Surprise! Facebook Avoids its European Taxes

If you are as cynical as I am, I know you are not surprised that Facebook paid Irish taxes (via Tax Justice Network) of about $4.64 million on its entire non-US profits of $1.344 billion for 2011.* This 0.3% tax rate is a bit below the normal, already low, Irish corporate income tax of 12.5%.



As with Apple, Facebook funnels its foreign profits into its Irish subsidiary. As the Guardian article explains:

Facebook is structured so that companies buying advertisements on the
website in the UK, or anywhere outside of the US, have to pay Facebook
Ireland.

As a result, Facebook manages to slash its taxes in other countries, paying, for example,  $380,800 in British tax on estimated 2011 UK profits of $280 million, or a little over 0.1%. What is shocking is that Facebook paid so much Irish tax since it managed to convert its $1.3 billion gross profit into a net loss of $24 million.



As you've no doubt figured out, it's that "Double Irish" ploy again. Facebook operates a second subsidiary that is incorporated in Ireland but controlled in the Cayman Islands. This subsidiary owns Facebook Ireland, but the setup allows the two companies to be considered as one for U.S. tax purposes, but separate for Irish tax purposes. The Caymans-operated subsidiary owns the rights to use Facebook's intellectual property outside the U.S., for which Facebook Ireland pays hefty royalties to use. This lets Facebook Ireland transfer the profits from low-tax Ireland to no-tax Cayman Islands. For more on the arcane mechanics, see Joseph Darby's article "International Tax Planning," downloadable at Wikipedia.



This makes no sense of course, but is, in David Cay Johnston's inimitable phrase, Perfectly Legal. But it shouldn't be. And in the UK, Chancellor of the Exchequer George Osborne has announced 

a £154m [$246.4 million] blitz on tax avoidance and evasion, with HMRC [the British equivalent of the IRS] hiring an extra
2,500 tax inspectors to target high earners who aggressively exploit
loopholes to avoid or evade tax.

The U.S. should do the same.



* Dollar figures converted from pound sterling figures in the Guardian at an exchange rate of $1.60 per pound.

Student Loan Debt Is Ballooning - See This Chart

http://si.wsj.net/public/resources/images/NA-BT838_Studen_G_20121127183304.jpg

Conservative ALEC Economic Policies Have No Benefit, Some Risks, for States

The economic policies proposed for states by the conservative American Legislative Council Exchange (ALEC) not only don't work, but carry risks for states' economies, according to new research by the Iowa Policy Project and Good Jobs First.



As we have seen most recently with Michigan's passage of anti-union so-called "right to work" legislation (which lets people free ride on union contracts and makes union organization and representation more difficult), the legislative agenda of ALEC proclaims that states should follow a low-tax, low-wage, non-union route to economic prosperity. Now, you or I might wonder how creating low-wage jobs is supposed to create prosperity, but luckily for us ALEC has ranked the states by how "competitive" their economic policies were beginning in 2007, giving us the chance to see how well their recommended policies have done.



ALEC's 15 recommended factors (p. 18) include taxes, debt service, public employees per 10,000 residents, "quality" of the legal system, "right to work," minimum wage, and workers' compensation costs. As pointed out by earlier commentaries, it says nothing about education or infrastructure, which have clear effects on a state's economy. The new report by economist Peter Fisher with Greg LeRoy and Phil Mattera undertakes a statistical analysis of these policies, using the ALEC ranking of all 50 states as of 2007 to see how well their economies have performed since then. Fisher et al. also highlight the shoddy statistical work by Arthur Laffer in creating the ALEC index and reporting results.



Whereas Laffer frequently makes his points simply by comparing the top vs. bottom 8-10 states, Fisher et al. start with a full comparison of all 50 states via a correlation analysis, then proceed to the necessary addition of holding other potential causes constant in what is know as multiple regression analysis. Beginning with the correlations, here is what the new report finds. Correlation runs from -1 (perfect negative relationship) to +1 (perfect positive relationship); the closer to +1 below, the better the ALEC competitiveness index predicted the following outcomes. All changes are from 2007 to 2011.



ALEC Competitiveness Index ranking correlated with--



State gross domestic product:  .02 (not statistically significant)

Percent change in nonfarm employment: -.09 (not statistically significant)

Percent change in per capita income: -.27 (statistically significant)

Percent change in state and local government revenue: -.16 (not statistically significant)

Percent change in median family income: -.30 (statistically significant)

Change in poverty rate: .21 ("statistically significant" at the .1 level*)



What this tells us is that the states which were following ALEC's preferred policies the most in 2007 saw worse performance in per capita income growth and median family income as well as a worse performance n poverty that we can almost be sure was not due to chance. The only thing ALEC's top states did see as predicted was an increase was in  population (Fisher et al. did not report the correlation coefficient, but their discussion makes it clear that it was statistically significant). However, population growth per se is not an economic outcome, as the report points out.



The concluding regression analysis weakens the case for negative consequences, but provides no support for positive effects of ALEC's state policies. Fisher et al. show that the most important determinants of 2007-11 GDP growth, employment growth, and per capita income growth are the components of a state's economy, with the strongest determinants being the presence of extractive industry (primarily due to the higher price of oil during this period) and a large health care industry. Once these are controlled for, none of the ALEC variables are statistically significant, though the closest is that the top personal income tax rate is associated with higher, not lower, per capita income growth.



If none of ALEC's policies work as advertised for job and income growth, what do they do? They are, in fact, a prescription for economic inequality. So-called "right to work" does not increase growth, but it reduces workers' bargaining power. Reducing taxes on the wealthy increases post-tax inequality. And so on, down the panoply of ALEC policies. Fisher et al. (p. 11) put it well:

The ALEC-Laffer strategies are exclusively those that would lower taxes on corporations and the wealthy, reduce public sector revenues (and hence public investments in education, health and infrastructure), and lower wages by eliminating minimum wages and weakening the bargaining power of workers. Yet the book claims that all of these measures would make states, and their populations, richer.

