Monthly Archives: November 2016

Naked Capitalism on Corporate Tax Scams

corporatetaxavoidance031813

Wall Street Journal Puts Foot in Mouth and Chews Via False Claim That Tax Law Change Would Lead US Companies To Move Cash to US

A colleague who is an top international tax expert says regularly that non-tax people should never write about tax. That dim view is no surprise given ho regularly and casually the financial media regularly parrots obvious false claims made by business lobbyists about tax policy.

We’ve written regularly how the press and public have been snookered into believing the bogus idea that clever tax structuring by tech and Big Pharma companies that result in them having large profits booked in offshore entities for tax purposes is tantamount to having cash overseas. The idea is ridiculous. Apple, who has been the biggest exploiter of this device, holds its cash in New York banks and runs it out of an internal hedge fund in Nevada. The fact that an offshore legal entity, most often Irish, is where profits are booked for tax purposes has squat to do with where money sits and how it can be deployed. The practical result of profits being held offshore is they are not included in the reported profits of the US public company.

For example, from an April post, debunking the Financial Times’ Gillian Tett going off the rails on this topic:

Massive Tett Error #1. Corporate cash for companies like Apple is not offshore. Tett:

President Barack Obama proposed raising an additional $238bn in tax by imposing a one-off levy of 14 per cent on repatriated cash piles if they were used for infrastructure spending… What the American economy needs is not on-off populist measures to ban tax inversions or repatriate overseas cash piles….the dismal status quo: a world of ever-growing offshore cash piles

This is nonsense and means that the basic premise of the article is 100% off base.

Corporate profits are booked in offshore entities. Tax books are not the same as accounting books or movement of cash. As top tax expert Lee Sheppard wrote in Tax Notes in 2013 (no online source):

But for reporting companies subject to generally accepted accounting principles and U.S. worldwide taxation, let’s stop talking about ‘‘offshore’’ earnings and ‘‘bringing the money home.’’ The earnings are merely booked offshore. The earnings are by and large not banked offshore. To the extent that the much-ballyhooed $2 trillion of deferred foreign earnings is classified as permanently reinvested in cash, most of that cash is sitting in U.S. banks, where it is propping up their capital.

Apple, for instance, runs its “offshore” profits as an internal hedge fund out of Nevada.

Massive Tett Error #2: Allowing companies to repatriate profits will lead to more investment and spending. Tett:

So investors would do well to note that cash repatriation is a topic on which Mr Trump has also been articulate — and unusually precise. Notably, under his tax plan American companies would pay a one-off discounted rate of 10 per cent if they “bring their cash home and put it to work in America”. Some of his advisers privately say this rate could be cut further — to, say, 5 per cent — if there was clear evidence of the cash being used to create jobs.

Again, we have the misrepresentation about “cash” being overseas. But corporate claim that they would invest more in the US if they were allowed to book those offshore profits in the US is demonstrably false. Why? The US gave companies a repatriation holiday in 2004, after a bout of the very sort of whinging they are engaging in now. And what did they do? They increased dividends and executive pay.

And from a Wolf Richter post earlier this month, on Moody’s dishing out corporate propaganda:

Some falsehoods simply refuse to die. No matter how many times they get stabbed in the heart, and no matter who stabs them, they rise again in their full glory.

The falsehood that a vast amount of US corporate cash, including much of Apple’s $250 billion, is “locked away overseas” is one of them. We’ve known since May 2013 from the Senate subcommittee investigation and hearings into Apple’s tax-dodge practices that a big part of corporate “overseas cash” is actually invested in the US…

On the forefront are our Tech Titans, which have on their books “almost half” of all cash “held by US non-financial companies. These are the top five “cash holders”:

  • Apple
  • Microsoft
  • Google parent Alphabet
  • Cisco
  • Oracle

And this is what Moody’s has to say about Apple’s wondrous cash hoard, much of it overseas:

Based on Apple’s reported results for its fiscal year that ended in September, Moody’s projects the company’s cash will exceed $250 billion by the end of calendar 2016, representing over 14% of total non-financial corporate cash.

And then it dives straight into tax lobbying, in behalf of its clients, directed straight at Congress:

“Without tax reform that reduces the negative financial consequences of repatriating money to the US, we expect offshore cash levels to continue increasing,” said Richard Lane, a Senior Vice President at Moody’s.

The financial media jumped on the bandwagon and quoted this falsehood for mass consumption in order to pressure Congress to give our multinational corporate heroes another opportunity to dodge taxes, on top of the countless opportunities already written into the tax code for them that small businesses don’t have access to.

But here’s the thing. In May 2013, Apple got into a pickle because it had decided to fund its stock-buy-back and dividend program by taking on a record $17 billion in debt rather than “repatriating” part of its “offshore” cash and paying income taxes on it.

The Senate subcommittee investigation and hearings, chaired by Senator John McCain, showed that Apple had sheltered at least $74 billion from US income taxes between 2009 and 2012 by using a “complex web” of offshore mailbox companies. The investigation found untaxed “offshore” profits of $102 billion held by Irish subsidiaries – which Apple refused to “repatriate” in order to keep that income from being taxed in the US.

But according to the Senate report, Apple doesn’t have to repatriate that moolah because it’s already in the US. The Irish mailbox subsidiaries, on whose books this money is for tax purposes, transferred it to Apple’s bank accounts in New York. The money is managed by an Apple subsidiary in Reno, Nevada, and is invested in all kinds of assets in the US. Apple’s accountants in Austin, Texas, keep the books,

Money doesn’t stop at borders. Tax accounting does.

