed on the job.
    * Corporations could not make any political or charitable contributions nor spend money to influence law-making.

    For 100 years after the American Revolution, legislators maintained tight controll of the corporate chartering process. Because of widespread public opposition, early legislators granted very few corporate charters, and only after debate. Citizens governed corporations by detailing operating conditions not just in charters but also in state constitutions and state laws. Incorporated businesses were prohibited from taking any action that legislators did not specifically allow.

    States also limited corporate charters to a set number of years. Unless a legislature renewed an expiring charter, the corporation was dissolved and its assets were divided among shareholders. Citizen authority clauses limited capitalization, debts, land holdings, and sometimes, even profits. They required a company’s accounting books to be turned over to a legislature upon request. The power of large shareholders was limited by scaled voting, so that large and small investors had equal voting rights. Interlocking directorates were outlawed. Shareholders had the right to remove directors at will.
    In Europe, charters protected directors and stockholders from liability for debts and harms caused by their corporations. American legislators explicitly rejected this corporate shield. The penalty for abuse or misuse of the charter was not a plea bargain and a fine, but dissolution of the corporation.

    In 1819 the U.S. Supreme Court tried to strip states of this sovereign right by overruling a lower court’s decision that allowed New Hampshire to revoke a charter granted to Dartmouth College by King George III. The Court claimed that since the charter contained no revocation clause, it could not be withdrawn. The Supreme Court’s attack on state sovereignty outraged citizens. Laws were written or re-written and new state constitutional amendments passed to circumvent the Dartmouth ruling. Over several decades starting in 1844, nineteen states amended their constitutions to make corporate charters subject to alteration or revocation by their legislatures. As late as 1855 it seemed that the Supreme Court had gotten the people’s message when in Dodge v. Woolsey it reaffirmed state’s powers over “artificial bodies.”

    But the men running corporations pressed on. Contests over charter were battles to control labor, resources, community rights, and political sovereignty. More and more frequently, corporations were abusing their charters to become conglomerates and trusts. They converted the nation’s resources and treasures into private fortunes, creating factory systems and company towns. Political power began flowing to absentee owners, rather than community-rooted enterprises.
    The industrial age forced a nation of farmers to become wage earners, and they became fearful of unemployment–a new fear that corporations quickly learned to exploit. Company towns arose. and blacklists of labor organizers and workers who spoke up for their rights became common. When workers began to organize, industrialists and bankers hired private armies to keep them in line. They bought newspapers to paint businessmen as heroes and shape public opinion. Corporations bought state legislators, then announced legislators were corrupt and said that they used too much of the public’s resources to scrutinize every charter application and corporate operation.
    Government spending during the Civil War brought these corporations fantastic wealth. Corporate executives paid “borers” to infest Congress and state capitals, bribing elected and appointed officials alike. They pried loose an avalanche of government financial largesse. During this time, legislators were persuaded to give corporations limited liability, decreased citizen authority over them, and extended durations of charters. Attempts were made to keep strong charter laws in place, but with the courts applying legal doctrines that made protection of corporations and corporate property the center of constitutional law, citizen sovereignty was undermined. As corporations grew stronger, government and the courts became easier prey. They freely reinterpreted the U.S. Constitution and transformed common law doctrines.

    One of the most severe blows to citizen authority arose out of the 1886 Supreme Court case of Santa Clara County v. Southern Pacific Railroad. Though the court did not make a ruling on the question of “corporate personhood,” thanks to misleading notes of a clerk, the decision subsequently was used as precedent to hold that a corporation was a “natural person.”
    From that point on, the 14th Amendment, enacted to protect rights of freed slaves, was used routinely to grant corporations constitutional “personhood.” Justices have since struck down hundreds of local, state and federal laws enacted to protect people from corporate harm based on this illegitimate premise. Armed with these “rights,” corporations increased control over resources, jobs, commerce, politicians, even judges and the law.
    A United States Congressional committee concluded in 1941, “The principal instrument of the concentration of economic power and wealth has been the corporate charter with unlimited power….”

