Corruption Is The Use Of Public Position For Private Gain

According to a law journal article by Zephyr Teachout, the Founding Fathers had a shared understanding of corruption.

To the Delegates, political corruption referred to self-serving use of public power for private ends, including, without limitation, bribery, public decisions to serve private wealth made because of dependent relationships, public decisions to serve executive power made because of dependent relationships, and use by public officials of their positions of power to become wealthy. P. 373-4.

Of course, the Supreme Court doesn’t see it that way. The only form of corruption the politicians on the Court recognize is quid pro quo transactions, the formal exchange of value for taking a governmental action. This view carries over to the private sector. Only rarely are there prosecutions for kickbacks or other forms of corporate bribery because the laws are spotty, and anyway, who cares? The market, whatever that is, will take care of it.

The Ryan-Trump tax bill is an excellent example of of corruption in Teachout’s sense. A number of senators received personal benefits from a provision which applies low pass-through tax rules to passive investments in real estate. This clause will not increase investment or jobs. It only benefits equity holders, including Tennessee Senator Bob Corker. For details, read the articles by International Business Times’ David Sirota. Corker and Hatch deny that they are corrupt but do not describe any benefit to ordinary Americans from the changes.

Another beneficiary of changes in the law is Senator Ron Johnson, R-WI, who owns interests in a pass-through manufacturing business and several pass-through real estate businesses. Equity holders pay ordinary income tax on it at their personal rate. Johnson announced he wouldn’t vote for the bill unless it benefited him; as well as anyone else who owned investments like his. He wanted a deduction of part of the income. Senate leadership eventually made an offer, there was bargaining, and eventually they settled on 20% of a number based on a complicated formula involving wages and capital. Just as on the real estate side, this bill is just a gift to owners of unincorporated businesses. The value of their interests will go up and their taxes will go down, and nothing will change in terms of investments in the business. Johnson’s explanation for this is not his personal wealth but the fact that business income is treated differently depending on the form of business organization. But the reason people choose non-corporate forms is the personal benefit, and Johnson doesn’t explain this crucial difference or the impact of the changes.

It isn’t only government officials who can use public positions for their personal benefit. In 2015, 58 university presidents made more than $1 million. They must be really good at raising money. Fun fact: the ridiculous tax bill provides for a 1.4% tax on income from endowments greater than $500,000 per students at schools with 500 or more students. The insufferable N. Gregory Mankiw is perturbed. I say good. At least there is somewhat less incentive to raise vast sums of money at schools like Notre Dame, which estimates its tax at $6 to 9 million. Notre Dame spent $354 million from its endowment which garnered about $1.21 billion, if I read this right.

Corporate CEOs have reached even higher levels of compensation; so of course as a group they were proponents of this sickening bill. They’ll get billions to use to pay shareholders with dividends and buybacks, and they’ll benefit handsomely from both, because almost all of them are big shareholders. They also love huge mergers, and once industries are consolidated, they raise prices in excess of costs which increases corporate income and thus their own. I wrote this about drug companies showing the details. And here’s a disgusting recent example.

I’ve focused on economic corruption, but abuse of power goes beyond economics; the most obvious arean is sexual predation. Others can do a better job explaining that kind of abuse so I’ll just leave it there.

Many of the people in positions of authority in the corporate sector, the non-profit sector and the government sector use their positions for private gain. We can speculate about the reasons for it, and debate the extent of it. Maybe it’s no worse now than before; it just seems worse because Trump is president. And of course, we aren’t all corrupt, and we aren’t all corrupt all the time. For those with some self respect or some self control, there is this sickening feeling of collapse.

I think that’s because our public discourse is so barren. We have no vocabulary for analyzing the problem, or thinking about what we need to change. We think in terms of criminal law when we talk about corruption, and not the language of duty and responsibility. Let’s stop doing that.

Corruption is the use of public positions of authority for private gain.

Notre Dame undergrad (math); JD, Indiana University at Bloomington; 1st Lieutenant, US Army.; private practice in corporate and securities law; Assistant AG in Tennessee for consumer protection and securities; Blue Sky Securities Commissioner, Tennessee; private practice, bankruptcy and corporate law.

I have had a lifelong interest in economics. For most of my career, that interest was practical, focused on the problems in front of me. Lately I have been more interested in economics as a theory, especially its impact on the lives of people like those I met in my bankruptcy practice, and on the politics of money in the US. I also enjoy reading philosophers, starting in college and steadily expanding my reading ever since. I wrote at FireDogLake for a number of years.