Last week, the Wall Street Journal added a new layer of misrepresentation to the tax lobbyists’ pitch. Because cash will move to the US (false), the dollar will go up. Um, even if Apple et al. were parking funds in a bank in Ireland, moving money across borders does not have a currency impact. The only way it would would be if Apple were holding the funds in foreign currencies and converted them to dollars. But most major multinationals, and Apple is clearly one of them, have their Treasury departments operate as profit centers, meaning they take currency bets. So even if the underlying phony claim (tax law change = money moves to US) were true, there’s not reason that would lead them to rearrange their trading/hedging bets.

But here is the nonsense from the Journal:

Part of $2.5 trillion in profits held overseas by companies such as Apple Inc. and Microsoft Corp. could be heading back to the U.S., a move analysts say could further fuel the U.S. dollar’s powerful rally.

U.S. corporations have been holding billions in earnings and cash abroad to avoid paying a 35% tax that would be levied whenever the money is brought home.

The article goes off the rails with remarkable speed, in the second sentence. Holding “earnings” abroad for tax purposes is not “holding cash abroad”. Help me.

And even better, foreign exchange experts, supposed pros, are either so dumb that they haven’t bothered to understand the issue or so clever that they are stoking the misunderstanding so as to trade the other side. But the remarks below are from a “strategist” who is supposed to look smart in public, as opposed to a trader, who has every incentive to headfake his competitors. So the ignorance is pervasive:

Now, some say the prospect of companies repatriating perhaps hundreds of billions of dollars could offer more impetus to the U.S. currency’s rally.

“However small, however big this flow of money will be, it will be positive for the case of dollar strength,” said Daragh Maher, head of U.S. foreign-exchange strategy for HSBC Holdings. “There will most likely be an inflow into dollars.”

But following Soros’ reflexivity principle, if market professionals trade based on this pervasive misunderstanding, the dollar will appreciate. Or as Buffett frames it, in the short term, markets are a beauty contest and the myth of cash flowing out of Ireland into US dollars is a very pretty fable.

3

Judge Steve Russell on Tax Reform

uncle-sam-taxes

This question goes out to all my rocket scientist friends. The issue is tax reform.

Long term readers know that I would prefer much higher taxes than we have arrayed in sharply progressive brackets. That’s a non-starter.

I would prefer taxing money made from money at the same rate as money made from labor. That appears to be a non-starter. The sources I read for my stock picking hobby forecast that Trump will manage to lower capital gains even farther.

I am not offended by the amount of Income tax I have to pay. I am offended by:

  1. I pay more by percentage of my income than either Mr. Trump or Mr. Romney.
  2. Preparing my taxes, even with Turbotax, burns hours of time for which I have better uses. Simplify!

There’s a big obstacle to simplification for somebody of my political opinions. Based on the experience of my first career—criminal court judge—I think criminalization should be a last resort when government is trying to get people to act in this or that way.

Tobacco taxes have done more to discourage smoking than years of nudges from the Surgeon General and making tobacco a controlled substance would be idiocy.

The other thing besides the stick of taxation and the carrot of tax credits is that taxes can be used to unleash the creativity of the profit motive.

Cap and trade was a bad idea from the get go to deal with CO2 pollution and complexity is only one reason. I agree that air and water pollution has to be criminal at the egregious end, but the criminal law will not work as the primary control.

A carbon tax works wonderfully to get the result you want without ordering people to do it a certain way. It gives the most efficient methods big advantages and offers a ready method to spread the part of the pain that is unavoidable. Just keep it simple.

Here’s my question.

Many tax dodges involve moving income around between this tax year and that.

Remember the late, great income averaging rule?

What about income averaging everybody on autopilot? That is, you are not taxed on what you made last year but instead on your AGI averaged over the last 3 to 5 years.

It’s simpler than the old income averaging rule bit still cushions the blow of a sudden spike of income. Set withholding by the highest year within the bracket.

It would probably be necessary to recalibrate depreciation rules, but I don’t care about complexity that falls on the IRS. I care about complexity that falls on taxpayers.

What’s the downside to permanent income averaging?

Second post on tax reform. Subject: subsidies.

Subsidies in the tax code are good if undertaken for good goals and repealed when the goals are met.

Impossible? Apparently not. See Germany’s solar subsidies, which were repealed after economies of scale took solar to grid parity.

Subsidies are un-American, say those who conflate capitalism with America.

Well, I don’t know what to say to persons so ignorant of their own history they don’t know how railroad lines came to span North America or how electricity got delivered to rural areas or how the Erie Canal got built.

Another reason to subsidize renewable energy is that there are so many subsidies for fossil fuels that never got repealed.

I’ve never seen a serious public discussion on whether we want to subsidize individual home ownership with many tax breaks but principally the mortgage interest tax deduction.

Note that Canada does OK without subsidizing home ownership.

Assuming it ever made sense, I’m not sure it makes sense in the gig economy. Owning the property makes it harder to follow the jobs.

The conservatives, every time extending unemployment benefits would crop up in the Great Recession, would ask why these shiftless bums drawing unemployment in Detroit didn’t move to North Dakota, where there were plenty of jobs in the Bakken even when it was hard to find work in most of the country.

If all of your net worth is tied up in your home and your mortgage is under water because the market crashed, you are stuck.

The Democrats made an effort to repeal oil and gas subsidies during the Great Recession and got nowhere. Meantime, reauthorizing the tax credits for renewables was a big fight because “we don’t want the government picking winners and losers.”

You wonder why everybody hates the government and does not think it can do anything better or cheaper?

Republicans have won the framing battle among an electorate ignorant of how government works. They have managed to demonize “picking winners and losers” and “tax and spend.” Those two anti memes cover everything government does.

But I digress.

I thought I had found the answer to getting rid of subsidies when they are no longer necessary. I was advocating that every subsidy put into the tax code should have a sunset provision and that sunset provision would contain performance metrics.