    Many U.S.-based corporations are now transnational, but the corrupted charter remains the legal basis for their existence. At ReclaimDemocracy.org, we believe citizens can reassert the convictions of our nation’s founders who struggled successfully to free us from corporate rule in the past. These changes must occur at the most fundamental level — the U.S. Constitution.

    Thanks to our friends at the Program on Corporations, Law and Democracy (POCLAD) for their permission to use excerpts of their research for this article.

    Please visit our Corporate Personhood page for a huge library of articles exploring this topic more deeply. You might also be interested to read our proposed Constitutional Amendments to revoke illegitimate corporate power, erode the power of money over elections, and establish an affirmative constitutional right to vote.
    ————-
    ABOLISH Corporations and Privately-owned banks!!

    By the way, Corporations are not satisfied with “cheap”” labor. They want FREE LABOR…And THEY HAVE IT!!

  8. Christina Marlowe

    Excerpt from Buckminster Fuller’s “The Grunch of Giants”: Heads or Tails We Win, Inc.–
    Further thoughts on monopolistic corporations that are protected as persons

    Heads or Tails We Win, Inc.

    Corporations are neither physical nor metaphysical phenomena. They are socioeconomic ploys—legally enacted game-playing—agreed upon only between overwhelmingly powerful socioeconomic individuals and by them imposed upon human society and its all unwitting members. How can little humans successfully cope with this greatest of all history’s invisible Grunch of nonhuman Giants? First of all, we humans must comprehend the giants’ games and game-playing equipment, rules and scoring systems. But before we can comprehend their game-playing, we must study the history and development of giants themselves.

    One of my many-years-ago friends, long since deceased, was a giant, a member of the Morgan family. He said to me: “Bucky, I am very fond of you, so I am sorry to have to tell you that you will never be a success. You go around explaining in simple terms that which people have not been comprehending, when the first law of success is, ‘Never make things simple when you can make them complicated.’”

    So, despite his well-meaning advice, here I go explaining giants.

    In addition to the B.C. David and Goliath theme, we have the A.D. 800 story of Roland (Childe Roland), legendary son of Charlemagne’s sister Gilles. There are many poetical chronicles of young Roland’s enfances (a very young person’s heroic exploits), such as vanquishing giants—one named Ferragus and another Eaumont. From the eighth to the seventeenth century,
    many variations of the story occur, published in Latin, Italian, French, and English.

    Much esteemed in Italy, Roland was known there as “Orlando Furioso”—the order of the name’s first two letters is reversed from ro to or—as immortalized in the A.D. 1502 poem by Ludovico Ariosto.

    The first comprehensive chronicling of Roland was written in Latin by Turpin, Archbishop of Reims, before A.D. 800. Roland (or Orlando) is mentioned by Dante in hisParadiso and is the subject of songs sung at the Battle of Hastings in the Chanson de Roland (c. A.D. 1100). Shakespeare
    mentions him in King Lear.

    With the advent of radio and television, the children’s Mother Goose-type storybooks of yesterday have been progressively abandoned. Few people today are familiar with the thousand-year-old story of the roaring of the giant as Roland approached his tower:
    “Fee-fie-fo-fum/ I smell the blood of an Englishman/
    Be he alive/ Or be he dead/ I’ll grind his bones/ To make my bread.”

    Supreme horse-mounted monarchs in the days of Roland could and did award vast hunting and farming lands to their horse-mounted blood kin and military henchmen, who together hunted their lands and had them cultivated by on-foot, tithe-paying tenant farmers.

    In ancient North China a new kind of giant had developed long, long before Roland’s time a three-component-parts giant, i.e., the little man, with a club, mounted on a horse—who could and did overwhelm the big, onfoot, tribe-leading shepherd. This new composite giant, the horse-mounted bully, could divert to his sole advantage as much as he wanted of the life-support
    productivity of the on-foot peasantry.(Pa ys = land; ped = foot = ped ant = pa ys antry = peasantry = combination of on the land and on foot = pa y of lands = pa of patriot = paof pagans = patois = po-gan, pa-gan peasantry.)