Generally, I think the problem facing the US is the dominance of neoliberal discourse. I think it clouds the vision, and limits the kinds of problems that can be identified and solved. For example, the existence and danger of climate change can easily be identified in a scientific discussion. However, the problem does not fit the neoliberal discourse because science insists that the pursuit of individual and corporate self-interest will lead to devastation. In neoliberal discourse, the pursuit of self-interest always leads to Eden.

The neoliberal project has two prongs. One is the police function of crushing dissent and alternative views. The police function is provided by government agencies and private and institutional actors. The counterpart is the economic system , which is operated by government and by private and institutional actors. Some of these actors operate in both spheres. I focus on the second prong.

37 replies
  1. scribe says:

    Let’s not forget stars such as Diane Feinstein – that palace on Nob Hill didn’t come cheap, and surely couldn’t have been bought on a lifetime public servant’s salary.  Granted, a lot of that money came through her husband and his work, for a large government contractor.  Do you think bid specifications may have been noodled a little so his employer would be the only responsive bidder (assuming there was public bidding and not a no-bid contract, of course).

    I’m not in favor of corruption, but one can only agree the kind of corruption talked about in the main article is a truly bipartisan project.

    • Bardi says:

      “the kind of corruption talked about in the main article is a truly bipartisan project.”

      The kind of corruption talked about in the main article is evident from very public information stemming from the recent tax scam.  I cannot say for certain but it seems every Democrat did not vote for it, hence your assertion that both sides do it (based on your suppositions) is incorrect.

      While I agree that corruption wears no particular skirt, in this case, corruption, as defined by sane people, is evident to the most casual observer.

    • SurfBot says:

      Feinstein is married to Richard Blum who owns Blum Capital a private equity firm.  Blum is worth approximately $1B.  I’m quite certain DiFi can afford her $16MM PacHeights home.  You might not like Feinstein or her politics but she’s not corrupt.

      • earlofhuntingdon says:

        Her husband’s wealth and whether she is corrupt in the sense Ed is using are two separate issues.  She is certainly fond of legislation that aids her husband’s often defense-related investments.  Separately, it’s time she stepped aside for the same reasons it’s time for Hatch to step down.  Voters should send them home.

  2. matt says:

    Ed, correct me if I’m wrong, but wasn’t the 20% pass-through deduction limited to 150K single and 315K joint filing? I believe there really was a small business motive behind this… Self employed have to pay all 15% of the SS/Medicare tax on every dollar they earn, vs employed who only pay half the amount.  As a pass-through you have to treat “profits” as earned income which means it’s taxed at a minimum of the SE tax plus the first tax bracket… currently about 30%.  Without this provision, a self-employed individual would be unfairly taxed in comparison to the new corporate rate, making it even harder to compete with the “big boys.”

    What we really need to do is tax “unearned” income -capital gains, dividends, and corporate profit distributions… which are taxed at a 15% flat rate and offer no contribution to SS/Medicare.

    Otherwise, I totally agree- except for the increase in the Child Tax Credit, everything else is a give away to the wealthy… and, hell yes, those Congressmen/women voted in public confidence for a bill that provided them private gain.

    • Ed Walker says:

      You are probably thinking of this provision:

      • Exception: Individuals with taxable income in excess of the threshold amount ($157,500 ($315,000 for joint returns)) plus $50,000 ($100,000 for a joint return) are ineligible to claim the deduction for income from most service partnerships (e.g., law firms, accounting firms, medical practices, etc.).

      That only applies to lawyers, doctors and such, who are not allowed to form LLCs to shield their ordinary income. In other words, the point is to benefit investors, not working people, a class which is disfavored by the law.

    • lefty665 says:

      Self employed people get to deduct the employer’s half of SS and Medicare, 7.65% from income. This reduces the cost to the self employed, and they get the benefit of the employer’s half of the contribution to SS and Medicare too. Not a bad deal.

      • Peterr says:

        Self-employed people get to deduct the employer’s half of SS and Medicare from income because they have to pay both the employer and employee half on Schedule SE. There’s no deal to be had here for self-employed people.

        • lefty665 says:

          The “deal” is that self employed people get the same treatment as corporations. The “employers” share of SS and Medicare is deductible from taxable net income for both. Point being there is no big penalty for self employed people.