Reading some stuff by Larry Lessig convinced me that sunset laws ought to be called “Lobbyist Full Employment Act.” The thing comes up for sunset and if the subsidies have been successful the renewable corporations look at the American Petroleum Institute as a role model. You know, the lobby shop that keeps us subsidizing fossil fuels when they don’t need the money and we don’t need the pollution.

Lessig shook my faith in sunset provisions as answers to the problem of making a temporary subsidy permanent. Having my proposed solution beaten up does not make the original problem less of a problem.

Further thoughts…

If you are in the one percent, complexity is your friend. You don’t do your own anyway and what you pay the preparers is deductible if it gets yuge.

The problem with enforcement in the US is that the Repugs have cut and cut and cut the IRS enforcement division funds–even in the face of studies showing that hiring X number of agent/auditors would bring in more money than their salaries would cost.

When Ted Cruz promises to abolish the IRS, he’s playing to a powerful set of voters.

There are criminal penalties right now we can’t enforce for lack of manpower.

I do think that a primary goal ought to be that citizens look at paying taxes as a duty of citizenship and those who don’t are seen as freeriders rather than, as Trump claims, smart.

My druthers would be to import Finland’s rule: everybody’s tax return is open to all on the WWW.

Greece’s bigger problem that economic recession is the public’s attitude toward taxes, which is about like Trump. Paying taxes is for those not smart enough to avoid same.

And this…

Controlling the behavior of others is what government does.

If you want no controls on the behavior of others, you need no government…but a howitzer in the front yard might come in handy.

The preamble to the Constitution sets out our aspirations and then the document goes on to empower the new government to take actions “necessary and proper’ to reach those aspirations.

Everything government does involves taxing and spending, picking winners and losers, and manipulating behavior. The object of the taxing and spending and the picking winners and losers is to manipulate behavior. Criminal law is a blunt instrument to that end but there are rules with civil penalties, licensing and permits, etc. In the Dust Bowl, the government made a major push and spent a lot of money to change the behavior of farmers to convert them to best practices in anchoring the soil. The government made people stop using freon for refrigeration and lead in paint or gasoline. Do I need to go on?

More…

An unfair tax can be administered fairly. The fair administration just means everybody similarly situated is treated the same. I don’t think there’s much dispute about that.

The dispute comes between folks who think those who have reaped the most rewards from the legal regime and infrastructure should pay the most to maintain those v. those who think a flat tax is fair.

A flat tax leads to more inequality but there are still people who cling to the rational markets theory. Those who have more deserve more. They work harder and they are smarter. Poor people are poor because they are inferior.

Communists believe that the inferiority is poor marksmanship.

Most flat tax proposals have tiers and so are not completely flat. The tiers are necessary to make the arithmetic work. The other way is to do away with the social safety net and let lesser humans fend for themselves.

There are reasons why rich kids go to prep schools and have trust funds. To enable those born on third base to think they hit a triple.

Those of us who are for “equality” are talking about equality of opportunity rather than equality of outcome. That is where how hard you work and how smart you are comes in.

Judge Steve Russell on the Electoral Dilemma

justin

There’s a movement afoot to convince enough Trump electors to switch sides that Clinton wins.

My first reaction was, “Sore losers!”

I’m persuaded my first reaction was wrong. Of course, I’m still smarting from Al Gore winning the popular vote and losing the Electoral College.

What’s wrong with trying to bend the Electoral College toward the popular vote?

Aren’t we in danger of exacerbating “the problem of the faithless elector?”

Why is it dangerous to highlight a structural problem?

We could at least have a debate about whether we want to continue an institution crafted to enhance the representation of rural areas.

The argument I’ve seen to keep the Electoral College is that switching to the popular vote would result in candidates aiming resources at the big media markets.

So it changes the definition of battleground states. The argument about driving money to where the people are is not up against some golden age when there was a 50 state strategy.

The structural issue is clouded by the fact that the boonies vote Republican and the cities vote Democrat. This is bassackwards to how it used to be and it might turn again. The Constitution is not for right now–it’s supposed to be for always. It’s hard to amend for a reason.

The Founders, collectively, feared democracy, and the Electoral College was a product of that fear. Read the original Constitution and notice that the only power nub thrown into the checks and balances was the House of Representatives.

Senate? Elected by state legislatures.

POTUS? Elected by the Electoral College.

Supreme Court? Appointed for life.

The House is uber-democratic. Every seat up every two years. Reapportionment every ten years to keep districts the same size. Still, the Democrats get more House votes but the Republicans get more seats because the GOP used the last reapportionment to put cities in the middle of pies, dividing the left votes in right districts. Exhibit A: Austin, Texas.

The GOP now runs the whole shebang and, despite campaign rhetoric, the GOP has a history of running up the national debt. Look for a BIG tax cut next year. In Trump’s plan, 51% of the cuts go to the one percent. There will be three brackets: 15%, 25%, and 33%.

On the spending side, Trump wants to drastically increase “defense” spending. There will be war on the CFR and repealing all those regulations should save some money. We will also quickly remember why the regulations were put in place.

There is nothing to stop the GOP from driving us over a fiscal cliff, but I’m thinking the downside will show pretty quickly.

I’m much more worried about foreign affairs. Authoritarians like Trump historically keep power by appealing to solidarity in the face of foreign enemies. If there are no enemies that are scary enough, it’s necessary to create them.

Faithless electors–if they are evil at all—are the lesser evil.

The History Lesson That Hasn’t Been Taught

wpa-rumor

The Big Con: what is really at stake in this US election

Big government helped make America great but it was so successful its effect has become invisible. Anti-Washington hatred helps only the super-rich and puts progress at risk for millions living with wage stagnation and rising inequality

by

Do you remember, your President Nixon?

Do you remember, the bills you have to pay?

