Corporations, Democracy and teh U.S. Supreme Court

Mason Gaffney


[ GroundSwell, January-February 2010]


On Jan 21, 2010 our High Court shocked Americans by ruling in Citizens United v. Federal Elections Commission that a corporation may contribute unlimited funds to political candidates of its choice - in practice, the choice of its CEO or Directors. The ideas behind this are that a corporation is a "legal person", with all the rights (if not all the duties) of a human being; that as such it has a right of free speech; and that donating money is a form of speech. This culminates a long series of actions and reactions (decisions, legislative acts, and electoral results) that bit by bit have raised the power of corporations in American economic and public life.

Some critics react apocalyptically, calling this ruling a death blow to democracy; some cynically, calling this merely formalizing what is already the fact; some legalistically, saying the Court ruled more broadly than justified by the case brought before it. Supporters, naturally, take this cheerily as simply righting an injustice of long standing. Some economists applaud this as a step toward sunsetting the corporate income tax. Many of them – not all - have been pushing this cause for years in their learned journals and op-eds.

This writer does not applaud. I agree with Jos. Stiglitz and others that the corporate income tax is mainly a tax on economic rent. Martin Feldstein, an economist who is as conservative as Stiglitz is liberal, sees the corporate income tax as a tax on economic rent (1977, p.357). It is not the ideal form of such a tax, but it beats any tax on work, or sales of the necessities of the poor, or value-added, or gross sales. However, the generally egalitarian Wm. Vickrey did approve, pushing this as one of his favorite causes. Both Vickrey and Stiglitz rated high enough in the profession to garner Nobel Laureates, so we need to consider both sides of this issue. To prepare our minds, let us review some milestones in the history of corporations in America.

England gave the East India Company extraordinary powers, a private corporation acting as the "chosen instrument" of the Crown. These powers included, among others, the governance of India, supported by royal military force; and a monopoly of tea export, again enforced by the British Navy. Americans' early experience with this monopoly corporation was as its angry exploited customer. Its monopoly power, coupled with Lord North's excise tax on tea, led of course to the "Boston Tea Party", an event that modern "tea-baggers" seriously misinterpret as they use it as a symbol to use against all taxes. "It was the danger of this monopoly rather than the tax itself only 5 pence to the pound that aroused resentment in the colonies" (Henry Steele Commager, Spirit of Seventy-six).

Some of the original 13 colonies were founded by chartered companies resembling corporations, with powers to grant land. A major goal of the American Revolution was to strip these original governments of their corporate powers , and confiscate and redistribute lands they had granted to their favorites. Descendants of these dispossessed "Loyalists" and "Tories", many living in Canada, occasionally still remind us that we should compensate them as a matter of "honor". Data are vague, and historians coy on the matter, but something like 1/3 of all early colonial land titles changed hands in this period. Hostility ran unusually high: in later wars the winning Americans have rarely confiscated the lands of the losers – unless they were Indians, and not always then. (But see Chandler, Alfred, Land Titles: a Tale of Force and Fraud, and J. Franklin Jameson, The Revolution as a Social Movement.) If the Dutch-granted "patroon" spreads in the Hudson Valley survived there were special reasons: British troops dominated the lower Valley; Holland became our ally and financial angel during the war; and Robert Livingston, a major landholder, was an influential Revolutionist himself. It was not the national government that confiscated Tory lands, but independent local militia seizing the occasion. Our "Minute Men" were the guerillas then. "The Revolution was in the hearts and minds of men" – John Adams. The British controlled many major cities, but militia controlled the countryside, and made the most of it. Commander George Washington lost every battle against the redcoats until Yorktown, when de Grasse's French fleet and Rochambeau's French troops and Paris's money played major roles, along with LaFayette, Polish Pulaski and German von Steuben.