The report is Selling Snake Oil to the States, and that is precisely what ALEC's policies are.





* Technical note: I'm old school on when we should consider something probably not due to chance. For generations, the standard cutoff was that you have to be 95% certain a result was *not* due to chance to call it statistically significant. In economics, and now increasingly in political science, researchers have sometimes called a result statistically significant using a 90% cutoff instead. In my view, this shift has been due to what is called "publication bias": it is easier to get your study published in an academic journal if you have some statistically significant result. But this is a big problem in areas like minimum wage research, where not finding a statistically significant negative effect from increasing the minimum wage actually tells you a great deal. The key analysis of publication bias in minimum wage research can be found in David Card and Alan Krueger's book Myth and Measurement.



Cross-posted at Angry Bear.

Suppression of Congressional Research Service Report Reversed

Just as quietly as it happened, the Republican suppression of a Congressional Research Service (CRS) report showing the lack of relationship between top tax rates and economic growth has apparently been overcome. Jared Bernstein reports today that the report is back up. You can find it on the CRS website here.



What made this report so objectionable to Republicans was that it showed no relationship between the top tax rates and economic growth rates, and went beyond simple correlation analysis to more complex analysis that statistically controlled for other potential causes, known as regression.



Moreover, it performed the same series of analyses on the data for tax rates and inequality, showing that a low top tax rate contributes to economic inequality, again controlling for other potential causes.



It is good to see that the non-partisan CRS is still allowed to post the results of its own research. But it's bad that there could ever have been any question of it.

Appearing on National Progressive Talk Radio Tonight

Sorry for the short notice, but I will be on Lane Prophet's live call-in show on National Progressive Talk Radio at 9pm Eastern/6pm Pacific for one hour. I'll be talking about the so-called "fiscal cliff" and, probably subsidies as well. Here is the announcement from NPTR: http://www.blogtalkradio.com/national-progressive-talk-radio/2012/12/10/the-fiscal-cliff--kenneth-thomas--nptr-29



If you want to call in, the number is 347-326-9690.

NYT Series Illuminates -- And Confuses -- The State of the Subsidy Wars

Louise Story's series in the New York Times this week has created a substantial buzz about the issue of economic development subsidies.This is a welcome development, because it's an issue that doesn't get nearly enough attention in the highest profile media. Story has, in addition, appeared on shows such as MSNBC's "Morning Joe" and NPR's "Fresh Air," bringing subsidies to an even wider audience.



She crafted a number of stories that highlighted the big picture issues: imbalance in bargaining power between city governments and giant multinational corporations, the blatant conflicts of interest on display in Texas subsidy procurement, and a border war between Kansas and Missouri involving multimillion dollar incentives to move existing facilities across the state line, with no net benefit for the Kansas City metropolitan area, let alone for the U.S. as a whole.



The last few days have given me time to absorb the articles and the database Story created, as well as surveying the commentary on the web from well-known experts on subsidies. Several tentative conclusions seem in order.



First, as I pointed out in my last post, and backed up by Timothy Bartik's detailed analysis of Michigan, 5/8 of the national total is in the form of sales tax breaks, and probably the overwhelming majority of those sales tax reductions should not be considered subsidies. Here is what Bartik says about Michigan:

For example, in my own state of Michigan, the New York Times database
identifies $6.65 billion in annual state and local business incentives.
Of this total, $4.83 billion is in “sales tax refund, exemptions, or
other sales tax discounts”.  Of this $4.83 billion, almost all of these
refunds come from two provisions of Michigan tax law. First, Michigan
does not apply the sales tax to most services, including business
services, which saves businesses $3.88 billion annually. Second, for
manufacturing, Michigan does not apply the sales tax to goods used as
inputs to the manufacturing process, which saves manufacturers about
$0.92 billion in sales tax.

For those keeping score at home, that means that $4.80 billion of the $4.83 billion in sales tax breaks should not be considered subsidies, unless you consider manufacturing "specific" enough that this aid constitutes a subsidy, in which case only 80% of the sales tax breaks should be excluded from the subsidy tally.



Second, changes of this magnitude mean that the Times estimates are not sufficiently accurate to use in a statistical analysis, as Richard Florida attempts in The Atlantic Cities. Finding out if incentives affect outcomes like wages, employment, or poverty is precisely the type of analysis we would like to do, but the fragility of the data makes this premature. The good news is that since the data on these state programs are all in one place, it should be possible to get a better handle on state incentives by cutting out those programs which should not be considered subsidies. Different analysts will no doubt have different judgments about what should be counted as a subsidy, but since the database is so inclusive, it should be useful no matter what your definition of subsidy is.



Third, there are some smaller errors in the program database as well. The one I have identified so far is that it counts net operating loss (NOL) tax provisions as subsidies in Illinois and New Hampshire, but not in other states, even though all states with a corporate income tax will have an NOL provision. In any event, this should not be considered a subsidy at all, but a part of a state's basic macroeconomic framework. In addition, Timothy Bartik pointed out to me in correspondence that the program database does not include single sales factor apportionment (only counting what percentage of a multi-state firm's sales take place in a given state, rather than standard three-factor apportionment that uses percentages of payroll and property as well) as a subsidy, which it should.



Fourth, the program database does not distinguish between investment incentives (subsidies to affect the location of investment) and subsidies more generally, which may or may not require an investment to obtain them. This is an important distinction I have tried to make clear by providing separate estimates in Investment Incentives and the Global Competition for Capital: $46.8 billion in incentives, and $65 or $70 billion in subsidies, depending on whether or not you count non-specific accelerated depreciation as a subsidy.