Or even yesterday?

David Bowie, Young Americans

The collective memory of America is short. During the 2010 midterm elections, it seemed like every other house in my north Dallas neighborhood sported a “Had Enough? Vote Republican!” yard sign. As if it had been two hundred years, instead of two, since the US economy was on the brink of collapse, with panicked credit markets, huge banks and insurance companies about to topple into the void, a flatlining auto industry, the Dow Jones plunging toward 6500, and job losses topping 700,000 a month, not to mention the wars that had turned the budget surpluses of the late Bill Clinton years into massive deficits, all courtesy of a two-term Republican president whose party controlled Congress for six of the last eight years. Yes, please! Take us back to the good old days of 2008!

Two years. The perpetual fog of American forgetting-gas had done its work. If two years are all it took to erase the memory of the worst economic meltdown since the Great Depression, then we shouldn’t hope for much awareness of that earlier crisis some 80 years ago, though there are a few old heads still around who lived it, and the experience of those times can be found readily enough in the archives and histories of the era.

The country, to put it mildly, was different back then. Life was harder, and in places like the Texas hinterland – which today forms the big beating heart of the state’s Republican base – it was a close approximation of 14th-century European peasant hell. The vast majority of rural Texans lived without electric power, which meant no refrigeration, no water pumps, no indoor plumbing, no furnaces, no electric stoves, no incandescent lights, no motors to power machines for milking or shearing.

Even for those of us only one or two generations removed from the farm, it’s almost impossible to conceive just how different life was, although the phrase “nasty, brutish, and short” comes to mind. Among the best guides to that time is “The Sad Irons” chapter of The Path to Power, the first volume of Robert Caro’s biography of Lyndon Johnson, which delivers a harrowing portrait of life as a medieval slog plunked down in the middle of 20th-century America. To take just one aspect of the slog: water. “Packing water” from the source – a stream or a well – to the house was a daily beatdown that often fell to the farm wife. As Caro writes:

A federal study of nearly half a million farm families … would show that, on the average, a person living on a farm used 40 gallons of water every day. Since the average farm family was five persons, the family used 200 gallons, or four-fifths of a ton, of water each day – 73,000 gallons, or almost 300 tons, in a year. The study showed that, on the average, the well was located 253 feet from the house – and that to pump by hand and carry to the house 73,000 gallons of water a year would require someone to put in during that year 63 eight-hour days, and walk 1,750 miles.

Laundry was done outside, an all-day, muscle-intensive process that began with a huge vat of boiling water suspended over a roaring fire – imagine that on a July day in Texas – next to which someone – almost always the farm wife – would stand “punching” clothes with a paddle or broomstick, the human equivalent of an automatic washing machine. Cooking was done with wood stoves, which were kept burning most of the day – summer and winter – for meals and baking, which in turn required constant tending – firewood in, ashes out. Because of the lack of refrigeration, most meals had to be prepared from scratch. In order not to starve in winter, a family had to can fruit and vegetables in summer, a hellishly hot process that went on for days and required the utmost precision. The wood stoves were also used to heat irons for pressing clothes, actual six- or seven-pound slabs of iron that had to be scrubbed, sanded, and scraped every few minutes to remove the soot. Farm wives dreaded the tedium of ironing day; hence, “the sad irons”. Caro goes on:

A Hill Country farm wife had to do her chores even if she was ill – no matter how ill. Because Hill Country women were too poor to afford proper medical care they often suffered perineal tears in childbirth. During the 1930s, the federal government sent physicians to examine a sampling of Hill Country women. The doctors found that, out of 275 women, 158 had perineal tears. Many of them, the team of gynecologists reported, were third-degree tears, “tears so bad that it is difficult to see how they stand on their feet.” But they were standing on their feet, and doing all the chores that Hill Country wives had always done – hauling the water, hauling the wood, canning, washing, ironing, helping with the shearing, the plowing and the picking.

Because there was no electricity.

This state of affairs wasn’t limited to Texas. In the early 1930s, more than six million of America’s 6.8m farms were without electricity. From sundown to sunup these farmers and their families practically lived in the dark. Most kerosene lamps provided 25 watts of light at best, barely sufficient for reading, and they were dirty, difficult to use, and dangerous. Many farmers preferred to do their pre-dawn chores in the dark rather than risk having a kerosene lamp in the barn. Radio, of course, was out of the question. The news and entertainment available to urban America were effectively blacked out in rural areas.

Then the Great Depression transformed what was an extremely hard life into an impossible one. With prices for crops, in real terms, falling below what they’d been in colonial times, financial disaster began to overwhelm rural America. By the end of 1931, 20,000 farms a month were being foreclosed, with even greater numbers on the horizon. Farmers’ pleas for relief – among them, a moratorium on foreclosures – were rejected by President Hoover, who in effect told America to quit whining and go chew on its moral fiber. Hoover seemed ignorant of a basic fact of human nature: people tend not to be models of obedience when they’re starving to death. “They had put their faith in government,” as one contemporary reporter said of the farmers, “and government had failed … they reached a point where they could stand the strain no longer and moved toward open rebellion.”

You’re not likely to find this episode of American history in the school books. In Iowa, the Farmers’ Holiday Association organized a strike in which farmers refused to bring food to market for 30 days. The strike soon spread to the Dakotas, Kansas, Minnesota, Missouri, Nebraska and beyond. Roads were picketed, then blockaded to enforce the strike. Telephone operators coordinated with striking farmers to warn them when soldiers or lawmen were headed their way. When 60 strikers were arrested in Council Bluffs, Iowa, a thousand farmers marched on the jail and forced their release. Four thousand men occupied the Lincoln, Nebraska, statehouse, and another 7,000 marched on the statehouse in Columbus, Ohio with the intention of establishing a “workers’ and farmers’ republic”. Across the midwest, farmers began to band together in armed groups to stop foreclosures; lawyers and judges were threatened with hanging, stripped and beaten, and in at least one case, murdered. “Rebellion in the Cornbelt: American Farmers Beat Their Ploughshares Into Swords” was the title of a December 1932 article in Harper’s that described the farmers’ increasing desperation and militancy.

