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.