Finally, as Phil Mattera at Good Jobs First points out, the deals database misses a number of large awards, leaving out Tennessee's $450 million (present value) subsidy to Volkswagen and an even bigger package for ThyssenKrupp in Alabama. It also underestimates other awards, including Apple in North Carolina and Boeing in South Carolina. I also found that it underestimated subsidies to Dell and Google in North Carolina by omitting the local subsidy portion of the awards, a problem Ms. Story is aware of, as I noted in my last post.



The Times series has been great for the spotlight it has put on state and local subsidies and the sometimes vulgar politics surrounding the process of awarding them, and for compiling a great database of programs all in one place. However, its interpretation of the sales tax breaks, which are 5/8 of the national total but largely not subsidies, confuses the issue of total impact on state and local budgets and makes statistical analysis premature. This will require some work to fix, but it appears like most of the raw material is there to do it.



Cross-posted at Angry Bear.

NYT: $80 Billion in State and Local Subsidies Annually (Updated)

In today's New York Times, Louise Story begins a series, "The United States of Subsidies," ten months in the making, with a story focusing on General Motors closures, the border war for investments between Kansas and Missouri in the Kansas City metropolitan area, and a new estimate of state and local incentives to business, $80 billion a year. Backing this up, and no doubt contributing to the long lead time, is a database of 150,000 state and local subsidy deals going back at least 20 years. Given its appearance in the country's newspaper of record, the series is sure to elevate the issue of state and local subsidies to a prominence it has never known before.



Since my 2011 estimate was $70 billion per year in total subsidies to business, and $46.8 billion in location incentives, the Times figure represents a substantial increase if accurate. Ever since David Cay Johnston reviewed my book when it first came out, he has argued that my $70 billion figure was probably an underestimate, and the new report would seem to back him up. Nevertheless, I will certainly be spending some time analyzing the database to see just what is in it. According to the story, $18 billion per year is accounted for by corporate income tax breaks, a whopping $52 billion by "sales tax relief," and the other $10 billion unspecified but most likely property tax breaks. I have some questions about these numbers, however.



First, it seems to me that property tax breaks likely exceed $10 billion a year. When California axed tax increment financing earlier this year, it was generating $8 billion in tax increment all by itself. Although California cities were by far the biggest user of TIF, municipalities in almost every other state still use it, as well as myriads of property tax abatements offered at the local level. Story is well aware of this. She writes:

The cost of the awards is certainly far higher. A full accounting, The
Times discovered, is not possible because the incentives are granted by
thousands of government agencies and officials, and many do not know the
value of all their awards.

Thousands of local governments give subsidies, and these are overwhelmingly related to property tax. In my most recent estimate, there were several states in Missouriwhich local subsidies exceeded state subsidies, including Missouri and Michigan, so my default  assumption was that they were equal if I did not have adequate information on local incentives, as is usually the case due to the huge number of governments involved.



On the other hand, there is some chance that the $52 billion in sales tax subsidies could be an overestimate; it all depends on what The Times includes in this category. My own thinking about sales tax has changed since I first created the subsidy estimates in my 2000 book, Competing for Capital. My estimate for Minnesota, for example, included many hundreds of millions per year in sales tax exemptions for business services. Now, I tend to think of these tax breaks as methods to avoid tax cascading (paying the sales tax on a good more than once, by taxing the full value of every intermediate good) and not a subsidy at all. They have been removed from my estimate of total subsidies in my more recent work, which did not prevent my estimate for 2005 (published in 2011) from being $20 billion higher than that for 1995 (published in 2000). I do still count some sales tax breaks as subsidies, particularly those on plant and equipment, which apply to the initial investment rather than ongoing operations.



While this may seem like a sterile academic argument, in fact it makes a big difference whether incentives are $50 billion a year or $80 billion a year, approximately 600,000 public sector jobs paying $50,000 annually. The larger the true figure, the more pressing is the case for subsidy reform. The inauguration of this new series of articles, plus the database, will help us put a better number on the value, a critical first step toward galvanizing public opinion to force politicians to rein in subsidies.



I will be commenting more on this series over the course of this week.



UPDATE: Text corrected to reflect that although I had specific data for local incentives in Michigan, the total of local incentives was somewhat lower than that of state incentives. In addition, it is clearly true that TIF in California exceeded state subsidies, so obviously so did the total of local subsidies. However, I did not know this at the time I made the estimate.



Cross-posted at Angry Bear.

Gigantic Journalistic Investigation Begins Ripping Mask off Bank Secrecy

While Mitt Romney may be fading from view in the wake of his defeat on November 6, the issue of tax havens is definitely not following suit.



Via the Tax Justice Network, I've just learned of a massive, multi-national joint investigation into secrecy jurisdictions by three very heavy hitters, the Guardian, BBC Panorama, and the U.S.-based International Consortium of Investigative Journalists (ICIJ). Though they are starting out with the United Kingdom and the seriously understudied situation in the British Virgin Islands, ICIJ has announced that this is just the start of a multi-year investigative project and that there are "many more countries to come in the next 12 months." Further, according to ICIJ, the investigation involves literally "dozens of jurisdictions and in collaboration with dozens of media partners and freelance journalists around the world" (emphasis in original).



As I write this, the first and second articles (Nov. 25 and 26) in the Guardian's series rank number two and number one in the "most viewed" articles in the last 24 hours. One of the most amazing articles discusses the use of "nominee" directors, people who pretend to be a company or foundation's directors in order to hide the true ownership from authorities. Incredibly, these nominee directors frequently do not know the companies they are supposedly responsible for; they just know that they are getting paid for the use of their names. Be sure to check out the BBC undercover film linked from this Guardian article.



The tremendous scope of the journalistic investigation begs the question: where is government on this? Part of the answer is that government is way behind the curve. In 1999, the British government claimed to have stamped out a nominee sham colorfully named the "Sark Lark," for the tiny Channel Island of Sark where the nominees lived. However, it turns out that the perpetrators of the Sark Lark have simply moved all over the world to continue their scam; the BBC caught up with one former Sark resident in Mauritius.



