TCS Daily

Enron Is Us

By Duane D. Freese - March 12, 2002 12:00 AM

Who would you like to see go to jail if it is found fraud was committed in the Enron collapse? Should the corporation be put behind bars or the people there who committed the fraud?

Seems like a silly question, really. Bad people in the dock and locked up is what justice is all about. After all, what would it mean if you put a corporation behind bars? Boxes of incorporation documents sitting in cells? Not much accomplished there. As John C. Coffee, a professor at the Columbia Law School told the Los Angeles Times, "Indicting a bankrupt company achieves next to nothing."

That's what makes the Bush administration approach to dealing with future Enrons so much more judicious than the approaches of many Enron detractors. One can quibble with the details, but the Bush proposals unveiled Thursday to increase scrutiny of accountants and accountability of top executives for financial reports points at the right targets. The bookkeepers and decision makers are the ones who ought to know what is going on. If anyone is to be punished for a corporate failure, it is such individuals, not other stakeholders in the enterprise.

Most politicians and commentators have recognized that Enron employees, shareholders and partners, even as they may have been "owners" of Enron, were victims not culprits in its failings.

Thus, Jesse Jackson went down to Texas to march in solidarity with 4,500 laid off Enron workers. And Rep. Henry Waxman, D-Calif., told Vice President Richard Cheney that he had to report all contacts of his energy task force as a debt owed "to the thousands of families that are facing financial ruin from the Enron bankruptcy." And Sen. Joseph Lieberman, at his Senate Committee hearings on Enron, chided Wall Street analysts for telling investors to "buy, before you asked why," leading some to buy at $90 each shares that plummeted to 27-cents.

The sympathy these activists and politicians have extended to these victims, despite their stakeholding in the Enron enterprise, is sensible. And not merely because, as Jackson said, "the big guys ...cleaned up," while "the little guys ... got cleaned out." It is because the "little guys" could have been any of us. Just about anyone with a 401(k) pension or Individual Retirement Account invested in mutual funds could have had a stake in Enron. Certainly, a lot of big pension plans - public and private - did.

The Florida public employees pension fund lost $335 million because of Enron's problems. The state of Nevada's employee fund took a $22 million hit. Calpers - the California Public Employee Retirement System - had 3 million shares in Enron when it announced its bankruptcy.

Enron's associations even reached into educational, charitable groups, as the Chicago Tribune recently reported. The John D. and Catherine T. MacArthur Foundation literally sank $9.4 million into an Enron partnership.

Despite this, all too often Enron critics lump wrongdoers and victims together, even while semantically they strive to keep them apart.

At the Labor Department's Saving Summit Feb. 28, Sen. Edward Kennedy argued that the lesson of the scandal was "no $250 million tax breaks for Enron while its workers lose their retirement savings."

What's wrong with that statement? Plenty. The so-called "tax break" would have been money paid Enron if the Alternative Minimum Tax had been repealed. And as Tech
Central Station Host James K. Glassman has written, the repayment to Enron and other corporations of that money would have been no tax break at all. It amounts to the government repaying credits for prepaid taxes. The government forcing such prepayments certainly didn't protect the retirement savings of those Enron employees, but may have helped speed Enron's decline.

Similar financial unreality was displayed by commentators' complaints about "Enron" not paying taxes. An editorial in the Los Angeles Times latched on to studies by Robert McIntyre's leftish Institute on Taxation and Economic Policy. The Times complained that the top 250 companies paid taxes of "only 20.1% (of their paper profits) in 1998." Enron from 1996 to 2000 showed paper profits of "$2 billion," the Times noted, but it got tax refunds during those years, netting $381 million. It then argued that Enron's failure to pay taxes came at the expense of "ordinary taxpayers who ended up footing Enron's tax bill."

Ah-hum. Enron as a business is bankrupt! The whole point of the Enron scandal is that its profits were only on paper - and on disintegrating paper at that. Further, the refunds were from earlier prepaid taxes. The company was getting its own money back. Its not having that money certainly didn't help save any jobs or protect any shareholders - including pension funds - or helped other taxpayers.

Even that, though, misses the larger point. Enron is not a person. It doesn't pay taxes, anymore than it can go to jail. The taxes come out of the earnings that otherwise would flow to its stockholders and employees. And while those folks include some who may be guilty of nefarious activities, they also include public employee pension funds, charitable organizations and other worthy institutions and individuals, as well as ordinary employees. Furthermore, except for earnings paid nonprofit groups, taxes would eventually be paid on those earnings if no corporate taxes were applied. But then they would be paid only once and at individual rates. And the question that deserves answering is why should money earned for a public employee's pension be taxed once at 36 percent at the corporate level and again at 15 percent when the employee draws the pension -- an effective rate of 46% -- while the maximum tax on money made by some Enron executives in its limited partnerships, which aren't taxed as corporations are, was less than 40%? That amounts to regressive taxation.

The real Enron lesson isn't simply about its accounting practices and some of its leaders' "greed." It is that corporations have deserving people within them and holding shares in them - who depend on them for jobs and retirement income - and aren't singularly "greedy" conglomerations.

Commentators have generally recognized that in looking at who is at fault for the bankruptcy. But on other issues, particularly tax matters, corporate critics lump everyone together. All tax deductions are "tax breaks" or "loopholes" serving only "greedy" corporate interests, as if those corporate interests don't include jobs, health care benefits and pension savings for millions of "deserving" Americans.

Enron is not just the Fastows, Lays and Skillings. It is us, the little guys, too. And when members of the media and politicians fail to recognize that reality in all circumstances, they lock us up, guilty and innocent, deserving and undeserving, inside policies that do the majority us great harm for little societal good.

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