    The horse-mounted, clubwielding bully asserted—as do the twentieth-century racketeers—that he owned the land on which the shepherds were grazing their sheep or the farmers were growing their crops.

    There was no way in which the shepherd could realistically contradict the bully. Each night, many of the shepherd’s sheep disappeared until the shepherd agreed to “accept” the horse-mounted bully’s “protection.” This was the origin of “property.” The most powerful amongst the leaders of gangs of horsemen became the emperor.

    The emperor rewarded his henchmen with deeds to the land in proportion to the deeds at arms they performed for him.

    There is no historical record of religion founders who have been so bold as to assert that God had deeded land to anyone. History shows that religious leaders have, however, frequently complied with their king’s instructions to plant a cross or other symbol of God’s approval of their king’s
    sword-accomplished vast lands-seizure and ownership-claiming.

    Over thirty thousand years ago, these prehistoric horsemounted “landowners” began expanding their territory northwardly and westwardly beyond the Himalayas into Mongolia and then ever westward into Europe.

    Also, starting at least thirty thousand years ago, South Pacific islanders and south and northeast continental Asians came to the West Coast of North, Central, and South America from the Orient by rafts swept along by the Japan Current. Many if not most of the rafted Southeast Asians colonized the West Coast of the Americas and islands of the east Pacific. The current then returned some of the rafters to Southeast Asia, as Thor Heyerdahl demonstrated with his raft Kon-Tiki. This circum-Pacific ovaling of the Japan Current raft-travel outlined the Polynesian world within which was spoken a commonly based language. The Polynesians became the world’s water people. Polynesia comprised more than one-quarter of the planet Earth. The great West Coast mountain ranges and deserts slowed both the North and South American coastal, raft-landed colonists’ eastward migrations. Landed at many North and South American coastal points from Alaska to Chile, these raft-landed Polynesians separated into many groups as they moved eastward over many routes to both North and South America, to become known as the American Indians.

    As water people, the Indians assumed that the “Great Spirit” (not an anthropomorphic God) gave them fishing, hunting, and cultivating rights, but never ownership of land. Obviously, to them, only the Great Spirit could own the land. Centuries later the Indians thought they were selling the Europeans only fishing and hunting licenses, not property rights. These were water people. No sailor can think realistically of “owning” a specific area of the ever transforming oceanic waters. Many pirates tried vainly to do so.

    We have, historically, two prime, oppositely directed world-encirclings, both starting about thirty thousand years ago: (1) from the Orient via water, eastbound from Southeast Asia, and (2) westbound via land from northeast Asia. Mastery of all the sea finally went to one landbased nation after another.

    Millennia after the first club-swinging Oriental horseman claimed land ownership, the man on the horse westbound from the Orient to Europe became helmeted and armored in metal. Due to the horses’ weight-carrying limit and the penalty of weight on the horses’ speed, the most effective of the horse and armored riders was, like the present-day jockey, the wiry, strong, little man. Inspection of the European museums’ armor discloses the diminutive size of the most successful knights. The main significance of what we are learning is that, to the man on foot, the horse-mounted and armed men became a new and formidable “giant.”

    Because the armored knight required many helping hands to mount him and maintain his horses and arms, he had to have their goodwill and support lest his helpers overwhelm him when dismounted and encased in his armor. As a consequence, the little, wiry man in horsemounted armor frequently became the champion of traveling bands of the little people. The little armored knight was more maneuverably effective than the armored giant when the latter’s multifolded weight overburdened his mount.

    As a special consequence of this trending, we have the nongigantic, successfully armored King Arthur’s Round Table Knights, who used their mounted and armed might to rectify wrongs wrought against people by local bullies and clumsily armored, horse-mounted landowners.

    Arms, armor, precious stones, skins, furs, fabrics, spices, incense, hand-looms, and other hand-tools were the principal goods traded in Roland’s time. Gold, silver, and pewter served as money. Trading was accomplished on foot, on the backs of animals, or on river-borne small craft. The land of the overlord was the principal wealth.