The other part of the answer is that much of these activities are, in the immortal title of David Cay Johnston's book, "perfectly legal." It appears that in many cases governments do not make the effort to sift the illegal from the legal activities.



But let's not forget: tax havens cost the middle class worldwide hundreds of billions of dollars in tax revenue that they have to make up. The evidence is mounting that they are a central piece of the world financial system. Fundamental reform is necessary and a massive journalistic effort like this one will help produce the outrage to make it possible. I'm looking forward to more fruits of this investigation.



Cross-posted at Angry Bear.

What the Fiscal Cliff Means for the Middle Class

Now that the election is over, it seems like all the politicians and pundits can talk about is the so-called "fiscal cliff." But the chatter around the fiscal cliff is deeply weird, so in this post I will explain what it is and what the issues involved mean for the middle class.



Just what is the fiscal cliff? It is the combination of spending cuts and tax increases set to take place on January 1 based on several different laws. Estimates of the consequences run as high as $800 billion next year, or 5.2% of the country's $15.29 trillion gross domestic product in 2011. Yes, that would mean a recession, with obvious consequences for the middle class. But this is only true if we did nothing after January 1, and that's not going to happen.



To put it another way, $800 billion is a 72.7% cut in the government's budget deficit for the just ended 2012 fiscal year. You would think this would make the people calling for an immediate cut in the deficit happy, but nooooo. Just the opposite, which is the weirdest aspect of the entire debate. I'll come back to that in a minute; first, let's look at the main components of the fiscal cliff.



The biggest chunk is $426 billion from the final expiration of the Bush tax cuts, according to a Bloomberg analysis in July. Of this, $358 billion is for the first $250,000 of all taxpayers' earnings, and the remaining $68 billion is for the tax cuts for income above $250,000 ($200,000 for a single person) that President Obama wants to get rid of. Both Republicans and Democrats want to retain the tax break for 98% of households, but Republicans will try to hold it hostage to the cuts for the other 2%. Since the Bush tax cuts expire if nothing gets done (because they were originally passed through the Senate's reconciliation procedure, which gave them a 10-year lifespan; then renewed for 2 years in 2010), on January 1 the Republicans will have no more leverage on this. Thus, I expect that the middle class tax cuts will be made permanent and, by early January at the latest, the $68 billion will be all that will have expired. Since the wealthy spend less of their income than do the middle class or poor, this tax increase will have little contractionary effect on the economy.



Another set of tax provision affecting couples with over $250,000 and individuals over $200,000 is contained in the Affordable Care Act. These folks will have to pay an extra 0.9% tax on earnings over the thresholds for Medicare, and an extra 3.8% on investment income, starting in 2013. According to an Associated Press estimate, this will raise $318 billion over 10 years, so we'll call it $30 billion for 2013. Since this is part of the funding for Obamacare, the President is highly unlikely to budge on this. Again, as a tax hike on the top 2%, it will have relatively little contractionary effect.



There are $110 billion in automatic spending cuts scheduled in 2013 due to the so-called "sequester." These were triggered last year when no deal was made on long-term deficit reduction. With unemployment still at 7.9%, government spending cuts are definitely harmful to the middle class. To the extent that the $55 billion cut from the defense budget comes from overseas spending, there will be little contractionary effect in this country. That is, if we closed a military base in Germany, it would have more of an effect there than here. In any event, since the United States spends 41% of the world's total military expenditure,* we could afford to redirect quite a bit of this $711 billion annual expenditure (China is a very distant second at $143 billion) to other uses. Nation building at home, as the saying goes.



The other $55 billion would come from domestic discretionary spending, so the middle class would bear the full brunt of this. Of course, neither party wants to see "their" favorite budget items cut, so there is a good chance that these spending cuts will be delayed, which would be a good thing, though not as good as shifting some military spending into the domestic budget.



There's more, of course, but the basic outline is clear: we are seeing a replay of last year's debt ceiling "deal," in which Republicans are trying to pass austerity measures the public does not support and did not vote for in the just concluded election. Indeed, a majority voted not just for a Democratic President and a Democratic Senate, but for a Democratic House of Representatives as well, with Republicans maintaining a majority only due to gerrymandering and compliant Republican courts. As Paul Krugman points out, the self-proclaimed "fiscal hawks" are tying themselves up in knots on why going over the cliff is bad when it achieves their goal of debt reduction. The answer, of course, is that they want to cut "low-priority spending," by which they mean programs benefiting the middle class. As Linda Beale argues, the right course for Democrats is to do nothing until January, when the Bush tax cuts will be gone and we can pass tax cuts more targeted to the middle class as well as redirecting spending from our bloated military to domestic programs.



* Source: SIPRI (Stockholm International Peace Research Institute) Military Expenditure Database 2011, http://milexdata.sipri.org



Cross-posted at Angry Bear.

Online International Political Economy Course

If you've enjoyed my posts, you may be interested in my courses, too. In spring 2013, I will be offering an online course at the advanced undergraduate level in my specialization, international political economy (Political Science 3830). This course will examine the main issues of the global economy, including trade, money, investment, and globalization, from a variety of theoretical perspectives and a special focus on who wins and who loses from different policies. I have taught this course for over 20 years and am now in the process of finalizing the online architecture.



This is a regular course at University of Missouri-St. Louis and you may be able to transfer it into your own degree program; needless to say, check with your adviser. To do this, you would enroll as a visiting student.



You can also enroll as a non-degree student if you are simply interested in the subject and are not taking it as part of a degree program.



This is a 3 credit-hour course. Tuition is $265.60 per credit hour for Missouri residents and residents of 22 counties in western and southern Illinois. Out-of-state tuition is $717.90 per hour. You will need to check what other fees may apply (there is a supplement for online courses; beyond that, I am uncertain).



If you are interested, you will need to apply as a visiting student or non-degree student. See here for more details on the admission process. Feel free to contact me at kpthomas55@hotmail.com if you would like more information.