After the Revolution, naturally, Americans were eager to avoid restoring the authority of such corporations. A common attitude in this era was that corporations are not persons because "They have neither souls to be damned nor bodies to be kicked": they are outside and above social sanctions, sacred or profane. Sanctity, a religious concept, is applied to property when it is questioned, but not to the corporations that own it: they are "soulless", and their directors' only social responsibility is to the shareholders (or, as it often turns out, to themselves and their top brass).

The U.S. Constitution did not mention corporations, pro or con, and left them to be chartered by the states, as they still are. It has been the U.S.S.C., using its power of judicial review, that gradually restored corporate power (even though the 5th Amendment limits Federal, not state powers). The Constitution does not mention judicial review, either – it is a power that the Court under Chief Justice John Marshall assumed from an early date and has gradually made into a tradition. The leading case is Marbury v. Madison, 1803. Marshall was a Federalist politician and a disciple of Alexander Hamilton, whose chief concern was upholding "property", including property in land and slaves. He had been Secretary of State under President John Adams. Adams when a lame duck appointed him as Chief Justice in order to offset the victory of Thomas Jefferson and his popular party – not that Jefferson in power was as radical as the words he wrote. Marshall was wily and did so effectively over a long tenure, 1801-35. His was the original "Activist Court" that propertied people have supported clear up until it became a pejorative to be used briefly against the Court under Earl Warren.

The next milestone was the decision in Trustees of Dartmouth College v. Woodward, 1819. A popular Georgist lecturer, John Z. White, published a keen analysis of the case (Public and Private Property) in 1935, reflecting the alliance of early Georgists with Progressive Trust-Busters. The Governor of New Hampshire, William Plumer, and his Legislature sought to take control of Dartmouth College to turn it from an elite private institution into a public university for a wider student body. Dartmouth had been founded by Eleazar Wheelock in 1769 under a corporate Charter from King George III – not a popular name in America. The original purpose was to "save" and instruct the Indians in European ways like privatizing their lands (waggish students have turned that into their kind of joke, emphasizing rather the sale of rum). Plumer believed that the Revolution had transferred sovereignty from the King to American legislatures, so he might take control by appointing new trustees.

Daniel Webster, representing the trustees, prevailed upon John Marshall to validate King George's charter on the grounds that a privilege, once given, was a contract in perpetuity and could not be withdrawn –lawyers may palter over the wording. The effect on academic freedom was to subject faculty members completely to the will of self-perpetuating boards of trustees, a matter covered in this writer's The Corruption of Economics. The effect on privileges was to make them sacred (a theological concept), however they originated and whatever damage they do to society at large. Before that the grant of a corporate charter was seen as a privilege, not a right; it was a license, not property, something more like your drivers' license, or a license to appropriate water or sell liquor or practice medicine or cut hair. It was subject to conditions, and revocable without compensation. After Dartmouth it was still not taxable as property, but otherwise protected nearly as much , under the 5th and later 14th Amendments.

The next milestone was in 1832 when Andrew Jackson defied the High Court in Worcester v. Georgia. Apparently Jackson never actually said "John Marshall has made his decision, now let him enforce it", as often quoted, but that was the idea. Jackson was morally in the wrong, by modern standards – he and Georgia aimed to force the Cherokees from their ancient homeland. Marshall was morally more right, although he was probably more concerned with the principle of upholding ancient land tenures than with helping the Cherokee people. The point for us here is that Jackson prevailed, after various face-saving moves, demonstrating that a strong assertive President can face down a Chief Justice when he thinks the stakes are high enough. This is relevant today, when Citizens United has suddenly raised the stakes high enough indeed.

Another milestone came as the crash and depression of 1836-42. President Jackson, with his "limited construction" of the Constitution, refused to finance internal improvements – mostly navigation canals in that era – even though he had the money from booming sales of public lands. Many states rushed into the vacuum, totally carried away by "irrational exuberance" coupled with political logrolling. A few canals paid out; most did not, leaving states saddled with huge debts, which some repudiated outright. State administrations were so discredited that people turned to corporations to handle the next big boom, the first railroad boom, in the 1850's. (It crashed too, in 1857.)