The cities were no calmer. Five thousand men took over the Municipal Building in Seattle. Thousands of unpaid teachers in Chicago mobbed the city’s banks, and in New York, a Communist party rally in Union Square drew 35,000. Twenty-five thousand “Bonus Marchers”– first world war veterans – occupied Washington, setting up camp with their families on the Mall; Hoover had them routed by US soldiers using teargas and fixed bayonets. Campaigning for re-election that fall, the president was greeted by snarling crowds and chants of “Hang Hoover!” A gridlocked Congress dithered and bickered, inspiring one columnist to label it, “The Monkey House”.

To scholars it’s known as “the mixed economy”, the combination of dynamic free markets, effective government, and a strong labor movement that characterizes the world’s most prosperous nations. Strict laissez-faire capitalism created extraordinary wealth in late 19th- and early 20th-century America. It also created extraordinary concentrations of economic and political power that threatened to undermine democracy, along with such virulent side-effects as frequent bank panics, wild vacillations of boom and bust, extreme social and income inequality, and monopoly control of major industries. The Gilded Age robber barons – the Goulds, the Vanderbilts, the Morgans and Rockefellers – did quite well under laissez-faire. Most of the rest of Americans were still stuck in the ditch, with little to no economic security, life expectancy of roughly 45 years and horrific infant mortality rates that claimed 300 babies per 1,000 in the cities.

Recognition was growing that the extraordinary pressures of industrial capitalism required an updating of the social contract. Theodore Roosevelt acknowledged as much when he said in 1910, “The citizens of the United States must effectively control the mighty commercial forces which they have called into being.” But it took the leadership of another Roosevelt, Franklin, along with the existential crisis of the Great Depression, to galvanize the political will that brought about this transition from laissez-faire capitalism to the mixed economy.

A mural fresco titled The New Deal, at the Leonardo Da Vinci art school in New York City.
Pinterest
A mural fresco titled The New Deal, at the Leonardo Da Vinci art school in New York City. Photograph: AP

Roosevelt gave it a name, the New Deal, and it transformed American life so thoroughly that it’s become invisible to us, as taken for granted as the air we breathe and the ground beneath our feet. Or as, for instance: electricity. As Caro shows in The Path to Power, 30 million farmers and their families lived in the preindustrial dark not because of technological obstacles – many lived within sight of power lines – or prohibitive cost to the utility company – plenty of farmers offered to pay the expense of running a line out to their homes – or that utility companies couldn’t make a profit on rural lines – studies in Minnesota and Alabama showed that rural lines were profitable – but because rural electric service wouldn’t be as profitable for utility companies as the urban market. The companies based their decision, as companies do, on capital risk and rate of return. Considerations of fairness, fellow feeling, or the greater social good simply didn’t factor into the corporate calculus.

This is known among economists as “market failure”. Sam Rayburn, the Texas congressman who led the legislative fight to bring electricity to rural America, stated it plainly during debate on the House floor: “When free enterprise had the opportunity to electrify farm homes – after 50 years, they had electrified 3%.” The Public Utilities Act of 1935 and the Rural Electrification Act of 1936 – crucial New Deal legislation – “brought the lights” to rural America over the strenuous opposition of the utility lobby, which put out fake “spontaneous” mass mailings to members of Congress (one of the first instances of astroturfing in American politics) and pushed a whisper campaign alleging that President Roosevelt was insane. John Carpenter, president of Texas Power & Light – there’s a freeway named after him in Dallas – so loathed Sam Rayburn that he offered to spend any amount of money to defeat him in the next election. Rayburn won. The lights went on.

Another example: banks. When Roosevelt took office, the banking industry was in freefall, a “market failure” that threatened to finish off what was left of the US economy. The system of government support and regulation established by the New Deal over banks – deposit insurance, capital requirements, the Glass-Steagall Act (separating commercial and investment banks) – and over the financial industry in general – such as the Securities Act of 1933, AKA the “Truth-in-Securities Act”, and the Securities Exchange Act of 1934 (if you think Wall Street is a rigged game these days, it’s a seminary compared with the fraud-fest of the Roaring Twenties) – made bank panics and market crashes a thing of the past. From the mid-1930s into the early 1980s, the US financial industry enjoyed remarkable stability. Bank failures were rare, isolated events. The bipolar booms and busts of laissez-faire capitalism became the much more manageable phenomenon of the business cycle. This began to change with deregulation, starting with the bipartisan overhaul of the savings and loan industry in the early 1980s. “All in all, I think we hit the jackpot,” said President Reagan as he signed the Garn-St Germain Act into law. Not quite. Within a few short years, there was no savings and loan industry, thanks to the frenzy of speculation and self-dealing that followed passage of Garn-St Germain. The biggest bank crisis since the Great Depression had erased an entire sector of American finance, leaving the American taxpayer on the hook for $160bn – a huge amount of money at the time, chump change compared with what was coming. The New Deal framework continued to be dismantled through the 1990s – Glass-Steagall bit the dust in 1998 – and, just as importantly, regulation was never extended to new markets in financial exotica like credit default swaps and derivatives. Banking and finance grew increasingly volatile, culminating (so far?) in the Great Recession of 2008, when only massive government intervention saved the economy.