    Squads of armed horsemen could protect caravans of goods-carrying horses, camels, and elephants along with human bearers. These caravans could transport the initially culture-evolved riches of the Orient westward to the ever more westwardly advancing frontiers of humanity, where the newly powerful cultures could acquire the historically recognized appurtenances of Oriental courts of power.

    A new kind of wealth-making occurs historically with the invention and development of stoutly and heavily keeled, ribbed, and planked, high-seas-keeping, deep-bellied, and, in much later times, cannon-armed sailing ships.

    These great ships were built in vertical shorings. Their
    keels were laid upon heavy wooden cross-ties and blocked against premature sliding.
    These cross-tie “ways” led down very gently sloped banks into the harbor’s deep waters. When the ships’ hull was completed and watertight, the cross-tie ways were greased and the blockings mauled out from under the ship. Gravity slid the ship swiftly seaward, maintaining its vertical balance long enough to plunge it deck-side-skyward into the water.

    After launching, the ship was floated progressively into a succession of wooden crane-equipped outfitting docks— the interior decks and bulkheading dock; the chain-plating dock; the mast-stepping dock; the rigging and sail-bending-on dock; the winch-, capstan-, and armaments-installing dock. Finally she sailed away to various lands where superior masts, fabrics, ropes, etc., progressively replaced the original make-do equipment. (World’s best masts from the Pacific Coast of British Columbia; best rope-making fiber from Manila, in the Philippine Islands; best cotton fiber for the sails from Egypt; best teakwood for the decks from Thailand.) It took complete circumnavigation to incorporate the “best in the world” of everything to produce a “gallant” ship—one capable of around-the-world sailing.

    It is probable that the first moving-line shipyard in history was established on the Chao Phraya River in Bangkok. However, the earliest now known militarily secure shipyard is to be found on the Greek island of Milos. It is in a miniature rock-walled fjord, well hidden from enemies by a deep-channeled, curved entrance. On the many rock platforms lining the fjord’s walls, many shipbuilding artifacts were found. The Milos shipbuilding fjord was so well hidden that the Germans used it for their Aegean Sea submarine hideaway during World War II. (The Venus de Milo, now in the Louvre in Paris, came from Milos.)

    History’s next great moving-line shipyard is as yet to be found in Venice. So strategically important was the Venice shipyard that it was initially seized by Napoleon early in his campaigning.

    Centuries later this progressively moved-forward-andadded-to shipbuilding pattern as yet clearly evidenced in the Venice shipyard became the prototype for all of massproduction industry’s “moving lines.”

    The ship was, of course, a tool, but not a craft tool produced by one man. It was an industrial tool, massproducible and operable only by large numbers of highly skilled craftsmen, metalworkers, woodworkers, sailclothmakers, rope-makers, iron chain- and anchor-makers, seasoned sailors, and the coordinated muscle of “all hands.” The merchant ship was a wind-energized industry, a tool that could sail around the world and carry cargoes worth many fortunes to lands not containing the materials brought by the ships, which when integrated with the home-port-occurring materials produced real wealth of increased life-support for more and more people.

    The building, rigging, and arming of such vessels and the production of the materials with which to build them, as well as the production of the food and other necessities to feed and clothe all those engaged in the shipbuilding, required an effectively powerful military authority able to command the full-time commitment of the work and skills of the large numbers of humans involved. It also called for the amassing of large sums of negotiable wealth. Preferably the negotiable wealth was in the form of trade-implementing precious metals and jewels, commercially acceptable around the world.

    For ages earlier the negotiable wealth had been the efficiently demonstrable products of labor and its produce, the grains and the livestock. Of the latter, the proteinamassed cattle constituted the most concentrated possible yet maneuverable realization of actual life-support wealth. Cattle were put up as collateral for the banker’s loan of gold, silver, and copper coinage. When the voyage was successfully completed, the merchant-ship venturers repaid the banker and paid the banker his “interest” in the form of calves that had been interimly produced by the collateraled cattle. This was called “payment in kind”— kind being the kinder or “children” of the cattle. When bankers eliminated live cattle as collateral and dealt only in gold or silver, there were no gold coins being bred by gold coins as calves had been by cows, so interest was taken out of the capital gold by diminishing the equity of the borrower when he repaid his debt. The banker’s interest was cut out of—that is, deducted from—the depositor’s original “cap”-ital (head of cattle) stake.