The next legal milestone was of course the dreadful Dred Scott decision by Roger Taney's Court, 1857. Dred Scott demonstrated two things we should note today. One is the tendency of the Court, left to its own devices, to uphold "property rights" of whatever kind, even in human flesh, in disregard of human rights like personal freedom. The other is the tendency of median Americans to react against the Court when it overreaches.

The reaction to Dred Scott produced, besides an awful war, The Emancipation Proclamation in 1863. This was an extra-legal act that Lincoln felt strong enough to perform after the Union victory at Gettysburg, and no slave-owner felt strong enough to challenge as invading the sanctity of property, and no Court to review. Following the war came the Radical Republican Congress that pushed Reconstruction in the South, and the 13th, 14th, and 15th Amendments establishing the freedmen as citizens with full rights. These were radical acts under radical leadership, leading towards considerable taxation of real estate in the south, temporarily.

Next came the Grant Administration, 1869-77, filled with bribery scandals and giveaways of public lands to private corporations, mainly to build railways. Mark Twain and Charles Dudley Warner labeled it "The Gilded Age" (the first one), and "The Great Barbecue". These scandals were on a greater scale than anything the states had done in the earlier Canal Boom.

In 1871 an obscure San Francisco journalist, Henry George, published Our Land and Land Policy with a map showing the extent of the railroad land grants, painting them as broad swaths comprising a large fraction of the west. He somewhat exaggerated their extent since these solid ribbons were actually checkerboarded, but he made his point. Historians of whatever stripe now credit him with being first to sound the alarm, slowly resulting in various political reactions like the Populist, Progressive, and Single Tax movements.

Meantime, propertied northerners recaptured the Republican Party and joined forces with propertied southerners to install Rutherford Hayes as President in the disputed election of 1876 (see the writer's "Florida Voting, The Stolen Election of 1876, Abram Hewitt, Columbia University, and Henry George", Groundswell, November-December 2000). Thus ended Reconstruction and Radical Republicanism.

In 1873 came a great crash, starting a 10-year depression that turned men's minds again against corporations and the enormous land grants that the railroad barons controlled. These bided their time until recovery and complacency let our High Court rule in Santa Clara County v. The Southern Pacific Railroad, 1886, that the corporation was a "legal person " within the meaning of the 14th Amendment. The Court hijacked the Amendment, which originally passed during Reconstruction to protect the rights and properties of former slaves, to protect corporations. Critics also say that the U.S.S.C. did not even include that in its decision, but some clerk wrote it into the headnotes, from which it has been cited ever since. If that is so someone would have challenged it by now, and since no one has I do not take the point seriously. The fact is that since Santa Clara all corporations endowed with personhood, so no state can deprive them of life, liberty OR PROPERTY, so there. The tenures deriving from the bribery scandals of the Grant years are now above the reach of any state. They are endowed with Sanctity! You offend God Almighty even to question them! That was quite a coup.

The reaction to this kind of judicial activism was voter receptivity to another wave of reform. History books dwell on changes at the Federal level during The Age of Reform, led by the Populist and Progressive Movements; but the unsung part of reform was that states and cities and counties and school districts struck back at land barons by raising state and local property taxes to finance public schools and public works of many kinds. 1880-1920 was the golden age of urbanization in the U.S.A., and growing cities taxed property to provide schools to make people literate, and many services like sanitation and water supply to make urban life possible. Henry George was a major part of this movement. Princeton historian Eric Goldman, author of Rendezvous with Destiny, speaks to that. "An enormous number of men and women … who were to lead 20th Century America in a dozen fields of humane activity wrote or told someone that their whole thinking had been redirected by reading Progress and Poverty; no other book came anywhere near comparable influence -- (it) magically catalyzed the best yearnings of our grandfathers and fathers."