The air we breathe. The ground beneath our feet. New Deal initiatives produced much of the infrastructure that we rely on to this day, the roads, waterways, airports, bridges, sewers and water mains, courthouses, libraries and communications networks. The omnibus Farm Relief Act of 1933 saved and stabilized American agriculture, and began establishing the institutions that would make farming an economically feasible way of life for future generations. The national framework of social insurance – social security, unemployment and disability benefits, work programs and workers’ compensation – protected citizens from the kinds of risks that private markets couldn’t or wouldn’t insure. The final piece of the mixed economy got its due with the Wagner Act (1935), which established the rights of workers to unionize and bargain collectively with employers, helping to ensure that rising productivity would be reflected in rising wages.

A Works Progress Administration (WPA) crew rebuilding the Morris Canal in New Jersey. Much of the infrastructure of modern America was built by New Deal inititatives.
Pinterest
A Works Progress Administration crew rebuilding the Morris Canal in New Jersey. Much of the infrastructure of modern America was built by New Deal initiatives. Photograph: MPI/Getty Images

The New Deal saved capitalism – saved it from the big-time capitalists, though many of the big-timers didn’t see it that way. Fred Koch, the multimillionaire father of the future multibillionaire brothers Charles and David Koch, had this to say in 1938: “the only sound countries in the world are Germany, Italy, and Japan.” He found Germany to be a heartening counter-example to Roosevelt’s New Deal: “When you contrast the state of mind of Germany today [1938] with what it was in 1925, you begin to think that perhaps this course of idleness, feeding at the public trough, dependence on government, etc, with which we are afflicted is not permanent and can be overcome.”

The comparison is instructive. Adolf Hitler became chancellor of Germany in January 1933. Five weeks later, Franklin Roosevelt was sworn in as US president. Two leaders, both taking office at the same time, both faced with the economic and social chaos of the Great Depression. To say that they took vastly different approaches, with correspondingly divergent outcomes, would be an understatement on the order of a piano falling on your head. History shows that Fred Koch was about as wrong as a human being can be, and Nazi Germany is only the half of it. By every measure – life expectancy, infant mortality, income, education, productivity, corporate profits, scientific and technological innovation – the mixed economy ushered in by the New Deal was a huge success. Within a generation, the United States was enjoying the fastest sustained growth in recorded history, and, moreover, the prosperity was shared broadly, with income rising faster at the bottom and middle of society than at the top.

By the 1950s, there was broad consensus in America that the mixed economy was “an established and useful reality”, to borrow a phrase from a Roosevelt-era president of the US Chamber of Commerce (he was referring to collective bargaining). President Eisenhower, Republican, five-star army general and no big liberal, much less a communist (though he was accused of being one by the John Birch Society, which counted Fred Koch – him again – among its founders) broadened social security, expanded federal support of science and technology, and pushed for major infrastructure programs. Such was the political consensus that his legislation initiating the interstate highway system passed Congress with one dissenting vote in the Senate, and by voice vote in the House. In private, he mocked the arch-conservatives who dreamed of dismantling the New Deal. “There is a tiny splinter group … that believes you can do such things,” he wrote in a letter to his brother Edgar. “Among them are HL Hunt … a few other Texas oil millionaires, and an occasional politician or business man from other areas. Their number is negligible and they are stupid.”

“You don’t miss your water till your well runs dry,” the late, great Sam Cooke sang in one of his more melancholy songs. Around 2009, 2010, around the time we were crawling out from under the wreckage of 2008 and saw that the Wall Street crowd had come through just fine, thank you, that seems to be when a critical mass of the American population began to realize that, hey, we were missing something; that maybe our well was running dry. People were angry. We had good reason to be. We saw great prosperity at the top, scant trickle-down toward the bottom. In Texas, and especially in rural Texas – where, by the way, electricity and access to electronic media have been settled facts of life for years – the Tea Party rose with a mighty roar to rage against liberals, the government and the newly elected Democratic president.

If that rage seems somewhat misdirected, here’s an explanation: 40 years of well-funded, highly organized laissez-faire proselytizing and government-bashing have done a number on the American mind. The country got conned by a profound ideological shift, starting in the early 1970s as hardcore free-market, anti-government advocates launched a concerted effort to change the political landscape. Jacob Hacker and Paul Pierson’s recent book American Amnesia ably tells the story, from the business elite who funded the movement (Charles and David Koch prominent among them), to the conservative thinktanks that developed the ideology, to the political actors who machined it into policy. The movement’s shock troops included tough-talking ideologues like Grover Norquist, president of Americans for Tax Reform, who said: “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” Ayn Rand, author of romance novels for business moguls, became a movement icon with her depictions of rugged capitalist heroes taking on wimpy liberals and overbearing governments. One of Rand’s inner circle, Alan Greenspan, would serve as chairman of the Federal Reserve Bank from 1988 to 2006, where he presided over the broad deregulation of the financial system. (Later he would profess “shocked disbelief” at the meltdown of 2008, and allow that he’d “found a flaw” in his Randian ideology.)

Demonstrators gather in Zuccotti Park to voice and discuss their frustration with the economy and Wall Street in 2011.
Pinterest
Demonstrators in New York voice their frustration with the economy and Wall Street in 2011. Photograph: KeystoneUSA-Zum/Rex Shutterstock

A very narrow slice of America – the 1% – reaped spectacular wealth from this political sea change. When Forbes magazine published its first annual list of the 400 wealthiest Americans in 1982, there were two billionaires on the roster, and the entire 400 had a combined net worth of $225bn in today’s dollars. By 2014, 113 billionaires were left off the list because they didn’t make they cut ($1.55bn); the combined net worth of the Forbes class of 2014 was $2.3tn. Meanwhile, earnings for working- and middle-class Americans stagnated even as we worked more hours, took fewer vacations and kept increasing our productivity. These days it’s not uncommon for hedge fund managers to make $1bn a year. CEOs routinely pull in annual compensation in the tens of millions of dollars. Even assuming these people are very good at what they do, you have to wonder: is anyone really that good?