    As I made clear in Operating Manual for Spaceship Earth, (Published by E. P. Dutton, 1969.) when the farmer or cattlemen producers of “real wealth” of one hundred forward days of life support each for one hundred people—i.e., one thousand man-days of life-support—deposited their monetary specie equivalent in the bank and the banker loaned it out at 10 percent, it meant that the banker stole one hundred man-days of life support from the farmer depositor instead of providing the farmers the bank-advertised “safekeeping.” The banker could hide this situation by price increase in the profits the banks made by using the depositor’s real wealth units. But the depositor’s dollar could buy him ever less real lifesupport units.
    The safe return of the merchant venturer’s ships was so unpredictable as to constitute a capital investment of high risk but also of very high potential gain—most significantly a risk whose rewarding payoff might take several “crop” seasons to realize. The voyage might take several or even many years to complete. These risks in turn could be lessened by insurance.

    As a consequence of all the foregoing, a half-millennium after Roland a new and overwhelmingly greater form of invisible seagoing and land-strutting giants appeared on planet Earth. This was a legally contrived, abstract giant —”legal” because the physically uncontradictable “topsword” king decreed it was legal. Having the most favored privileges accorded real humans, the giant, abstract, corporate “man” is inventively created in 1390 in England. (The corporate “human” may have been invented in ancient Babylon to cover the potentates’ voyaging venture, but we have as yet no written record of such.) “His” abstract name is the “Merchant Venturers Society.” This composite man was formed by the king of England with a small group of his very powerful friends, who lorded over their king-deeded vastlands.

    By royal prerogative, the venture-financing riskers could not be held liable for any losses of the venture. With limited liability, individuals might sue the company but not the human individuals who underwrote the venture If the enterprise failed and went bankrupt, its shareholders lost their ventured stake but were not to be held responsible in any way for its debts. The creditors of the company were the losers, and not the shareholders. Bankruptcy could reflect no credit stigma upon the companies’ shareholders. The shareholders were held absolutely blameless for any misfortunes of their ships’ crew or for damage caused by collision of their ship with another ship. If the ship and its cargo were lost, the shareholders lost their original shares, but no more. As long as the ship operated successfully, the shareholders shared its trading profits

    Whether the ship was lost or not, the banker who loaned the gold for the merchant ship’s trading held the life-support-producing lands and their cattle as collateral. Since many voyages ended in disaster, the banker occupied a long-time, steadily profitable position in the overall merchant venturing—and as yet does.

    Naturally, the shareholder’s limited-liability advantage, granted by sovereign decree, encouraged a swift expansion of such enterprises.

    In 1522 Magellan’s ship demonstrated that the world is not a laterally extended plane off the edge of which a ship might plunge, nor an ocean extended laterally to infinity from which there was no return. Magellan’s ship’s circumvoyaging proved that the Earth is a sphere—a closed system with enormous trade-monopolizing potentials. Laws of the land could not be enforced on the sea. The seagoers were outlaws—privateers or pirateers. The most powerful outlaws became the sovereigns of the ocean sea.

    In 1580, Queen Elizabeth was the largest shareholder in Sir Francis Drake’s merchant ship The Golden Hind. Naturally, the queen granted Drake’s venture “legal” freedom from liability. After paying Elizabeth her conspicuously major share, Drake and his other shareholders each realized almost 5,000 percent profit on their risked capital.

    Enthusiastic over her Golden Hind venture, in 1600 Queen Elizabeth chartered the limited-liability East India Company. This time the shareholders acquired shares in a fleet of ships, docks, and warehouses in both England and India—not shares in just one ship, as in the earlier “venturing.”

    Employing her sovereign power, Elizabeth limited the losses of its chartered riskers to their initial monetary or equivalent capital stakes, while continuing their right to receive their proportional profit dividends for as long as the venturing company might exist—in perpetuity.