Bain Capital Avoided $102 Million in Taxes Via Dutch Subsidiary UPDATED

A Dutch newspaper, de Volkskrant, reports today (translation here) that Bain Capital used a Dutch
subsidiary to avoid $102 million on its taxes. This has been picked up
by Taegan Goddard 
and the Atlantic Wire.
The Dutch author wrote a comment on Goddard’s site clarifying that Bain
(not Romney) saved $102 million. From his 2010 and 2011 tax returns,
Romney received $2.1 million in dividends and $5.5 million in capital
gains. Of course, who knows what he received in previous years, since
Romney hasn’t released more tax returns?



Since all the original analysis is in Dutch, which I can't speak, it's hard to say much further at this point, though Bain and the Romney campaign predictably refused to comment. However, the report does show the statement for Bain Capital Fund VIII for the first nine months of 2010 (part of the documents leaked to Gawker, I believe). One illuminating nugget on how private equity makes its money is that the fund reported $174,493,175 in income for the nine months, and a staggering management fee of $46,746,696! This makes it easy to see how private equity folks make so much money whether the underlying investment does well or not.



Of course, this is just one more piece of how the 1% hide their money from taxation. With Romney, it's gotten to the point where we are no longer surprised by this anymore.



Where is the mainstream media on this?



UPDATE: Here is a fuller translation from a Dutch speaker at Daily Kos.

What Senate Republicans Don't Want You to Find Out

There is a lot of buzz now about the fact, discovered over a month after it happened, that the Congressional Research Service (CRS) had withdrawn one of its research reports due to pressure from Republican Senators. Probably the most commonly used adjectives used to describe the CRS are "respected" and "non-partisan," so what is going on here? The simple answer is that the Republicans didn't like the study's conclusions and complained vociferously to CRS. Why did the CRS give in? No one knows yet, although the New York Times reported:

A person with knowledge of the deliberations, who requested anonymity,
said the Sept. 28 decision to withdraw the report was made against the
advice of the research service’s economics division, and that Mr.
Hungerford [the study's author] stood by its findings.

What was in the report that terrified Republican Senators so much? In fact, a lot more than reported in the media: "Tax Cuts for the Rich Do Not Spur Economic Growth," Talking Points Memo, September 17;  "Tax Cuts for the Rich Cause Income Inequality, Not Economic Growth," Think Progress, September 17; for example.



One major finding is contained in a plot of the top personal income tax rate and real economic growth rates for every year from 1945 to 2010. Contrary to conservative arguments, when the top tax rate was from 70-90+ percent, the country had growth rates averaging 4.2% in the 1950s, but only 1.7% in the 2000s, when the top rate was 35%. Overall, according to Figure 5 of the report, there appears to be no relationship at all between the top tax rate and growth.



It's important to remember, though, that a simple comparison of two variables tells us nothing by itself. It's only when we control for other potential causal factors that we can say whether a relationship does or does not exist between two variables like tax rates and growth. In the report's appendix, the author carries out such a regression analysis, as it's called, and still finds that there is no relationship between the top tax rate and real GDP growth rates.



Moreover, the study takes a look at the ways that lower tax rates are supposed to improve the economy, i.e., by increasing private savings, private investment, and labor productivity growth. In no case does the bivariate analysis (some of which shows higher taxes increasing private savings) or the regression analysis show either the top personal tax rate or the capital gains tax rate having an effect on these intervening drivers of economic growth. This completely undermines the economic arguments for tax cuts as the recipe for a better economy.



But wait, there's more! The diagram (scatterplot) showing the relationship between the top tax rate and the private savings rate shows that the highest private savings rates since 1945 were achieved when the top marginal rate was 70% (see top left of Figure 3), which comports well with recent calculations of the top optimal tax rate (70% or higher). In fact, when the top bracket was 90%, the rate of private savings as a percentage of potential GDP exceeded the rate when it was 40% or below in every year but one!



The other discomfiting finding for the Republican Senators is that lower top tax rates and lower capital gains tax rates increase income inequality. Not only is this obvious in the scatterplots for the top 0.1% and top 0.01%, it remains true in the regression analyses after controlling for other potential causes of the high income shares of the rich.



Tax cuts, then, don't increase economic growth (the ultimate zombie idea, as Paul Krugman says) but do worsen economic inequality. It may even be the case that high top marginal tax rates increase private savings, with the country's historical postwar maximum savings rates coming at a rate of 70%.



What the suppression of this study amounts to, then, is part of the present-day Republican Party's war on science, arithmetic, and knowledge in general. Unable to refute the findings of the CRS report, they demand its censorship instead. As Jared Bernstein says, this is simply scary: "this type of suppression is wholly inconsistent with democracy." That Congress' non-partisan research arm is going along with this makes it especially chilling.

This has nothing to do with law, but it's fascinating

This is really cool.



http://dvice.com/archives/2012/10/ethiopian-kids.php

Discussing Tax Increment Financing on TV

I recently appeared on a local public access TV show, "Conversation with Lee Presser," discussing tax increment financing and European Union subsidy control regulations. It's a great format, just an almost 30-minute discussion without interruption, which allowed me to explain the problems with TIF as it has been used in Missouri in great detail. We also had a shorter conversation about EU regulations to control investment incentives and other subsidies, which covered the basics of transparency, maximum subsidy rates that vary by how rich the region is, and the reduction in those rates for large projects. Many thanks to Lee Presser for having me on. If you are interested in economic development issues, I think you will enjoy the program.



"A Conversation with Kenneth Thomas - UMSL Professor of Political Science - 10/23/12"

McMahon's WWE has taken $36.7 million in Connecticut subsidies

U.S. Senate candidate Linda McMahon's World Wrestling Entertainment (WWE) has received $36.7 million in Connecticut film tax credits in 20 separate deals since 2006, reports CTPost.com (thanks to Karin Richmond on the LinkedIn Public Incentives Forum). As in many states, what historically began as tax credits for motion pictures are now available for TV and online media as well, and it is in these two latter categories that the WWE received its subsidies. Also as is typical of other states, the Connecticut program has no job creation requirements, but is calculated simply as a percentage of "qualified expenditures," with the rate being 30% in Connecticut. In fact, in WWE's case, the company had laid off about 60 workers in 2009, yet continued to receive the credits.