According to them, yes. What’s more, they’re liable to tell you they did it all themselves. Sanford Weill, Citigroup’s former chairman who clocked $785m over a five-year period, declared, “We didn’t rely on somebody else to build what we built.” A few years later, Citigroup would be rescued by the government to the tune of $476bn in cash and guarantees. More recently, tech venture capitalist Chamath Palihapitiya asserted, “If companies shut down, the stock market would collapse. If the government shuts down, nothing happens, and we all move on, because it just doesn’t matter.”

Granted, a thriving mixed economy depends on individual initiative, innovation and risk-taking. But it also depends on the institutions and social structures that only well-functioning governance can provide, such as: laws, both civil and criminal. Private property rights. Secure and enforceable contracts, copyrights and patents. Stable banks. Well-regulated international commerce, including treaties, trade agreements, secure borders and customs controls. “I can guarantee that if you don’t have a legal structure you will not have innovation,” said Jim Dempsey, executive director of the Berkeley Center for Law and Technology, in a 2015 article in Wired. “Instead you will have chaos … every innovator survives on the oxygen of multiple regulatory systems.”

The wealth that results from private enterprise is very much a social construct. President Obama famously overstated the case when he said in 2012, “If you’ve got a business – you didn’t build that.” Margaret Thatcher, Great Britain’s ideological twin to Ronald Reagan, equally overstated the case with her famous pronouncement, “There is no such thing as society.” The truth is it takes both, and there’s no readier example than the cellphone most of us are never without. In American Amnesia we find the story of Dr Vannevar Bush, FDR’s science czar during the second world war, and how Bush, at Roosevelt’s urging and with strong bipartisan support from Congress, set the path for America’s huge postwar spending on research and development in science, technology, and medicine. As Hacker and Pierson write:

The fruits of these investments ranged from radar and GPS, to advanced medical technology, to robotics and the computing systems that figure in nearly every modern technology. Far from crowding out private R&D, moreover, these public investments spurred additional private innovation. The computer pioneers who developed better and smaller systems not only relied on publicly fostered breakthroughs in technology; they also would have found little market for their most profitable products if not for the internet, GPS, and other government-sponsored platforms for the digital revolution.

If, as the authors of American Amnesia point out, you crack open that smartphone, you’ll find that every component is the product of research that the US government either funded or carried out directly: lithium-ion batteries, GPS, cellular technology, touch-screen and LCDs, internet connectivity, algorithmic applications. The internet itself is a government creation; the Department of Defense developed its precursor, the Arpanet, in order to connect with computing centers at major universities.

The smartphone: a triumph of US government investment.
Pinterest
The smartphone: a triumph of US government investment. Photograph: Samuel Gibbs for the Guardian

So we can only stand amazed at the Olympian chutzpah of Silicon Valley billionaires when they talk about creating libertarian utopias that will transcend government. Venture capitalist Tim Draper has proposed making Silicon Valley its own semi-autonomous state. Google’s Larry Page wants to construct a “Google Island” where tech research can proceed free of government meddling. PayPal’s Peter Thiel, whose fortune was built not just on the internet but through helpful government regulation (such as the Securities Exchange Commission’s rule limiting losses on identity theft; how many of us would put our credit card information on the internet if the downside was losing everything we own?) is a prime mover of the Seasteading Institute, dedicated to the creation of manmade island nations beyond the reach of government.

When faced with this sort of nonsense, one can’t help but think of the little boy who declares independence from his family, and runs away as far as the tree house in his backyard. The worldview of Thiel and company is about as juvenile as that, a kind of nerdy romanticism that recalls the capitalist fantasies of Ayn Rand. If not for the collective (Randians break out in hives when they encounter that word) efforts of American society, the industry in which tech moguls have so fantastically prospered wouldn’t exist. But it’s even more basic than that. The development and widespread availability of vaccines and antibiotics following the second world war are due in large part to initiatives carried out by the National Institutes of Health, the Department of Agriculture, and other government agencies. Longevity, quality of life – like wealth creation, these are social constructs. But it’s even more basic than modern medicine, and reaches back before the New Deal, to some of the very first initiatives of progressive government. The sharp improvement in mortality that began in the early years of the 20th century was largely the result of many more children surviving into adulthood. The cause was simple, though it took huge investments by government to make happen: cities began to clean up their water supplies. Filtration. Chlorination. Basic stuff we take for granted. If a good many of us are alive today, breathing and walking and talking and in some cases making a career out of raging against the government, it’s because our great-granddaddy didn’t die from cholera or typhoid way back in the day.

The air we breathe. The ground beneath our feet.

The New Deal goal of broadly shared prosperity has taken a beating the past 40 years, and the damage shows. By virtually every measure relative to other rich nations, the US has lost ground since the 1970s. We’re shorter (height is an excellent indicator of social conditions), we don’t live as long, more of our babies die before their first birthdays, wages and educational achievement have stagnated, and inequalities of wealth and opportunity are higher than at any time since the late 19th century. Mortality rates for middle-aged white Americans have actually risen the past 15 years, especially for non-college-educated whites. Maternal mortality rose 27% nationwide between 2000 and 2014. In Texas, the maternal mortality rate doubled between 2010 and 2014.

The very rich, of course, can buy what they need – healthcare, clean water, political clout. They have their walled compounds and private islands to retreat to. As for the rest of us – for instance, all the good citizens out there in rural Texas, Tea Party Texas, the hard country that was transformed by the New Deal – one tries to imagine how it might look in 70 or 80 years if current trends continue. Crumbling roads, jerry-rigged bridges, worn-out farms. A grudging, “market-based” energy grid. Clean water a rarity, and healthcare that’s hit and miss. Perineal tears, perhaps, are once again commonplace. A far-fetched scenario, surely, but no harder for us to imagine in 2016 than the lived reality of rural Texas 80 years ago.