          • Peterr says:

            Ordinary employees only pay income taxes on their half of SS+Medicare taxes. All this is saying is that when I pay both halves of the SS+Medicare tax on the “other taxes” line as a self-employed person, I don’t have to also pay income taxes on the employer half of the SS+Medicare tax. This allows self-employed people to be treated in exactly the same way as ordinary employees.

            And as my tax history has taught me, this has been the way self-employed people have been treated with respect to SS & Medicare taxes for at least 30 years. There’s nothing new about this at all.

            • matt says:

              Right, you don’t get “income” taxed on half of SS/Medicare tax like employees, but you still have to pay an extra 7.65%… (the employer contribution).  On 50K earned income that’s an extra $3800.  With the  new the 20% deduction… on 50K… that would allow 10K deduction saving the 15% SE and 18% Federal for that portion ($3300).  So, that’s about even with those who are self employed.  Am I getting that right?

  3. Peterr says:

    Fun fact: the ridiculous tax bill provides for a 1.4% tax on income from endowments greater than $500,000 per students at schools with 500 or more students.

    You know, I think the GOP may be on to something here.

    Suppose the next tax bill assessed a 1.4% tax on income of financial firms with income greater than $100,000 per employee. (Fun fact: 2016 income of Goldman Sachs – $7.4B in income with 34.4 thousand employees comes to $217,442/employee.)

    Suppose the next tax bill assessed a 1.4% tax on the corporate compensation of CEOs if the CEO compensation was more than 40 times the compensation of the average worker. Or 30 times. Or 20 times.

    Who knew that the GOP was in favor of progressive taxation? But hey — if that’s what they want, I say let’s go with it.

  4. Trent says:

    How about taxing assets, not income, as a way to discourage hoarding wealth and promote the highest, best use of everyone’s income producing potential?

    • Ed Walker says:

      I am all for that. There is a wealth tax in France, and other European nations, and it is one of Piketty’s ideas for dealing with wealth inequality. Coupled with Peterr’s suggestion above, maybe we could get some interest.

    • bell says:

      trent – good idea… charles eisenstein wrote a book called ‘sacred economics’.. he discusses getting to a place where money decays like everything else on the planet… if it decayed at even 5% per year, folks would be more inclined to use the money, as opposed to hoarding it.. negative interest rates would work in a similar fashion.. however the financial ponzi scheme that presently represents world finance are not going to go with any of that.. the whole system will be coming down before that happens.. the system at present is in for some rocky transition/s..

      • matt says:

        Economist Silvio Gessel also had that idea in 1918 – The Natural Economic Order.  

        Of, course the financial elite could not perpetuate wealth on wealth in a system where value decayed.  Instead we have a civilization where certain individuals have access to wealth pools (trusts) that have been increasing with little tax for (sometimes) hundreds of years.

    • lefty665 says:

      We do tax assets when they are sold. The issue with inherited wealth is that it can be structured so that the cost basis to the inheritor can be the asset value at the time of inheritance, not at the time the asset was originally acquired. That difference in taxable value can be profound, and capital gains taxes are lost on asset appreciation during the lifetime of the grantor.

      Simply removing that dodge would be a significant step towards limiting the growth of inherited wealth.  But don’t hold your breath, the bipartisan elites and their congressional toadies, whether affiliated with Citi (Dems) or Goldman (Repubs) or both (Hillary) won’t stand for it.

        • lefty665 says:

          And if I buy something at X, pass it to my kids at value Y upon my death and they sell it at Z they pay taxes on Z-Y. Taxes on Y-X evaporate. That is a negative estate tax.

          If the asset was held for a long time the loss of taxes can be material, especially when compared to the $0 tax that would be due if the asset was sold at death when Y=Z. Or, if at a later sale the value of the asset had declined (Y>Z) it could still yield a ton of cash AND a capital loss that would shelter other income from taxes.

          Much inherited wealth, like investments in real property, stocks and bonds are assets that generate capital gains taxes when sold. Taxing using the original cost basis would not solve the problem of massive inherited accumulations of wealth, but it would take a bite out of it, and it is exceedingly simple. However, it ain’t gonna to happen. As George Carlin observed, the rich are members of a club (bipartisan) and you and I aren’t in it.

          • Peterr says:

            It’s still a capital gains tax. The law that changes the basis of the asset is certainly tied to inheritance issues, and there are legitimate questions about whether that’s a good idea or not, but at its core you are still talking about taxing capital gains, not taxing wealth.