At the Federal level many dissidents joined to form The Populist Party, winning one million votes and 22 electoral votes for their unknown presidential candidate, James Weaver. In the 1894 by-elections they polled even 50% more votes. They elected six senators and several congressmen and enough influence to pass a desired progressive personal income tax that included a tax on property income. In 1896 they merged with the Democrats, cast out old leaders like Cleveland and went with Bryan and his brain, John Peter Altgeld. Republicans, trolling for their votes, became Progressives themselves under T.R. and Wm. H. Taft, followed by Progressive Democrat Wilson, so for two decades we had two Progressive Parties. Many Progressive Republicans and their ideas even survived the postwar reaction against Wilson. Few have called Andrew Mellon, powerful Treasury Secretary under Harding, Coolidge and Hoover, a Progressive, and yet he believed that we should tax property-derived income higher than wage income.

Of course in 1894 our High Court overturned the Populist personal income tax on the grounds that it included a tax on real estate income, which they construed as a "direct" tax (Pollock v. Farmers' Loan and Trust Co.). The U.S. Constitution reads that a "direct" tax must be apportioned among the states according to population, which the 1894 tax was not. This setback, however, only led first of all to the corporate income tax of 1907, a major blow to corporations, and then in 1913 to the 16th Amendment and the personal income tax. In 1916 a number of radical Democratic Congressmen, including Henry George, Jr., fashioned the first substantial income tax bill under the amendment. They exempted most wage and salary income, making this more a tax on property income even than envisioned in the Act that the 1894 Court had disallowed.

In 1912 Hiram Johnson won as Governor of California, defying and breaking (some of) the power of the Southern Pacific Railway Corporation. As part of this movement before and after Johnson, the California Legislature enabled the growth of Irrigation Districts with strong powers to tax lands to pay for remarkable systems of water supply, under which California quickly vaulted into our leading farm state. It was a striking object lesson in how radical Progressive policies of the right kind can attract industry, people and capital. The U.S. High Court had laid the foundation for this in its validation of District powers in Fallbrook I.D. v. Bradley, 1896.

By 1917 the old Populists could say they had achieved most of their goals through other Parties. The anti-Progressive postwar mood of 1920, however, was all the Court needed to rule in Eisner v. Macomber, 1920, that the I.R.S. could not tax unrealized capital gains without another Act of Congress – an Act that Congress never provided. This has provided a major loophole ever since, both for corporations and their shareholders.

Meantime in England a parallel movement led by the "Radical-Liberals" installed in series three PM's: Henry Campbell-Bannerman, Herbert Asquith, and David Lloyd-George. In 1909 Lloyd-George, then Chancellor of the Exchequer under Asquith, introduced his radical "People's Budget", including a token tax on the hitherto untouchable ancestral lands of the Lords. When the House of Lords vetoed it, Asquith demonstrated how a strong executive can overawe such a body: he prevailed upon King Edward VII to threaten to "pack" the House by creating new peers. The Lords bowed to superior fire power and passed the budget – an event known since as the Constitutional Revolution in England. It set a precedent for what FDR was to attempt in 1937.

1937 saw the next milestone when President FDR, at the height of his electoral strength, tired of having the High Court reject his programs. He copied Lloyd-George's 1909 success against the House of Lords . He didn't just threaten to "pack" the Court by adding new justices, he played hardball with the Reorganization of Judiciary Act. At this point Justice Owen Roberts, , who had been joining in 5-4 majorities against the President, prudently changed sides in a minimum wage case. It's been called "The switch in time that saved nine" (cutely mimicking an old saying that many young people today never heard). It demonstrated that there are limits to the Court's power to override a united electorate. As the comic "Mr. Dooley" quipped long ago, "The Supreme Court follows the election returns."

The Warren Court, 1953-69, did many notable deeds for the common man and woman, but it did not stop the decremental fall of the share of corporate income tax revenues in Federal finance. 1968 was the milestone year when the payroll tax quietly surpassed the corporate tax as the second biggest source of Federal Revenue. Just think: the corporate income tax of 1907 antedated the payroll tax of 1935 by 28 years, and it was another 33 years, 1935-68, before the payroll tax took in more money than the corporate tax did. That was a revolution indeed, but so quiet and gradual that most people never noticed. Nor was that the end of it: by 2008 the corporate tax raised just 11% of Federal revenues, compared with 38% for the payroll tax, nearly 4 times as much. That is a measure of the growing power of corporations in politics.

