How corporate tax loopholes defund the American Dream

Note: This is the first installment in a series on how corporate tax loopholes undermine the middle class—and what can be done about it. You can read the second article in the series here, and read the third article here.

By Amanda Litvinov and Dwight Holmes

As more middle class Americans than ever before wring their weary hands over whether to pay down their student loans or make their next mortgage payment, corporations are also experiencing a history-making moment. They’re sitting on record profits, and are taxed at historically low rates.

Between 2001 and 2010, corporate profits in America increased by 125%. Meanwhile, the median family income went down by 4.6% in the same time period. How was such growth in corporate profits possible, given the economic meltdown that started in 2007? Here’s the quick and dirty answer: They stacked the deck.

For decades, some of the nation’s most successful companies and CEOs have financed and lobbied enough politicians to curry a shocking level of influence over how laws are written and which ones pass. They’ve molded a system in which they can keep an ever-increasing share of profits for themselves, stunting the paychecks of working Americans and putting more burden on small businesses.

See the sources for the information used in this graph.

On top of that, corporations are contributing less in taxes to the federal government and to the communities where they conduct their business, meaning less money for serving the public good through education and other services. (A recent report shows 30 of the most profitable Fortune 500 companies pay more to their lobbyists than they do in federal taxes.)

“The middle class is being harmed by the structure of the economy, the structure of the tax burden, and the erosion of social services, including education,” said Robert Kuttner, a co-founder of the Economic Policy Institute and distinguished senior fellow at the non-partisan public policy center Demos.

When corporations don’t pay their fair share in taxes, Kuttner said, there are only three alternatives: “You either cut the services, you add to the deficit, or you make someone else pay—in this case, the middle class.”

We’re not talking chump change here. The Institute on Taxation and Economic Policy estimates that in the past three years, the federal tax revenue lost through corporate tax loopholes is $222.7 billion, which represents a loss of as much as $9.8 billion to public schools. State tax revenue from just the 265 largest companies saw losses of $42.7 billion in three years, roughly $15.4 billion of which would likely go to public schools if the loopholes were closed (see source 1 below).

Our economy was once much more balanced. Between 1948 and 1973, as productivity increased, worker wages grew at the same pace—in other words, American workers got a fair share of the growth. Between that and programs like the G.I. Bill and Social Security, America’s thriving middle class and vibrant public education system astonished the world. Then things changed. It’s more accurate to say that things were changed, by small but powerful groups, including ALEC and other right-wing organizations, and business leaders who wanted to see their companies’ already healthy profits grow exponentially.

To be clear: The concentration of power now in the grips of corporate America and the resulting unprecedented economic inequality we see today is no accident. For the past 30 years, we’ve all been trudging down a path that was carefully plotted for us by those who bought political influence for the express purpose of putting business profits above the well-being of America’s middle class.

They promised us tax cuts would lead to more revenues, greater investment and more jobs. Instead we have unprecedented deficits, falling family incomes, and four job-seekers for every open position.

Americans’ optimism about their children’s futures has reached an all-time low for good reason. Working hard and playing by the rules just doesn’t pay off like it used to; in past eras, greater equity in the distribution of income made for an economy that worked better for everyone. Our best hope for restoring balance is to demand change from our elected leaders.

“We need adequate levels of public spending that are not financed by taxes that come out of the pockets of the middle class,” says Kuttner. “And there are two sources to get those revenues: From wealthy people in their role as individual tax payers … and corporate income taxes.”

Raising our collective voice is the only hope we have in countering the other voices lawmakers hear every day—those of corporate lobbyists and influential business execs who are asking for even more tax breaks. Do you think they have your sons’ and daughters’ educations in mind?

Merit pay and the candle problem

Let us pretend for one moment that many of the corporate education reforms being proposed offered more than just a metaphorical big stick with which to fire teachers more easily, but also a few carrots too in the form of extra money toward paying high performers as determined by their students test scores. Yes, yes, we know.

Let's go even further, and pretend that student test scores were the perfect means with which to judge the effectiveness of any teacher. What do we know of financial incentives? From Nature magazine.

here's a simple fact we've known since 1962: using money as a motivator makes us less capable at problem-solving. It actually makes us dumber.

In the 1940, an experiment was carried out, now referred to as the "Candle Problem". The experiment has the participant try to solve the problem of how to fix a lit candle on a wall in a way so the candle wax won't drip to the floor. The participant can only use (along with the candle) a book of matches and a box of thumbtacks.

