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The Man From Alcoa
Published in the July 16, 2001 issue of The Nation
The Man From Alcoa
Treasury Secretary Paul O'Neill is Turning Out to Be a Dangerous Crank
by William Greider
 
Paul O'Neill was supposed to be the "grownup" in the Bush Cabinet, the guy with government savvy from many years in Washington and the industrial-strength smarts of a successful CEO. Instead, he sounds more like Uncle Bonzo, flapping his gums with crank pronouncements on how the world ought to work. Some people (including many reporters and editors) pretend not to hear his rants. Except--good grief--this guy is Secretary of the Treasury. O'Neill's verbal excursions are reminiscent of a former President known as the Gipper, whose legendary pop-off remarks (trees are the biggest polluters) seemed amusingly daft until it became obvious Ronald Reagan was dangerously sincere.

Reforming Social Security and Medicare? O'Neill wonders aloud why we need them at all. "There's a concept that has a lot of appeal to me," he mused. "Able-bodied adults should save enough on a regular basis so that they can provide for their own retirement and for that matter for their health and medical needs." Otherwise, he explained to the Financial Times, elderly people are just dumping their problems on the broader society. On June 18, the Secretary went to Wall Street to rally the financial guys in behalf of his crusade. The brokerages and banks will pony up $20 million for TV ads selling Social Security privatization. The package is called "reform," but O'Neill's musings indicate that the lasting objective is destruction.

The risks of nuclear power? "If you set aside Three Mile Island and Chernobyl, the safety record of nuclear is really very good," he explained. Other than that, Mrs. Lincoln, did you enjoy the play?

Corporate taxation? A ridiculous scam, O'Neill complains. Don't just reduce the tax on business profit--abolish it! Abolish the corporate income tax? "Absolutely. In economic logic, there is no reason to have the phony process as though somehow individual human beings didn't pay the taxes that are embedded in the prices of goods and services." What about the capital gains tax on business? "Left to work in the most satisfying theoretical way, if there weren't any corporate and business taxes, there sure as hell wouldn't be corporate and business capital gains taxes. Therefore, there wouldn't be any need to lower the rates because there wouldn't be any rates at all."

AIDS treatment drugs for Africa? A waste of money, an unnamed senior Treasury official suggested to the New York Times, because Africans lack the "concept of time" needed to take pills at the prescribed hourly intervals. O'Neill was widely believed to be the unnamed source. He was taken off the hook somewhat when another Bush official, the new administrator of the Agency for International Development, made the same point on the record. Many Africans, Andrew Natsios explained to the Boston Globe, cannot tell time because they only know morning, noon and night (plus, they don't own watches). So how could they possibly take their medicine at the right times? Religious Action Network, Africa Action and the Health GAP Coalition sent angry protests to Secretary of State Colin Powell, but also to the Treasury Secretary. O'Neill's evasive reply made them even angrier.

These and other glimpses into Paul O'Neill's thinking reveal the mind of a stone-age Republican, notwithstanding his progressive assertions on matters like worker safety and global warming. Like Reagan's rambles, O'Neill's breezy, righteous self-certainty provokes mirth as well as alarm. But it would be a mistake to dismiss them as Bonzo's harmless ruminations. O'Neill reflects the warped sensibility of some leading industrialists, people who are not simply flaky right-wingers but who run things. In his peculiar perspective on society, the most flagrant injustices are inflicted upon the wealthy and powerful, and they ought to be eradicated. While the prospects for achieving this are unpromising, O'Neill's sermonettes on the tax system and other abominations are probably helpful to the White House political agenda--stroking the corporate interests that got left out of the first tax-cutting round as well as the right-wing frothers. O'Neill confided that the President is "intrigued" by his out-of-the-box thoughts. Phase out Social Security? Repeal corporate taxation? He can't be serious. That's what they used to say about the Gipper.