            The estate tax is completely different. It does not care what price an asset was purchased at, back in the day. It simply asks “what is the value of each asset in the estate today?” which may be greater than its initial purchase price, less than the purchase price, or exactly the same. If the value of the entire estate exceeds the floor of the estate tax law, the taxes kick in.

            • lefty665 says:

              Capital gains=Wealth (most but not all – capital gains not include liquid assets like the nickels in Uncle Scrooge’s money bin, but nickels value depreciates with inflation the longer you hang onto them, so the rich do not tend to have big puddles of cash hanging around to lose value. Less acquisition costs too).

              We have an estate tax, and it taxes the rich. The current law on taxable capital gains is a big part of it (and what I have advocated changing above). The estate tax is also pleasantly surprisingly (to me anyway) progressive with a top bracket of 40%.

              The current lifetime exclusion of the estate tax is $5.49mm. Do you want to lower that exclusion to tax the middle class too? Where do you propose to set the threshold? Do you want to limit the exclusion to $1mm, $100k, $0?  Exactly how much wealth, if any, do you believe it is moral to accumulate untaxed?

              The elites would not skip a beat to estate tax right down to $0. No skin off their noses, they’re already paying the tax, and it would be a good way to fuel popular outrage at the ‘death tax’. Good luck on preventing them from reducing the top marginal estate tax rates while they’re at it.

               

              • Peterr says:

                I’ll try this one last time.

                Capital gains taxes the change in value of an asset over time.

                Estate taxes tax the total value of the assets themselves.

                 

                • lefty665 says:

                  Asset taxes that do not adjust for acquisition/maintenance costs are profoundly unfair. If you tax my house at the $1 it is valued at on my death without reducing that value by the $.50 I paid for it (with already taxed current income) I’ll send my ghost to haunt you.

                  If you adjust the asset tax to remove acquisition cost you have, viola, created a capital gains tax, no matter what you call it.

                  Again,  “Exactly how much wealth, if any, do you believe it is moral to accumulate untaxed?” What are we arguing about here?

                   

                  • Peterr says:

                    If you are going to talk about appropriate levels of taxation, it makes sense to distinguish between types of taxes. A tax on the present value of something is profoundly mathematically different than a tax on the change of something’s value over time.

                    You seem to want to conflate these two, or refuse to recognize that they are different, in your desire to get the question of morality. There are moral implications of both kinds of taxes, and conflating the two creates significant problems for those discussions.

                    Believe me, I’m all for moral discussions (kind of goes with the “Rev.”, but please don’t ignore the math.

                    • lefty665 says:

                      “If you are going to talk about appropriate levels of taxation, it makes sense to distinguish between types of taxes. A tax on the present value of something is profoundly mathematically different than a tax on the change of something’s value over time.”  Exactly, and appropriate levels of taxation has been the topic.

                      However, you are off on a frolic with your straw man argument of conflation. Apparently divinity school did not include studies of finance or logic. I am specifically distinguishing values and taxes that recognize acquisition cost from those that do not (what you are advocating). To further deconflate the conversation, I am advocating taxing net asset values. You are advocating taxing gross asset values.

                      Perhaps you should stick to theology, then you might address the question I am asking you for the third time “Exactly how much wealth, if any, do you believe it is moral to accumulate untaxed?” What residue of earnings, if any,  did Jesus believe should be safe from the emperor?  $5.49 million seems wildly excessive to me, but I do not know what the right answer is. I was asking in hopes of learning from your opinion. Although those hopes have dimmed, I would still be interested in hearing what you have to say on the accumulation of financial resources and their taxation.

                    • Peterr says:

                      My undergrad work was in advanced math and economics, so it’s not as if I’m some fuzzy-headed preacher who can’t understand a spreadsheet or finance.

                      But nice try with the ad hominem.

                      You introduced the “how much . . .” question after your 10:32 comment to which I responded about conflating capital gains taxes that are based on the change in value with estate taxes that are based on present value.

                      In that comment, you wrote “Simply removing that dodge [adjusting the cost basis upon death] would be a significant step towards limiting the growth of inherited wealth.” I agree that it would be a step, but I wouldn’t call it significant when it comes limited the growth of inherited wealth. If you want to do that, put a limit on the estate itself by taxing it — lower the level at which the tax kicks in, increase the amount paid, or both. Any of those three would likely have a very significant and precisely targeted effect on how much wealth gets inherited.