Let's go back to that Nature article to explain the rest of the experiment, and it' counterintuitive results

The only answer that really works is this: 1.Dump the tacks out of the box, 2.Tack the box to the wall, 3.Light the candle and affix it atop the box as if it were a candle-holder. Incidentally, the problem was much easier to solve if the tacks weren't in the box at the beginning. When the tacks were in the box the participant saw it only as a tack-box, not something they could use to solve the problem. This phenomenon is called "Functional fixedness."

Sam Glucksberg added a fascinating twist to this finding in his 1962 paper, "Influence of strength of drive on functional fixedness and perceptual recognition." (Journal of Experimental Psychology 1962. Vol. 63, No. 1, 36-41). He studied the effect of financial incentives on solving the candle problem. To one group he offered no money. To the other group he offered an amount of money for solving the problem fast.

Remember, there are two candle problems. Let the "Simple Candle Problem" be the one where the tacks are outside the box -- no functional fixedness. The solution is straightforward. Here are the results for those who solved it:

Simple Candle Problem Mean Times :
WITHOUT a financial incentive : 4.99 min
WITH a financial incentive : 3.67 min
Nothing unexpected here. This is a classical incentivization effect anybody would intuitively expect.

Now, let "In-Box Candle Problem" refer to the original description where the tacks start off in the box.

In-Box Candle Problem Mean Times :
WITHOUT a financial incentive : 7:41 min
WITH a financial incentive : 11:08 min
How could this be? The financial incentive made people slower? It gets worse -- the slowness increases with the incentive. The higher the monetary reward, the worse the performance! This result has been repeated many times since the original experiment.

We've published a video on this phenomenon before, titled "As Teacher Merit Pay Spreads, One Noted Voice Cries, ‘It Doesn’t Work’", and an article from the Harvard Business Review, titled "Stop Tying Pay To Performance".

Here's another video - The surprising truth about what motivates us

Knowing all this begs the question, why are we going down the path of some of these corporate education reforms, when we have known for over half a century many of them are flawed concepts that have been demonstrated to fail time and time again?

How to Buy and Sell School Reform

If you want to change government policy, change the politicians who make it. The implications of this truism have now taken hold in the market-modeled “education reform movement.” As a result, the private funders and nonprofit groups that run the movement have overhauled their strategy. They’ve gone political as never before—like the National Rifle Association or Big Pharma or (ed reformers emphasize) the teachers’ unions.

Devolution of a Movement

For the last decade or so, this generation of ed reformers has been setting up programs to show the power of competition and market-style accountability to transform inner-city public schools: establishing nonprofit and for-profit charter schools, hiring business executives to run school districts, and calculating a teacher’s worth based on student test scores. Along the way, the reformers recognized the value of public promotion and persuasion (called “advocacy”) for their agenda, and they started pouring more money into media outlets, friendly think tanks, and the work of well-disposed researchers. By 2010 critics of the movement saw “reform-think” dominating national discourse about education, but key reform players judged the pace of change too slow.

Ed reformers spend at least a half-billion dollars a year in private money, whereas government expenditures on K-12 schooling are about $525 billion a year. Nevertheless, a half-billion dollars in discretionary money yields great leverage when budgets are consumed by ordinary expenses. But the reformers—even titanic Bill and Melinda Gates—see themselves as competing with too little against existing government policies. Hence, to revolutionize public education, which is largely under state and local jurisdiction, reformers must get state and local governments to adopt their agenda as basic policy; they must counter the teachers’ unions’ political clout. To this end, ed reformers are shifting major resources—staff and money—into state and local campaigns for candidates and legislation.

Jonah Edelman, CEO of Stand for Children ($5.2 million from Gates, 2003-2011), sums up the thinking: “We’ve learned the hard way that if you want to have the clout needed to change policies for kids, you have to help politicians get elected. It’s about money, money, money” (Wall Street Journal, November 3, 2010).*

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Flunking the Test

Fareed Zakaria is worried about the state of American education. To hear the CNN host and commentator tell it, the nation's schools are broken and must be "fixed" to "restore the American dream." In fact, that was the title of Zakaria's primetime special in January, "Restoring the American Dream: Fixing Education." Zakaria spent an hour thumbing through a catalog of perceived educational woes: high dropout rates, mediocre scores by American students on international tests, inadequate time spent in classrooms, unmotivated teachers and their obstructionist labor unions. "Part of the reason we're in this crisis is that we have slacked off and allowed our education system to get rigid and sclerotic," he declared.