At the outset, one might have assumed the loose-lipped performance was attributable to a business executive's inflated sense of privilege--a man accustomed to saying exactly what he thinks and expecting everyone to genuflect to his superior wisdom. The President introduced O'Neill as "a steady voice" who would calm the nerves of people and markets, but in the early going O'Neill sent international financial markets spinning (in the wrong direction) when he said, "We are not pursuing, as is often said, a policy of a strong dollar. In my opinion, a strong dollar is the result of a strong economy." Speculators jumped--the dollar reeled, the euro soared. The Treasury Secretary had to swallow his remarks and reassure markets that the Clinton Administration's strong-dollar policy remains unchanged. After elaborating his strong objections to financial bailouts by the IMF, O'Neill was compelled to retreat again and endorse the vast new bailouts the IMF provided Turkey and Argentina.

The criticism rankled the Secretary. "I made a mistake of assuming it was all right to talk about the intellectual fabric around that subject [currency values]," he grumped. "It's apparent it's not possible to do that, so I'm not going to try anymore." On the contrary, O'Neill has continued his efforts to educate us on complex subjects and clearly enjoys the role of "intellectual" provocateur. After expressing a string of off-the-wall propositions, he asked an interviewer: "Is that radical enough?" In fact, his ideas are not so much radical as retrograde, resembling Vice President Cheney's views on energy and the environment. O'Neill is exhuming golden oldies from the Daddy Warbucks era of Republican ideology.

His disquisition on corporate taxation, for example, revives the mythical proposition--business doesn't pay the taxes, consumers do--that was very popular among business conservatives more than a generation ago (it originated in the early twentieth century, when the income tax was introduced). Now and then, a conservative economist with an ivory tower grasp of the subject will revive the same theory and set corporate hearts aflutter, until their accountants explain the real-world facts. Aside from modest dividends, corporations do not distribute their profits to shareholders but retain the money in-house to use for financing new investments (preferable to borrowing the funds from banks or financial markets). Thus, if corporate earnings were not taxed at the source, business profits would accumulate each year as tax-free income (maybe what O'Neill has in mind).

The government, in exchange for repealing the corporate rate, might conceivably compel companies to distribute all their profits to the shareholders, but no one in business wants that. Alternatively, in theory, the profits might be attributed to the individual shareholders for tax purposes, so they would have to pay the taxes on the income. But that's an accounting nightmare for both taxpayers and the government, since the stock market's daily churning continuously changes the ownership of shares and would slice up any tax obligations into small, moving fractions. The more fundamental fallacy in O'Neill's reasoning is that the bulk of privately owned corporate shares are already exempt from taxation because they are held in some form of tax-sheltered status--pension funds, personal IRAs, tax-exempt foundations. The owners don't pay anything on their income from equities. As a practical matter, the corporate tax is the only nick the government gets to take on business profits--and it's already weakened.

The reason corporations lobby so fiercely to reduce the corporate tax rate and gut the code with crippling loopholes is simple--they know it's their money, not the consumers'. They intend to hang on to as much of it as possible; so far they've been quite successful. In the 1960s corporate taxes yielded 35 percent of total federal income-tax collection, but that proportion shrank steadily as more and more business tax breaks were enacted. Reagan's splurge of tax-cutting in 1981 achieved the nadir: Corporate tax revenue fell to 10 percent of the whole. Some of those losses were recovered by the tax reform legislation of 1986, which closed many loopholes, and corporate tax payments swelled further when profits surged in the early 1990s, rising to 21 percent by 1995. But the corporations have since figured out how to have it both ways--rising profits and falling tax obligations. The corporate share of tax revenue actually declined during the recent economic boom, back down to 17 percent in 2000.

As chief executive at Alcoa, O'Neill was not the worst of the looters, but he did better than average at beating the tax collectors. In 1996 Alcoa enjoyed profits of $399 million and paid nothing. In fact, it collected a rebate of $17.6 million from the Feds--a tax rate of -4.4 percent derived from accounting ploys not available to mere mortals. For the three-year period from 1996 to 1998, Alcoa paid an effective tax rate of only 15.9 percent on $1.7 billion in profits--less than half the statutory rate of 35 percent and right in line with what ordinary working stiffs pay on their incomes. The man himself, meanwhile, earned $59 million in his last year at Alcoa, enjoying fabulous stock options that are one of the devices Alcoa uses to reduce its taxes. So why all the whining? It's not the money, it's an "intellectual" thing.