    Known later in England as “Ltd.” (for “limited liability”), in France as “Societe en Commandite,” in Germany as “Kommanditgesellschaft,” and as “Corporation” under the U.S.A.’s “Inc.” (for incorporated) status, this newborn abstract legal giant was to be treated as a human personality, empowered to do anything humans can do but also accredited to operate as an abstract, legal entity able to enter or leave any nation without a passport. As such it was able to employ millions of people and any amount of money, tools, buildings, and equipment, and to perform its giant acts anywhere about the oceanic world exclusively for the profit in perpetuity only of its shareholders.

    When the Fourteenth Amendment to the U.S.A. Constitution was passed in the post-Civil War railroad-expansion days, the U.S. Supreme Court required that the individual states grant the corporation all the privileges and protection granted to human citizens. A hundred years later, in 1980, the U.S. Supreme Court ruled that a corporation had the same rights of free speech as all U.S. citizens.

    To allow its corporate bodies to make a colossal new grab, Grunch has ordered its pet puppets to take over the world ocean-bottom resources. As of February 1982, the United States, Britain, France, and West Germany have reached preliminary agreement to bypass the stalled Law of the Sea Conference and proceed with development of seabed mineral resources, the Japanese foreign ministry said. Japan expressed opposition to the agreement—unconfirmed by the four other countries—and said such a program should operate under U.N. auspices. The United States and other developed countries have refused to agree to developing nations’ demands that seabed development be overseen by a U.N. agency dominated by the poorer countries.

    The fourteenth-, fifteenth-, and sixteenth-century rulers who instituted and empowered those abstract corporate giants were able to popularize their acts by celebrating the visual wealth of goods it brought to their country and to the political satisfaction of their many citizens. The profit to society was visibly distributed as the goods, services, museums, and public-place rarities the enterprising produced. The shareholders’ dividend checks were invisibly distributed.

    With the battle of Trafalgar in 1805, the risk-capital powers backing the “British Empire” became the “Sovereigns of the Seas.” Until that time the high-sea venturers had carried gold and silver as their trading medium. This induced world-around high-seas piracy. The behind-thescenes masters of the British Empire then invented the annual balance of trade” as a world-around bookkeeping system which kept its gold off the seas and instead, after the year-end tallying of the trade interactions, transferred the gold from one country’s London vault to another country’s London vault. This withdrew the gold from the seagoing pirate’s reach. However, it brought many of the pirates into the financial districts of great cities.

    Naturally, shareholding in Ltd. enterprise became increasingly attractive as an investment risk, but soon the monetary size of investment required for share participation grew beyond the acquisition means of all but the wealthy. Stock-exchange brokers, for their own convenience, imposed trading only in hundred-share “lots” or “blocks,” which quickly raised the equity-purchasing increments to so great a price that only the very wealthy could any longer participate in such venture-sharing. The capital games’ playing-rules “kept the pikers out,” the original pikers being the on-foot, pike-bearing castle guards.

    In the nineteenth century the limited-liability corporate venturing began not only putting its shipyard donkey engines’ steam engines in ships, but also mounting them on steel wheels on rails and powering them out of the shipyards. Thus they began railroading heavy loads inland. This initiated new mass-production industry centers at inland water-power sites. For instance, industrial venturing underwrote water-wheel-driven mass-yardage cottonmill fabric production, preferably in such low-wage-paying countries as India. The annual balance-of-trade accounting brought about many obviously inequitable economic conditions, such as, for instance, India’s burlapbag-makers working for a penny a day. It was the vast profits made on burlap bags so produced which financed the early-twentieth-century expansion of the Massachusetts Institute of Technology in the U.S.A.

    Such cotton and woolen fabric production-venturing was logically followed by thread and needles, pins, buttons, and small hardware mass-production moving-line ventures. With the introduction of electricity and the electricity-driven motor, industry began moving-line massproduction of dollar watches, tin cans, safety razor blades, big-city clothing-production sweatshops, then bicycles, then motor cars. In World War I, it introduced steel steamship mass-production; in World War II, transoceanic aircraft mass-production; and, in the “cold,” puppet-nation-waged war (World War III), extraterrestrial travel and transport, and mass-production of invisible mass-killingry potential.