On top of that, personal income taxes on corporate dividends and capital gains have been singled out for preferentially low rates. In 2003 President Bush and his Congress lowered the tax rate on both dividends and capital gains to 15%, so that a smaller share of the personal income tax now comes from corporate shareholders. As late as in the Tax Reform Act of 1986, dividends were taxed like other "ordinary" income. So, briefly, were capital gains. President George H.W. Bush then devoted most of his presidency, and sacrificed a second term, to get a token cut in the capital gains rate. It was the thin end of a wedge, leading quickly to the present cap of 15%. "Capital gains", so-called by Congress, derive from many sources, but one of the biggest is sales of corporate stock.

And so things stood until January 21, 2010, when the High Court authorized corporate leaders to contribute unlimited amounts of their shareholders' cash to political candidates. This poses a challenge to our TV-cosseted generation. Will "ordinary" taxpayers rebel, as they did in the American Revolution, Emancipation, the Progressive Age of Reform, and the New Deal; or will corporate power wax unchecked until it replaces public governance altogether?

Here is a summary of the problems with treating corporations as "legal persons".

1. Corporations never die, never pay estate taxes, never divide their wealth among succeeding generations. In this they resemble the medieval Churches that agglomerated over many years so much land they threatened the state itself – resulting often in massive confiscations, as by Henry VIII.

2. Besides not dying, corporations merge with or otherwise acquire other corporations, progressing, if unchecked, from competition to cartel to oligopoly to monopoly.

3. A corporation is by nature a combination in restraint of trade – that is, a union of many individuals with their wealth to act as a unit, dealing with customers, suppliers, and workers. The courts, historically, have borne down on labor unions as illegal combinations while treating this combination of capitals as an individual.

4. Corporations enjoy the legal privilege of limited liability.

5. The ownership of corporations is, or may be made, secret. Many stocks are recorded in "street names" – a favorite being "Cede and Co." Hugo Chavez is one such owner whose name has been revealed: others might be Al Quaida, the Nazi Party, the heirs of Mao tse-Tung, La Cosa Nostra, or anyone. No citizenship is required for a corporation to sway American government more than almost any citizen.

6. No person is easily held responsible for corporate acts. The first duty of CEO's is to the shareholders, so they may say, and most shareholders have little idea what their CEO's are doing.

7. The internal governance of most corporations is intensely undemocratic

8. The corporation cannot be jailed, and its officers seldom are, as they have great opportunities to pass the buck

9. The corporation has no spiritual counselor or confessor to prick its conscience.

10. Before January 21 the attitude, as expressed by Justices White and Rehnquist in the 1970s, has been that corporations are "creatures of the law", not equal to natural persons in their civic rights.

Finally, what can we do about the High Court's marriage to corporate power? I begin with what I consider ineffective remedies, and move on to those that can work, and work quickly.

1. Ineffective remedies

a. Justices may be impeached. This has succeeded only once, to my knowledge, in 1804, when a justice was obviously insane.

b. Within a State a Justice may be recalled, as Rose Bird was. There is no such provision for Federal judges.

c. A President can appoint anti-corporate judges as vacancies occur. This will happen at best over a long time-span, and needs to happen fast because with their newfound pecuniary "free speech" corporations will soon control both Congress and the Executive even more than they do now.

2. Effective remedies

a. The Executive and the Congress can play hardball by drafting new legislation to curb corporate contributions, and threatening to raise the corporate income tax as a bargaining chip – a big chip! This calls for a leader who sees the imminent danger, and is willing and able to act firmly and decisively, a la FDR.

b. The Executive can introduce legislation modeled on the 1937 Reorganization of Judiciary Act. This act worked quickly and effectively. It is what we need today. It is radical, yes; but the Court's ruling is radical, and calls for a remedy equally strong or stronger.



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