Moreover, according to the Sacramento Bee blog, "Cageside Seats," WWE has so little state tax liability that it sells the vast majority of its tax credits via a broker, including 93% of the tax credits it earned in 2007-9. While selling tax credits is perfectly legal (in David Cay Johnston's memorable phrase), it also increases the subsidies that states give, because they wind up giving subsidies to companies that did nothing to qualify for them under any subsidy program.



Nor is WWE alone in its sale of Connecticut tax credits. According to a 2010 article at the CT Post, "of the 80 productions that received credits, only nine applied them to state taxes." The rest, presumably, sold their credits via brokers. The article also states that the national tax credit market had reached $500 million annually in 2010, from $50 million per year in 2005.



Robert Tannenwald of the Center for Budget and Policy Priorities (CBPP) has analyzed state film subsidies and concluded they provide very little bang for the buck. This should not be surprising. Unlike most subsidies, film/TV/digital media subsidies do not go to an investment, but to operating costs. There is nothing left after the crew packs up. Tannenwald points out that even the early adopters of film subsidies (New Mexico and Louisiana), which appeared to have built up some in-state film capacity, are now finding it difficult to maintain their position as the number of states offering such incentives skyrocketed to over 40 by 2010. The increased competition has led states to bid up their reimbursement percentages, to over 40% in Alaska and Michigan. Moreover, it's hard to have job creation requirements for jobs that are inherently temporary.



Tannenwald estimates that the 43 states that gave film tax credits in fiscal 2010 spent $1.5 billion. This is enough to hire back 30,000 state workers laid off since the recession began, at an average of $50,000 per year in salary and benefits.



Although not members of the Forbes 400, Linda and Vince McMahon follow their example in collecting millions in subsidies from government. This is particularly hypocritical since as a Senate candidate McMahon has tried to portray herself as an opponent of "corporate welfare."



Besides having little bang for the buck, film subsidy programs have been rocked by scandal in both Iowa and Louisiana, where the film commissioner was convicted of bribery to accept inflated expense submissions. The Iowa Film Office director was convicted of felonious misconduct, but acquitted on eight other felony charges. A number of credit claimants in Iowa were convicted of felonies as well in other trials.



As I have argued before, investment incentives generally constitute a race to the bottom. However, film and related media subsidies have shown us a high-speed race to the bottom for amazingly little economic benefit. While a few states have cut back on the subsidies due to the recession (and Iowa suspended its program for three years due to the scandal), only federal controls can truly address this problem. My research in Canada (paywalled) found the provinces there similarly unable to control their film subsidy wars. At this point, only transparency in program costs, plus information on the low benefits and frequent scandals, is the only way to generate political pressure for reform.

Medical Debt Has Huge Impact On Bankruptcy Filings

http://www.cbsnews.com/stories/2009/06/05/earlyshow/health/main5064981.shtml

Starbucks in Hot Water Over British Tax

Reuters (via Tax Research UK) reported on October 15 the results of an extensive investigation into the British unit of coffee giant Starbucks, the second largest restaurant firm in the world after McDonald's. It turns out that the company has reported losing money in every one of the 14 years it has operated in the country, even as it tells investors that the unit is profitable. Reuters documented this latter fact by getting the transcripts of 46 investor conference calls Starbucks has made over the last 12 years.



For the last three years, Starbucks has paid no income tax at all in the United Kingdom. This is a textbook case of using transfer pricing to hide your profits from the taxman and make them show up in tax havens instead.



According to the Reuters report, there are three potential routes the company has to make its profitable British subsidiary legally have no tax liability.



1) The British subsidiary pays a Dutch subsidiary for the use of trademarks and other intellectual property of Starbucks, at a cost of 6% of sales as royalties. An undisclosed amount of this barely profitable unit's revenue is paid to another Starbucks subsidiary in Switzerland. Where the money goes from there only Starbucks and its accountants, Deloitte, know for sure.



2) Starbucks UK buys its beans through another Swiss subsidiary and they are roasted at a second Dutch subsidiary (this may be a pattern: pay a Dutch subsidiary, which pays a Swiss subsidiary). This gives a second opportunity for transfer pricing, although a transfer pricing investigation by Her Majesty's Revenue and Customs (HMRC) in 2009-10 resulted in no penalties, the company told Reuters (HMRC would not comment). However, Richard Murphy reports that HMRC has been cutting audit staff and been subject to regulatory capture by the companies it is supposed to be regulating.



3) Finally, the British subsidiary's operations are financed entirely through debt, for which it pays interest to other Starbucks subsidiaries. The interest is deductible from income in the UK and can accumulate in tax havens as income there. Reuters found that Starbucks UK pays at least 4 percentage points more in interest than McDonald's UK does.



Paying zero corporate income tax (or corporation tax, as they call it in the UK) gives Starbucks a competitive advantage over other coffee companies that are purely domestic and can't get out of the tax. Not surprisingly, this has ignited a firestorm of controversy in the United Kingdom. In the last 6 days, HMRC officials have been summoned for testimony before Parliament, probably in November. The Irish Congress of Trade Unions (which represents unions in Northern Ireland/UK as well as in the Irish Republic) has called for a boycott of Starbucks. And the company's reputation has been simply hammered in the social media there, with studies by YouGov and Buzz showing sharp dips into negative territory on their measures of brand perception.



Of course, if Starbucks goes to all this effort to avoid British taxes, you've got to wonder what strategies it's using to avoid taxes in the United States. Any reporters out there up for the challenge?