    There is a fundamental evolutionary patterning in which, with each new era and phase of technology and social-economic venturing, both the tools and their products get bigger and bigger, and the numbers of humans involved multiplies. A period of doing more with more until a mammoth peak magnitude is attained which is followed by evolutionary production of ever more effective results with ever less pounds of material, ergs of energy, and seconds of time, all of which integrating synergy produces ever more comprehensively effective tools with ever smaller technological artifacts produced by ever fewer unskilled human workers—the 1895 to 1929 model “T” waxing to the 1960s Cadillac limo, then waning to the 1980 Japanese Honda.
    For example, trans-ocean traffic brought into use ever more gargantuan ocean liners leading eventually to the five-day-Atlantic-crossing leviathans, such as the 81,000tonQueen Mary and her sister ship the Queen Elizabeth. Using the World War II technology’s new, lightweight, high-strength, saltwater-impervious aluminum alloys in her superstructures the S.S. United States was built to carry the same number of passengers and the same amount of cargo, and to cross the Atlantic at the same speed as the Queen Mary, though weighing only forty-five thousand tons, that is, 55 percent of the weight of the Queens.

    These five-day-Atlantic-crossing passenger carriers are now obsolete. In 1961, three jet airplanes outperformed the S.S. United States in carrying capacity, in hours instead of days and at less expense.

    In 1980, ever lighter, swifter “liner”-type steamships are being built, but only for luxury cruise ships. For twenty years, these obsolete ocean liners have been progressively replaced by ten-to-thirty ton, one-third-of-aday-transatlantic-crossing jet aircraft.

    Another example of the little-to-big-to-little evolution is manifest in the world of mathematical computing. In developing trigonometry and its solution by logarithms, thousand of monks worked for hundreds of years to produce the one-degree tables of sines, cosines, tangents, and cotangents. During the Great Depression years of 1930 to 1936 the British and German mathematicians were hired by their governments in a joint project to calculate the table of functions to a one-minute of arc exactitude. Then came the big post-World War II calculating machines, Univac et al., filling whole university buildings with thousands of thermionic tubes. Then came the tubeless transistor and computers weighing and bulking far less, until we came to printed circuits and “chips” and table-top equipment doing better work than the whole-building-filling equipment. Before all this, I myself spent two pre-calculator or -computer years carrying out the trigonometric calculations for geodesic domes. I had to do so “longhand.” Then appeared seventy-five-pound electric calculating machines, followed by the pocket-size computers with which the trigonometric problems that took me two years of work became solvable in one day by one person.

    This process promises within a few years to become so miniaturized and so comprehensively capable as to be the size of a hearing aid, though able to interact with all the world-around computers and able to discern how best to operate our planet, making obsolete the opinions of corporate or government executives.

    As mass-capital-venturing flourished after World War I, General Foods Company absorbed many pre-World War I individually owned, independent mass-producers of canned and packaged food. General Electric acquired other successful electrical goods manufacturers. The growth of corporate venture activity was, however, at that time yet identified by unique product categories.
    After World War II, “mergers and acquisitions” and outright “takeovers” agglomerated almost all successful industrial capital ventures, regardless of their class of produced goods and services. The great conglomerates found it more profitable, safer, and more credit-powerful to diversify their risking. The successful “biggies” became ever more gargantuan—for example, the Dupont chemical company’s 1981 acquisition of Conoco, America’s ninthlargest oil company, for $7.57 billion, to form the seventhlargest industrial corporation in the U.S. Because many of these conglomerations embraced all the national defense weaponry production, they “legally” qualified for guaranteed government “bailout” should their operation become financially “embarrassed” or debts unmeetable. The U S government’s decade-ago bailout of Lockheed Aircraft or its multibillion-dollar guaranteed loan to private Chrysler Corporation (the government’s military-tank producer) are the current outstanding examples.

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