Gaming the tax code is resurgent again in corporate America and was documented by Robert McIntyre of Citizens for Tax Justice in an alarming study released last October (largely neglected amid pre-election tumult). Among 250 of the biggest corporations, McIntyre found forty-one that, like Alcoa, had dodged taxes altogether in one or more years from 1996 through 1998. They paid less than zero on $25.8 billion in profits and collected $3.2 billion in rebates. In 1998, the needy cases included PepsiCo, Pfizer, J.P. Morgan, Enron, Weyerhaeuser, General Motors, MCI Worldcom and CSX. O'Neill is right to say the tax code is an "abomination" in need of reform. He only has the direction wrong.

Beyond corporations, the talking Secretary seems to be driving toward a larger point: Wealth accumulation should not be taxed in any form. It's hard to say for sure because his remarks are often elliptical to the point of incoherence. But the new Treasury boss did overrule his own department's policy staff and withdraw from an inquiry by the Organization for Economic Cooperation and Development into offshore tax havens that allow wealthy people to hide investment money and evade taxes at home [see Lucy Komisar, "After Dirty Air, Dirty Money," June 18]. O'Neill parroted the right-wing line that this modest reform effort might discourage low tax rates in Caribbean islands where the money is parked.

Though the Secretary waxes philosophical on the subject of wealth and taxes, his personal behavior could be mistaken for that of a regular old greedhead. When he took office, O'Neill brushed aside the conflict-of-interest rules and decided he wouldn't sell his shares in Alcoa, the bulk of his $62 million in assets. He relented once an uproar ensued, but the Secretary sold off his shares v-e-r-y slowly, while Alcoa's stock price was rising nearly 30 percent. Unlike some of the rest of us, this man has saved up for retirement. Besides, he is already receiving an annual pension of $926,000 from his old employer. The repeal of the inheritance tax will save his heirs $30-75 million, by McIntyre's estimate. So, hey, who needs Social Security anyway? O'Neill envisions instead a relatively small welfare program limited to the truly deserving lame and halt.

On the subject of tax theory, O'Neill strikes a tone of moral indignation. "We've gotten to the issue of thinking about taxing income and wealth as though they are two separate things," he mused. "And you can make an argument--I think a fair argument--that people should be taxed on period income, which means the amount of income that comes in some particular calendar period." This sounds like he thinks the passive accumulation of wealth over many years from appreciating stocks and other assets should not be taxed--a cute way of saying, Let's repeal the capital gains tax on individuals too, along with the inheritance tax. Others interpret his remarks as obliquely favoring a national sales tax to replace the lost revenue from corporations--putting the full burden on consumers, where he thinks it belongs.

O'Neill's perspective demonstrates how far the moral fulcrum has gravitated in the conservative era. A generation ago, it was assumed that income earned from human labor was morally more deserving than income accumulated passively from invested wealth. "Unearned income," as it was then called, was taxed at a higher rate than wage and salary income. The preference for human labor was repealed in the Reagan tax cut, and now O'Neill seems to envision the next step: giving full preference to wealth by not taxing it at all.

Should we worry about this loose talk? Not much, thinks Bob McIntyre, who has been a watchdog critic of tax-code inequities for two decades. "To do any of these things he wants would almost certainly cost a ton of money, and they already broke the bank with the tax cuts," McIntyre said. And with Democrats taking charge of the Senate, the political obstacles have recently become more formidable.

Nevertheless, the corporate-conservative movement has prospered by taking the long view of politics--talking up the most improbable propositions, year after year, and creating a framework for public debate that makes looting the Treasury sound like a moral crusade. This appears to be O'Neill's noble mission too--beating the drum for "tax reform" by grossly falsifying the fundamentals. The odds are against immediate action, of course, but his righteous chatter starts us down the road and ought to be vigorously refuted, right now, before it poisons the climate of public understanding. Ten years ago, while Democrats smirked, the Republicans started popularizing the "death tax" as a cause for righteous indignation. They found farmers and small business owners to front for the issue, even though it was obvious that only the very wealthy would benefit. This year, the long-running agitation paid off for George W. Bush when the inheritance tax was repealed--despite the gross injustice. A lot of Democrats voted for it too.

© 2001 The Nation Company, L.P.

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