And just how shaky, artificial, and ridiculous have leveraged
buyouts gotten?
Well, Forbes magazine pointed out that "...Duff and Phelps,
the Chicago-based bond-rating service, underwent a management
buyout early this year and issued its own junk bonds. When the
deal closed, long-term debt ballooned to $112 million from $34
million. Net worth fell to minus $10.8 million from positive
$3.6 million. Fees and expenses in connection with the buyout
ran almost $13 million, which was more than the equity contribution
of the management investors." {B62}
Who stands to lose money if these "leveraged to the hilt"
corporations collapse in a recession, or a depression brought
on by another stock market crash?
Two entities will bear the brunt of banks going bankrupt if and
when the cash poor leveraged corporations default on their payments
to the banks. If the banks get bailed out by the government, taxpayers
as a whole will end up paying for the economic elite's gambling
spree. If the impending economic collapse is severe enough to
make widespread bank bailouts impractical or impossible, YOU and
the little old lady who put her life savings on deposit will lose
your shirts. That's who! So when you hear that a huge corporation
is running at a loss, don't be too eager to get out your hankie
unless you are crying over the havoc caused by corporation wreckers
who have, in the process of milking the nation, driven it to the
brink of bankruptcy.
Lest we forget:
The proportion of Federal Income tax (derived from Corporate income
tax) has already declined from 32% in 1952; to 23% in 1960; to
17% in 1970; to a low of 9% in 1985.
To make things even worse, the bulk of the leveraged buyouts
which ushered in a horrendous wave of tax avoidance, have occurred
since 1985. In 1988 there were 3,500 public deals worth some $300
billion. {B63} The four firms previously mentioned on 1-36, alone
represent a potential annual legal tax avoidance in excess
of $2.2 billion.
Furthermore, Mr. Bush has been fighting for some time to have the capital gains tax reduced even further, this time by half. However, in the face of some congressional opposition, he has suggested and will probably succeed in passing a supposed compromise to his original demands. His compromise involves a significant reduction of the capital gains tax for a two year period only. This compromise would nevertheless effectively give all the profit takers a golden opportunity to remove from the system whatever windfall profits they have been sheltering from the tax department over recent years. Few concessions to the rich have been as blatant as this impending tax scam.
The excuse has always been given that "Reducing corporate taxation stimulates the economy." It does no such thing. On the contrary, the proposed corporate tax reductions will free up enormous amounts of capital for investment abroad!
In banking circles, this whole process of exchanging debt for equity is known as the "monetization" of private wealth. It is estimated that 40% of the $311 billion value of deals carried out in 1988 alone went into private hands. {B64} In other words, the elite have been exchanging their industrial equity for cash which can now be used to buy up cheap industries overseas in order to take advantage of the remaining pools of cheap unorganized labor.
As a result of the exodus of American industry previously described, America's capital stock (industrial machinery, etc.) fell from 70% of GDP in the mid-1970's, to 56% in the mid-80's. {B65} And of course less industry means more unemployment which in turn tempts more employers to cut wages back as close as possible to the minimum wage.
In addition, much industrial machinery is old and outdated due
to the reluctance of corporations to consider anything beyond
the next quarter's earnings. Consequently, the elite have begun
to pressure employees into buying outdated plants and machinery
(through employee stock ownership plans) with threats of plant
closures.
Obviously, if corporations are eager to get on the ESOP bandwagon, and they most certainly are, logic if nothing else should suggest that despite the lies being fed to employees all around the country, employee stock-ownership plans benefit employers more than they benefit the employees. And they do. Here's how.
As the ESOPs are phased in, a company's existing pension plan gets phased out. For an increasing number of people, their retirement income will then be tied to the fluctuating price of the company's stock. This means that in a recession, or worse yet a depression, neither their stocks nor the dividends from the stocks will be worth a damn. For companies that go bankrupt, in good times or in bad times, the pensions for all current and retired workers will simply cease to exist!!
Because post-retirement medical coverage gets phased out as well, employees will have the option of withdrawing equity from their stock accounts to pay for their own medical coverage. If medical costs skyrocket in later years, and they will, employees and particularly the retired ones will feel the pinch of reduced pension income. If stock dividends plummet in a recession, which they most certainly would, pension income would be reduced accordingly. Not so with the cost of medical care. With little or no income during a recession, sickness may cause many to borrow against whatever equity is left in their homes.
In recessions and depressions, workers who have not retired yet will be faced with the option of allowing their company to go bankrupt, and in the process losing both their jobs and their pensions, or they could keep the company going, at any and all costs, by working for wages that would at last compete with 3rd World labor costs!!
In bad times many workers would be forced to sell off their company stock for additional income. However in bad times, dividends from the stocks would most likely cease as well. If many people are forced to desperately dump their shares on the market for survival income, the stock market could once again easily collapse.
The prospect of getting rid of existing pension liability is so lucrative to the elite that the current administration is providing no end of tax incentives to corporations to get them to participate in ESOPs. Even the banks and Insurance companies are being given irresistible tax incentives to provide corporations with loans to set up their ESOPs. They only have to pay tax on 50% of the interest revenue from ESOPs!! Next, the corporations can write off not only the interest they pay on these loans, but also the principal! In addition they can write off the dividend payments on the stock. The tax incentives alone are so lucrative that last year over $18 billion was borrowed by corporations to set up ESOPs. In short ESOPs are simply another vehicle designed for the economic elite to reduce worker benefits, and withdraw their money completely by selling the country's debt laden industrial carcass to gullible workers. On the other hand, the mega-rich minority would be fewer and richer than ever. Many have already taken their wealth out of America and invested it in 3rd World countries. During recessions and depressions, their wealth will, relatively speaking, escape the losses suffered by capital invested in the 1st and 2nd World countries. {B66}
What makes the whole ESOP scheme transparent and laughable is that, almost without exception, when companies are 100% owned by the employees, the employees have little or no representation on the company's board, and subsequently little or no influence over supposedly their own company's policy.
Studies carried out by Michael Conte at the University of Baltimore,
by Jan Svejnar of the University of Pittsburgh, and by the General
Accounting Office (GOA) itself, have all reached the same conclusion.
ESOPs do not improve either profits or productivity. They have
however reduced Federal tax revenues by billions, and suckered
many workers into jeopardizing not only their present well-being,
but their retirement security as well. {B67}
Let's assume that Nabisco operates with an operating loss of $500 million per year. Theoretically, this operating loss can be prorated out to each of the companies forming the corporation, all of which can begin accumulating tax loss credits. This means that an outside company which is running with a profit of $100 million per year could approach Nabisco and arrange a deal to buy up a portion of Nabisco's companies that account for a loss of $100 million per year.
After the merger, the new hybrid company would now theoretically pay no taxes either, because their previous $100 million profits would be offset by the $100 million tax loss of the newly acquired companies from Nabisco. And so another $100 million dollars in