Romney's Accountants Busted in New Tax Justice Network Study

When Mitt Romney released the second of his tax returns last month, he also gave us a summary of his 1990-2009 taxes prepared by his accounting firm, PricewaterhouseCoopers (PwC). The whole point of that exercise, aside from trying to distract people from demanding the actual returns, was to muddy the waters and hide behind the supposedly strong reputation of PwC: an accounting firm would never lie, would it?



Of course, this is a silly question on its face. Who do you think designs abusive tax shelters, other than tax accountants and tax attorneys? Now, in a new study by the Tax Justice Network, we see that there is a positive correlation between a jurisdiction's (remember, not all tax havens are independent countries) secrecy index and the number of banks and Big Four accounting firms (PwC, Ernst & Young, KPMG, and Deloitte) per capita present there. The report documents one "leveraged partnership transaction" that PwC both designed and then pronounced to be legally valid (in what is usually termed an "opinion," for which it was paid $800,000), which the U.S. Tax Court strongly criticized as a "conflict of interest" when it upheld the Internal Revenue Service's squashing of this arrangement.



More specifically, we find that the Cayman Islands had the third most Big Four accounting offices per 1000 population at 0.95, compared with just .001 per 1000 for the United States (see Graphs 4 and 5, p. 24, in the report). This density is almost 100 times higher in the Caymans than in the U.S. The Caymans also had more than twice as many banks per 1000 as any other country, at 4.5 per 1000, compared to .023 per 1000 for the U.S. (Graphs 1 and 2). The graph below shows Big Four offices per 1000:





Source: Tax Research UK



Note, too, that Bermuda (which the Romneys also have used) comes in at about .06 per 1000 population, or about 60 times the U.S. rate.



Similarly, we find that comparing the secrecy score of the 20 worst tax havens with the Tax Justice Network's broader list of 71 tax havens and with the G-20 nations shows a much higher mean and median secrecy score in the tax havens than in the non-havens, as the next graph shows.





Source: Tax Research UK



As Richard Murphy, one of the authors of the report, comments at Tax Research UK:

This research lets us conclude that working in conditions of secrecy has
become an inherent part of the work of bankers and accountants. It
suggests that this has led to a culture of creative non-compliance with
laws and regulations, which is likely to increase the potential for, and
volume of, crime. At the same time, banks’ and Big 4 firms’ lobbying
for laws and regulations that reduce transparency is likely to have
resulted in further opacity in the world’s financial system.

This, then, is the world in which Mitt Romney travels, a world in which accounting firms actively seek to create tax avoidance opportunities with little concern for whether they step outside the law's boundaries, and in so doing facilitate the transfer of the tax burden from the 1% to the 99%. In my opinion, PwC's assurances about Romney's tax situation are not worth the paper they're printed on.



Bonus question for President Obama to pose in the third debate: Why is the "McCain precedent" (2 years of tax returns) more important to you than the George Romney precedent (12 years of returns)?

Fortune 500 Deferring $433 Billion in Taxes

According to a new report today from Citizens for Tax Justice, the 285 members of the Fortune 500 that have parked money overseas would owe an estimated $433 billion in taxes if and when it is repatriated. No wonder these companies are working so hard to get a "repatriation holiday" even though the one given in 2004 did not yield  any significant new investment, but lots of dividends and stock buybacks.



The new report list 10 companies with $209 billion parked overseas that report the taxes they would owe on these profits (only 47 do so). These companies all report that they would owe 32-35% on their money, which indicates they have not paid any taxes abroad on it; in other words, the money is in tax havens.









Note that some estimates place these figures even higher; in March, I reported that Apple's overseas stash was estimated at $64 billion.



Based on the entire 47 companies that report their estimated tax bill, CTJ came up with an average tax rate of just over 27%. Multiplied by the $1.584 trillion in overseas cash held by the 285 corporations (up from about $1 trillion estimated in March) yields the figure of $433 billion in taxes that would be due if the income were repatriated or the deferral provision for overseas income ended.



What does it all mean? As U.S. companies continue to enjoy record profits, they are declaring them to be foreign profits at a high rate, as we can see in the increase from the March to October estimates. Numerous tech and financial companies have stashed literally tens of billions of dollars, each, in offshore tax havens, which drain billions a year from tax coffers that must be made up with higher taxes on the middle class, larger budget deficits, or cuts in programs. And as we have seen from the two tax returns Mitt Romney has released, there is one tax system for the 1% and another one for the rest of us.

The Folly of Subsidizing Retail

Next to giving subsidies for a company to relocate, or to prevent it from locating, the lease defensible common use of investment incentives is for retail. Why should this be? Let me count the ways.



Most importantly, retail is a derivative economic activity, as David Cay Johnston says. A location's population and income determine how much retail it can support. For this reason, the apparent job creation of retail subsidies is completely phantom, as sales and jobs are simply transferred from older stores to newer locations. The best proof of this is contained in a groundbreaking study by the East-West Gateway Council of Governments, the regional planning agency of the St. Louis metropolitan area.



East-West Gateway's study found that from 1990 to 2007 (i.e., before the financial crisis), the over 100 local governments of the St. Louis metro area had collectively provided over $2 billion in subsidies for malls and other retail facilities. Most of this was in the form of tax increment financing, a popular local subsidy tool in both Missouri (to the tune of $339 million annual average from 2004 to 2006; see p. 7 in the source) and Illinois. Yet, by the end of this 17 year period, there were only 5400 more retail jobs in the metro area than at the beginning. This would total $370,370 per job if the jobs were created by the subsidies; however, it is more likely that they are simply due to income growth in the region. (Note to reporters: This would be a great study to replicate in your area.)



Second, retail jobs are not all that good. Here is a custom graph from FRED showing the nominal wage trend for all production and non-supervisory workers (blue) and for production and nonsupervisory workers in retail (red). As you can see, the wage gap has been increasing for 40 years. As of September, the exact figures were $13.86/hr. for retail vs. $19.81/hr. for all private industries. Moreover, given that the overall total as shown in the graph actually represents a decline in real wages, the decline in retail is much more pronounced.