                      And yes, I’d like the level to be lower and the rate to be higher.

                    • lefty665 says:

                      You raised the ‘rev’ thing, played your preacher card. I simply commented in response to that.

                      The heart of our disagreement is that I advocate taxing the change in value while you have been advocating taxing present value.  I have not conflated those concepts. Your repeated assertion that I have reflects either ignorance or malignancy.  Neither furthers an honest discussion.

                      Many inherited assets are highly appreciated, often they have been held for a long time. Removing the adjustment of cost basis to value on death would make a material contribution towards reducing inherited wealth, and as a practical matter it would be simple (but not easy).

                      Nice that we agree that reducing the exclusion and increasing the rates (how much higher than the current 40% marginal rate would you like to go?).  And finally Reverend, drawing on your self professed professional standing, WWJD?

                       

  5. apav says:

    A wealth tax seems logical if not a necessity.  I’m surprised it hasn’t been discussed more – sense it’s like a 3rd rail.  So proposals have to come out the door shields up against attacks.  E.g. with things like exclusions for what you pay property tax on, some personal property and maybe retirement accounts.   As long as corporations are treated as people, corporate property and cash would get assessed (at appraised value, not depreciated value).

  6. Peterr says:

    The US has a wealth tax already. It is only assessed against highly wealthy people, and only assessed once – after you die.

    We call it the estate tax.

    And of course the GOP wants to get rid of it and not strengthen it. “I deserve all that money I earned by working hard to pick the right parents!”

  7. earlofhuntingdon says:

    States often have asset taxes, although they are often regressive.  A wealth tax could be profoundly fair, if properly structured and administered, always a big if in the US.

    Wealth is rarely a function of one’s own bootstraps.  A significant portion of it is inherited.  Ask the heirs of Mary Kay, the Waltons, Mercers, Kochs, Donald Trump, ad nauseum.

    Even when wealth is earned, its accumulation depends on the work of thousands, the people who do the actual work of an enterprise and those who provide the infrastructure to make it possible and to keep it secure.

    Wealth is often acquired through state-assisted predation: Wal-Mart workers who survive only with public assistance.  Fish, chicken and cattle butchering workers, who try to survive without meaningful workplace safety rules and the ergonomics rules gutted by Scalia fils.  Amazon warehouse workers who need permission to pea during a ten or twelve hour day.  And that leaves out agricultural and mining workers, and farmers working by leave of a sole source purchaser of pigs or corn or cattle.  It leaves out those suffering far greater abuse offshore, whether digging De Beers’s diamonds or making most of the shoes, clothes and toys in the world.

    A wealth tax needn’t be confiscatory, but it should be admonitory, reminding coupon clippers that unearned income is just that. American economists, unlike their European counterparts, have written the idea of unearned income out of the culture.

    A securities transaction tax, for comparison, is often small.  But it’s intended targets are not mom and pop accounts at Charles Schwab or a successful day trader in her Talbot’s smock or his Brooks Brothers boxer shorts.  It’s targets are program traders who generate the vast majority of total market trades for the tiniest fractions of gains or loss.  That’s an abuse of a market byproduct and distorts trades.

    • Peterr says:

      This.

      Years ago, long before the advent of programmed trades and such, an econ professor of mine observed that there is an important distinction between people who invested and people who traded. Traders make a play for the moment, while investors look at the long (or medium or even relatively short) term. Playing for the moment has little to do with economic incentives, market conditions, or supply-and-demand. Playing for the moment does nothing to reward “good” firms and weed out “bad” firms. That’s what economic theory says investing does. Trading is all about gaming the system.

      As such, I have no problem changing the rules of the game on traders, by assessing a per-trade fee (securities transaction tax). Traders like this are parasites on the economy.

      • lefty665 says:

        Yes! And, charge the transaction fee on a per share traded basis. Even a very small per share traded fee would swamp the small price discrepancies that high speed traders exploit to the detriment of investors. It would curb that abuse.

  8. wmd says:

    Dean Baker had some takes on progressive items in the tax bill (while as a whole it is awful, there are things like ending deductibility of high executive salaries):

    So it’s good to see the tax bill make a modest effort to rein in excessive pay by ending the deduction for amounts in excess of $1 million.[2] It’s not clear this will have too much impact on CEO pay (in effect it imposes a 21 percent tax on CEO pay in excess of $1 million), but it is a step in the right direction.

    Any ideas how this will be gamed?

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