This is odd. By many important measures – high school completion rates, college graduation, overall performance on standardized tests – America's educational attainment has never been higher. Moreover, when it comes to education, sweeping generalizations ("rigid and sclerotic") are more dangerous than usual. How could they not be? With nearly 100,000 public schools, 55 million elementary and secondary students and 2.5 million public school teachers currently at work in large, small, urban, suburban and rural districts, education may be the single most complex endeavor in America.

Zakaria's take, however, may be a perfect distillation of much of what's wrong with mainstream media coverage of education. The prevailing narrative – and let's be wary of our own sweeping generalizations here – is that the nation's educational system is in crisis, that schools are "failing," that teachers aren't up to the job and that America's economic competitiveness is threatened as a result. Just plug the phrase "failing schools" into Nexis and you'll get 544 hits in newspapers and wire stories for just one month, January 2012. Some of this reflects the institutionalization of the phrase under the No Child Left Behind Act, the landmark 2001 law that ties federal education funds to school performance on standardized tests (schools are deemed "failing" under various criteria of the law). But much of it reflects the general notion that American education, per Zakaria, is in steep decline. Only 20 years ago, the phrase was hardly uttered: "Failing schools" appeared just 13 times in mainstream news accounts in January of 1992, according to Nexis. (Neither Zakaria nor CNN would comment for this story.)

Have the nation's schools gotten noticeably lousier? Or has the coverage of them just made it seem that way?

Some schools are having a difficult time educating children – particularly children who are impoverished, speak a language other than English, move frequently or arrive at the school door neglected, abused or chronically ill. But many pieces of this complex mosaic are quite positive. First data point: American elementary and middle school students have improved their performance on the Trends in International Mathematics and Science Study every four years since the tests began in 1995; they are above the international average in all categories and within a few percentage points of the global leaders (something that few news reports mention). Second data point: The number of Americans with at least some college education has soared over the past 70 years, from 10 percent in 1940 to 56 percent today, even as the population has tripled and the nation has grown vastly more diverse. All told, America's long-term achievements in education are nothing short of stunning.

As the son and husband of schoolteachers, I can't say I'm unbiased on this subject. But as a journalist, I can't help but see the evident flaws in some of the reporting about education – namely, a lack of balance and historical context, and a willingness to accept the most generic and even inflammatory characterizations at face value. Journalists can't be faulted for reporting the oftentimes overheated rhetoric about educational "failure" from elected officials and prominent "reformers" (that's what reporters are supposed to do, after all). But some can certainly be faulted for not offering readers and viewers a broader frame to assess the extent of the alleged problems, and the likelihood that the proposed responses will succeed.

Check out some of the 544 articles that mentioned "failing schools" in January; they constitute an encyclopedia of loaded rhetoric, vapid reporting and unchallenged assumptions. In dozens and dozens of articles, the phrase isn't defined; it is simply accepted as commonly understood. "Several speakers said charter schools should only be allowed in areas now served by failing schools," the Associated Press wrote of a Mississippi charter school proposal. The passive construction of the phrase is telling: The schools are failing, not administrators, superintendents, curriculum writers, elected officials, students or their parents.

The running mate of "failing schools" in education stories is "reform." The word suggests a good thing – change for the sake of improvement. But in news accounts, the label often is implicitly one-sided, suggesting that "reformers" (such as proponents of vouchers or "school choice") are more virtuous than their hidebound opponents. Journalists rarely question the motives or credentials of "reformers." The Hartfort Courant hit the "reformer-failing schools" jackpot when it reported, "Like most people seeking education reform this year..the council wants policies that assure excellent teaching, preschool for children whose families can't afford it, and help for failing schools."

One reason schools seem to be "failing" so often in news accounts is that we simply know more than we once did about student performance. Before NCLB, schools were measured by averaging all of their students' scores, a single number that mixed high and low performers. The law required states to "disaggregate" this data – that is, to break it down by race, poverty and other sub-groups. One beneficial effect of the law is that it showed how some of these groups – poor children and non-English speakers, for example – lag children from more privileged backgrounds. But rather than evidence of a "crisis," this new data may simply have laid bare what was always true but never reported in detail.

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Analysis of Education MBR bill SB316

As part of the Governor's Mid Biennium Review (MBR) he has proposed a number of education policies. SB316 is the vehicle that these policies are being carried in. Note that there is no school funding plan introduced, nor is the "Cleveland plan" part of this bill.

the Ohio Legislative Services Commission has just published their analysis of the bill (i.e. they turned it into humanly readable language), and we've posted it below for you to review.

There are a number of items that should interest educators and public education advocates.

• Third Grade Reading Guarantee

The governor proposed to hold back those students who cannot meet 3rd grade reading proficiency levels, though he fails to supply any funds with which to meet this new, and costly mandate.