Naked Capitalism: The Myth of ‘Repatriating’ Corporate Cash from Overseas

pic1288219

Wolf Richter: Come on Moody’s, Spare Us These Falsehoods: That $1.3 Trillion “Overseas Cash” Is Already in the US

Yves here. Wolf addresses a pet peeve, and even better, in long form.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

Some falsehoods simply refuse to die. No matter how many times they get stabbed in the heart, and no matter who stabs them, they rise again in their full glory.

The falsehood that a vast amount of US corporate cash, including much of Apple’s $250 billion, is “locked away overseas” is one of them. We’ve known since May 2013 from the Senate subcommittee investigation and hearings into Apple’s tax-dodge practices that a big part of corporate “overseas cash” is actually invested in the US.

Now Moody’s Investor Services repeats the same falsehood and explicitly lobbies Congress to give our poor, multinational Corporate Titans with their hardscrabble businesses another tax break.

The biggest US non-financial companies that pay Moody’s to rate their credit worthiness “will increase their cash holdings to $1.77 trillion by the end of the year, from $1.68 trillion at the end of 2015,” Moody’s writes. And it goes on:

Most of the cash that companies have is generated and being held overseas. Moody’s estimates that the amount of overseas cash will reach about $1.3 trillion, or 74% of total cash, in 2016. That’s up from an estimated $1.2 trillion, or 72% of total cash a year earlier.

For US tax purposes, these funds are classified as “permanently invested overseas” and thus are exempt from federal corporate income tax until they’re “returned” to the US. These overseas cash holdings have “more than double in the last ten years,” Moody’s reports.

By contrast, US individuals have to pay federal income taxes on all their income, even income they earn from overseas sources while living overseas. The US is one of only a few countries that mistreats its citizens that way. But the largest corporations are coddled and get very special treatment.

On the forefront are our Tech Titans, which have on their books “almost half” of all cash “held by US non-financial companies. These are the top five “cash holders”:

  • Apple
  • Microsoft
  • Google parent Alphabet
  • Cisco
  • Oracle

And this is what Moody’s has to say about Apple’s wondrous cash hoard, much of it overseas:

Based on Apple’s reported results for its fiscal year that ended in September, Moody’s projects the company’s cash will exceed $250 billion by the end of calendar 2016, representing over 14% of total non-financial corporate cash.

And then it dives straight into tax lobbying, in behalf of its clients, directed straight at Congress:

“Without tax reform that reduces the negative financial consequences of repatriating money to the US, we expect offshore cash levels to continue increasing,” said Richard Lane, a Senior Vice President at Moody’s.

The financial media jumped on the bandwagon and quoted this falsehood for mass consumption in order to pressure Congress to give our multinational corporate heroes another opportunity to dodge taxes, on top of the countless opportunities already written into the tax code for them that small businesses don’t have access to.

But here’s the thing. In May 2013, Apple got into a pickle because it had decided to fund its stock-buy-back and dividend program by taking on a record $17 billion in debt rather than “repatriating” part of its “offshore” cash and paying income taxes on it.

The Senate subcommittee investigation and hearings, chaired by Senator John McCain, showed that Apple had sheltered at least $74 billion from US income taxes between 2009 and 2012 by using a “complex web” of offshore mailbox companies. The investigation found untaxed “offshore” profits of $102 billion held by Irish subsidiaries – which Apple refused to “repatriate” in order to keep that income from being taxed in the US.

But according to the Senate report, Apple doesn’t have to repatriate that moolah because it’s already in the US. The Irish mailbox subsidiaries, on whose books this money is for tax purposes, transferred it to Apple’s bank accounts in New York. The money is managed by an Apple subsidiary in Reno, Nevada, and is invested in all kinds of assets in the US. Apple’s accountants in Austin, Texas, keep the books,

Money doesn’t stop at borders. Tax accounting does.

These revelations explained another corporate mystery that had long baffled economists. In 2004, after heavy lobbying by our Corporate Titans, Congress declared a “repatriation holiday” to encourage the “return” of $300 billion in overseas cash to be invested in the US. This would cause a burst of investment and hiring in the US, it was said. This was similar to what Moody’s is now clamoring for on behalf of its clients, except this time, they want permanent tax reform rather than a one-time “repatriation holiday.”

So in 2004, our heroes made some adjustments on their books to “repatriate” these profits that were then taxed at the special and minuscule rate of 5.25%, less than the payroll taxes withheld from their US working stiffs.

And then nothing happened. There were no investments and no hiring and no benefits for the economy because the money had already been deployed in the US, as we now know. In May 2013, as a result of the Senate hearings, the New York Times summarized the 2004 phenomenon this way:

On the contrary, some of the companies that brought back the most money laid off thousands of workers, and a study by the National Bureau of Economic Research later concluded that 92 cents on every dollar was used for dividends, stock buybacks or executive bonuses.

This sort of “repatriation holiday” or tax reform would simply be a handout benefitting our Corporate Titans, but not the millions of smaller companies that don’t have the resources to lobby Congress, make special deals with foreign governments, and create that “complex web” of offshore mailbox companies. They’re too busy struggling on a daily basis in their dog-eat-dog world.

Subcommittee Chairman John McCain thundered in his opening statement of the hearings that it was “unacceptable that corporations like Apple are able to exploit tax loopholes to avoid paying billions in taxes.” Since then, nothing happened in Congress. The loophole wasn’t closed. And the falsehoods that had been stabbed many times during the hearings have once again risen to shine in even greater glory, with Moody’s adding some additional sparkle.