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American Opinion

A corporate poster child

Caterpillar Inc., an icon of Midwestern manufacturing for more than 80 years, has been saving itself about $300 million per year in US taxes by routing most of the profits from its foreign replacement parts business through a subsidiary in Switzerland, where it neither makes nor warehouses those parts. There are two things to say about this: It’s legal, maybe. It stinks, definitely. 

Caterpillar is a poster child for American corporations, which still draw daily on government spending for the education, research, corporate laws, infrastructure, and other necessities of doing business in the United States, but are increasingly refusing to help pay for this spending. 

The company makes no apologies. “We pay the taxes we owe, not more,” Julie Lagacy, Cat’s vice-president for finance services, told the Congressional hearing in Washington where the Swiss tax dodge was aired. It’s the same thinking that drives the company’s CEO, Doug Oberhelman, in his campaign to drive down wages, closing factories if necessary, and easily winning strikes against demoralised unions. 

“I always try to communicate to our people that we can never make enough money,” Oberhelman said in an interview with Bloomberg Businessweek. “We can never make enough profit.” 

Caterpillar’s corporate behaviour raises issues that the United States, and especially its industrial heartland, is just beginning to debate. Caterpillar, and other huge corporations — Ford, General Motors, Delphi, Maytag, Ball Glass, US Steel — created the industrial boom that drove the American economy for a century. They also created and led the towns where they made their headquarters — Flint in Michigan, Dayton in Ohio, Muncie in Indiana, and, in Caterpillar’s case, Peoria in Illinois. 

Some of these companies, such as Maytag, are gone now. Some, such as US Steel, produce as much as they ever did, but with shrunken work forces. Others, such as Caterpillar, are still major employers and big exporters, not to mention community anchors. But with the arrival of globalisation, their hearts — and their money and loyalties — have left town. 

Caterpillar is a big global corporation, with operations — manufacturing or sales — in 180 countries. It has 118,000 employees, more than half of them outside the United States. Its most important market is China. It ranks 42nd among American corporations and remains by far the biggest employer in Peoria. 

These big companies once played a seigneurial role, both locally and nationally, as major employers and corporate citizens. That day is over. In an era where the bulk of a company’s sales and employees are elsewhere, old loyalties are dead or dying. 

Caterpillar today has emerged as one of the uglier faces of American capitalism but remains so big nationally and so prominent locally that its opinions and demands get a respectful hearing, however grudging. 

This is the question. How much does Caterpillar owe to the country and town that nurtured it for 80 years and still provides it with the stable legal and corporate base from which it straddles the globe? What does it owe its workers, some of them fourth generation or more, at a time when it employs other workers elsewhere at a fraction of the cost? How tough can the folks back home — in Peoria, Illinois; or in Washington — get with a company that it still needs and that periodically threatens to pull up stakes? 

Caterpillar clearly has decided that it doesn’t owe much, at least in taxes. In the Swiss case, it put the profits from its parts sales in the name of a Swiss subsidiary and paid an effective tax rate of 4 to 6 per cent, low even by Swiss standards. The legality of this has been questioned, and the morality was attacked by Senator Carl Levin, who said that Cat shifted $8 billion in profits to the Swiss affiliate over 13 years, saving a total $2.4 billion in that time. 

“Caterpillar is an American success story,” Levin said. “But it is also a member of the corporate profit-shifting club that has transferred billions of dollars offshore to avoid paying US taxes.” Those taxes, he noted, go to pay for government investments “on which Caterpillar and other US companies depend for their success.” 

Caterpillar also has been a leader in the drive to cut wages, especially in manufacturing, that has helped close the pay gap between American and Chinese workers. Twenty years ago, it fought two bitter strikes with the United Auto Workers that still scar Peoria and the region. More recently, it froze wages at another Illinois factory: the UAW struck, then gave in after six weeks. Not long before, it closed a Canadian locomotive factory after workers rejected wage and benefit cuts and moved production to Indiana, giving jobs to American workers but at wages well below the Canadian level. 

This is hardball, and it didn’t end there. Oberhelman, whose most recent raise was a 32 per cent bump to $22.4 million, threatened two years ago to shift jobs out of Illinois if the state didn’t rescind increases in its personal and income taxes. He later backed down, but said any future hiring will more likely be in low-tax states such as Texas. 

Oberhelman has made it clear that his obligation is to Cat’s shareholders, not its stakeholders. He also argues that, by keeping costs down, he is preserving jobs in the United States, even if those jobs don’t pay as well as they used to. 

He also says that we’re in a global economy, and that what he’s doing is no different from that of other successful corporations. He’s right: these big corporations, such as Ford and GM, still dominate their industries and often their regions. They’re too big to snub: no politician can ignore their whims. But they’re so big that anything they do to improve the bottom line can have an outsize impact on lesser beings — be it towns, employees, or nations — down the line. 

This is one of the major conundrums of the global economy, and it’s not just an American, or a Midwestern, problem. The corporations that rule this economy roam the globe, untethered from any loyalties or responsibilities to the locales where they do business. Americans’ livelihoods depend on them, but they aren’t close to turning them into decent corporate citizens.