• New District and school rating system

We've discussed the proposed new rating system at length here, and here.

• Reports of district and school spending

The poorly conceived plan to implement a ranking system for schools based on spending has been delayed 1 year, and also undergoing some technical changes.

• Teacher evaluations

This modifies a number of provisions introduced in the budget bill (HB153), it narrows the number of teachers to only those who spend more than 50% of their time in the classroom, it makes changes to who can perform evaluations, including added the ability to hire outside contractors to perform the task. The law will prevail over collective bargaining agreements with regard to district evaluation policies. A provision for teachers who are employed by the state is also added (think department of corrections, etc)

• Teacher testing

The provision in the budget for forcing teachers to be retested if they teach in a school rated in the bottom 10% has undergone major changes. Changes to teacher retesting do not eliminate the requirement, but will delay implementation for at lease another three years as it is now dependent on results of the new teacher evaluation system. Under this model it is applied to individual teacher performance instead of school/district performance. Meanwhile, teachers in charter schools are still linked to the school being in the bottom 10% of rankings. Instead of taking the tests required for licensure, the state department is tasked with identifying an appropriate content test for educators to pass. Still no empirical evidence to support this law as a method to improve instruction.

The full analysis can be read below, and we encourage you to do so.

SB316

Poor schools can’t win

Without question, designing school and district rating systems is a difficult task, and Ohio was somewhat ahead of the curve in attempting to do so (and they’re also great about releasing a ton of data every year). As part of its application for ESEA waivers, the state recently announced a newly-designed version of its long-standing system, with the changes slated to go into effect in 2014-15. State officials told reporters that the new scheme is a “more accurate reflection of … true [school and district] quality.”

In reality, however, despite its best intentions, what Ohio has done is perpetuate a troubled system by making less-than-substantive changes that seem to serve the primary purpose of giving lower grades to more schools in order for the results to square with preconceptions about the distribution of “true quality.” It’s not a better system in terms of measurement – both the new and old schemes consist of mostly the same inappropriate components, and the ratings differentiate schools based largely on student characteristics rather than school performance.

So, whether or not the aggregate results seem more plausible is not particularly important, since the manner in which they’re calculated is still deeply flawed. And demonstrating this is very easy.

Rather than get bogged down in details about the schemes, the short and dirty version of the story is that the old system assigned six possible ratings based mostly on four measures: AYP; the state’s performance index; the percent of state standards met; and a value-added growth model (see our post for more details on the old system). The new system essentially retains most of the components of the old, but the formula is a bit different and it incorporates a new “achievement and graduation gap” measure that is supposed to gauge whether student subgroups are making acceptable progress. The “gap” measure is really the only major substantive change to the system’s components, but it basically just replaces one primitive measure (AYP) with another.*

Although the two systems yield different results overall, the major components of both – all but the value-added scores – are, directly or indirectly, “absolute performance” measures. They reflect how highly students score, not how quickly they improve. As a result, the measures are telling you more about the students that schools serve than the quality of instruction that they provide. Making high-stakes decisions based on this information is bad policy. For example, closing a school in a low-income neighborhood based on biased ratings not only means that one might very well be shutting down an effective school, but also that it’s unlikely it will be replaced by a more effective alternative.

Put differently, the most important step in measuring schools’ effectiveness is controlling for confounding observable factors, most notably student characteristics. Ohio’s ratings are driven by them. And they’re not the only state.

(Important side note: With the exception of the state’s value-added model, which, despite the usual issues, such as instability, is pretty good, virtually every indicator used by the state is a cutpoint-based measure. These are severely limited and potentially very misleading in ways that are unrelated to the bias. I will not be discussing these issues in this post, but see the second footnote below this post, and here and here for some related work.)**

The components of the new system

The severe bias in the new system’s constituent measures is unmistakable and easy to spot. To illustrate it in an accessible manner, I’ve identified the schools with free/reduced lunch rates that are among the highest 20 percent (highest quintile) of all non-charter schools in the state. This is an imperfect proxy for student background, but it’s sufficient for our purposes. (Note: charter schools are excluded from all these figures.)

The graph below breaks down schools in terms of how they scored (A-F) on each of the four components in the new system; these four grades are averaged to create the final grade. The bars represent the percent of schools (over 3,000 in total) receiving each grade that are in the highest poverty quintile. For example, looking at the last set of bars on the right (value-added), 17 percent of the schools that received the equivalent of an F (red bar) on the value-added component were high-poverty schools.

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