Chrysler loan writeoff a gift to wealthy shareholders

In 2017, Fiat Chrysler made a €3.5 billion (roughly Can$5.27 billion) profit. But in spite of the fact Fiat Chrysler is now profitable, the way the loan agreement was structured in 2009 means a loan that helped the company survive will be written-off.

Ottawa (24 Oct. 2018) — The federal government’s decision to write off $2.6 billion that it is owed by Chrysler is a gift to wealthy shareholders from low- and middle-income Canadians.

This week, CBC reported that the federal government was writing off one of the loans made to keep Chrysler afloat in 2009. The $2.6 billion represents both the original loan and the interest.

For Fiat Chrysler shareholders, the write-off is good news. In 2017, Fiat Chrysler made a €3.5 billion (roughly Can$5.27 billion) profit. But in spite of the fact Fiat Chrysler is now profitable, the way the loan agreement was structured in 2009 means a loan that helped the company survive will be written-off.

Need to stop companies taking advantage of the public when companies are “too big to fail”

There are a number of problems with the way the loan to Chrysler is being written off. The biggest is that the way this and many other bailouts for large corporations have been multi-billion dollar transfers from low- and middle-income earners to the wealthy and large corporations.

There are a number of reasons that loans or grants to failing companies end up as a gift for the well-heeled and large corporations. The reluctance of governments to take an active role in building a strong economy makes it harder for them to impose enforceable conditions when providing support to companies that run into difficulty. A lack of enforceable conditions attached to many bailouts means we regularly see things like companies that received government assistance paying senior executives generous bonuses. And then problems with the tax system that allow the wealthy and large corporations to avoid paying their share, mean that when governments bailout businesses, the 1% profit and the rest of us are left with the bill.

Loan writeoff made worse by unfairness in the tax system

Over the last 3 decades, income tax rates for large corporations and the wealthy have been steadily reduced. Other problems are tax loopholes and weak enforcement of rules on things like tax havens. These problems with the tax system mean that the wealthy and large corporations are not paying their share of the cost of writing off the Chrysler loan.

An example of how tax loopholes help the wealthy avoid paying their share is the difference in the way the tax system treats earned income and investment income. While people earning salaries or wages pay tax on 100% of their income, wealthy individuals getting income from dividends or selling shares only pay tax on 50% of their income.

Similarly, weak laws and poor enforcement mean that Fiat Chrysler, like other corporations, has been able to use tax havens to reduce the taxes it pays. Fiat Chrysler’s attempt to use a tax deal with Luxembourg, a notorious tax haven, is currently being challenged by the European Union, which argues that the company owes an additional €30 million in tax. Most of its U.S. subsidiaries are registered in the state of Delaware, which is widely viewed as a tax haven. For tax purposes, the company is based in London, because of weak British tax rules.

There is an alternative to writing off billions in bad loans to corporations

Those defending bailouts that end up largely benefiting large corporations and the wealthy like to claim we don’t have a choice. They argue the choice is between the severe economic problems we would see if corporations like Chrysler or GM were allowed to go bankrupt,or providing the loan guarantees or grants that end up primarily benefiting wealthy shareholders and corporate executives.

But, there are things governments can do differently so we don’t have to choose between fairness and avoiding severe economic problems. As a recent National Union publication explains, one important step is for governments to end the hands-off approach they have taken and start using economic strategies to build a stronger economy.

Governments also need to make tax fairness a priority. This is more than just a question of fairness. With the billions the federal and provincial governments are losing due to loopholes and tax havens, tax fairness is essential if we want to be able to afford the public services Canadians need.