In addition to the low pay, retail workers rarely get benefits. According to a new report, only 29% of retail workers get health care benefits, even though half of retail employees have college degrees and 70% are over age 24.



Third, retail does not generate much secondary employment, the way manufacturing does. It does require warehouse jobs, but those generally get subsidized, too, as in the case of Wal-Mart.



The bottom line, then, is simple. Retail is a derivative economic activity that generates almost no new spinoff activity, and local governments (except perhaps in poor areas with food deserts) should not subsidize it. As we have seen in St. Louis, local governments have proven perfectly capable of wasting billions of dollars for temporary gains in sales tax revenues. It's time to stop the madness.

Why You Should Be Wary Of Investing In A Hedge Fund

http://www.marketwatch.com/story/why-hedge-funds-may-not-be-right-for-you-2012-08-20?grcc=a7f24c54a647d13131fa762b3b407132Z3ZhpgeZ0Z107Z200Z129Z2&mod=WSJ_hpp_sections_personalfinance&grcc2=ec81c45fe8b322c6cfd0d5d080866c1d~1345583764374~18f3b45caef80572d421f68a979bd6dc~joefulwiler~1345574637221~3~2~0~0~0~107~200~129~0~2~

They don't reliably beat a plain vanilla S&P 500 index fund.

Fed Govt is taking people's Social Security benefits for unpaid student loans

http://www.smartmoney.com/borrow/student-loans/grandmas-new-financial-problem-college-debt-1344292084111/?grcc=a4f895e7054a7059c6202ead76abe9fcZ3ZhpgeZ0Z945Z200Z122Z2&mod=WSJ_hps_sections_personalfinance&grcc2=42c73cb69dec487e83620f173e1812d4~1344450110805~18f3b45caef80572d421f68a979bd6dc~joefulwiler~1344450032742~3~2~0~0~0~945~200~122~0~2~

This is going to leave some seniors in a very tough spot financially.

The dangers of a Do It Yourself will

http://www.gftpln.org/Article.do?orgId=450&articleId=16968

The data is in - tort reform is baloney

http://www.statesman.com/opinion/tort-reforms-slight-impact-no-shock-2402843.html

Just another example of wealthy special interest groups buying off legislators.  

Finally - some bankruptcy relief for student loans on the horizon

The growth of student debt is stirring debate about whether the government should step in to ease the burden by rewriting the bankruptcy laws—again.

In 2005, Congress prohibited student debt from being discharged through bankruptcy, except in rare cases, because of concerns that many young graduates—who often have no major assets such as a house or a car—would be tempted to walk away from loan obligations.

Some lawmakers now want to temper that position, pointing to concerns that a significant number of Americans could be buried under education loans for decades. Their efforts, however, would apply only to private loans—a fraction of the market.

In the past decade student debt has surged as tuition and enrollment climbed. At the same time, college graduates' earnings have declined. The average debt load of all new graduates rose 24%, adjusted for inflation, from 2000 through 2010, to $16,932, says the Progressive Policy Institute, a left-leaning think tank in Washington. Over the same period, the average earnings of full-time workers ages 25 to 34 with no more than a bachelor's degree fell by 15% to $53,539.

Terri Reynolds-Rogers, a 57-year-old health-program manager from Palmer, Alaska, declared bankruptcy in 2007, but still has $152,000 in student debt. She said she dropped out of medical school in 1999 to care for her two children after her husband died of brain cancer.

http://online.wsj.com/article/SB10001424052702303978104577364120264435092.html?mod=WSJ_hps_sections_careerjournal

Student Loan Debt Tops $1 Trillion

The amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes, potentially slowing the housing recovery, U.S. officials said Wednesday.

Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

http://online.wsj.com/article/SB10001424052702303812904577295930047604846.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsForth

Consumer Protection to regulate debt collectors and credit bureaus

http://www.cnbc.com/id/46414250/Credit_Report_Firms_Debt_Collectors_Face_New_Oversight

This sounds like good news to me.

NY AG Sues Banks For Deceptive Practices, False Documents

New York State Attorney General Eric Schneiderman on Friday sued three major U.S. banks, accusing them of fraud for using an electronic mortgage database that resulted in deceptive and illegal practices, including false documents in foreclosure proceedings. 

http://www.reuters.com/article/2012/02/03/us-banks-mortgages-idUSTRE8121BI20120203 

Consumer borrowing ticks up

http://online.wsj.com/article/SB10001424052970204257504577151182063854006.html?mod=WSJ_hp_LEFTTopStories

Suze Orman's new card - not such a good deal

But once again, there is little reason for consumers to go through all
this hassle, say consumer advocates. There are plenty of debit cards
that are free and easy to use. For example, you'd likely be better off
by opening a checking account with a credit union and getting a debit
card issued, says John Ulzheimer, president of consumer education at
SmartCredit.com, a credit-monitoring site. Orman says her prepaid card
can be used an alternative by consumers who aren't happy with their
bank.

And consumers who opt for a prepaid card could be better served with
an alternative option. For someone who receives a monthly paycheck of
at least $2,000 and uses the ATM at least once a week, the Green Dot
Gold Prepaid Visa card comes out to $0 a month, according to a study
by CardHub.com.

http://blogs.smartmoney.com/advice/2012/01/09/sizing-up-suze-ormans-new-prepaid-card/

Just got charged $90 by Bank of America

I am feeling quite frustrated by Bank of America right now.  They charged me $90 just to tell me what my payoff balance was on my mortgage.  These little fees add up, and they are so frustrating.  Shouldn't it be free to tell me, in writing, how much I owe?  Why can't I just get an email telling me how much I owe, without having to pay a bunch of money?  What a rip off.

So, I'll be looking for a new bank.