The Obama administration stunned the business world yesterday with new, draconian rules designed to prevent so-called tax inversions. Inversions allow American corporations to escape most U.S. income taxation. The animus against such inversions is emotional and financial. On the one hand, companies wanting to leave are accused of being ungrateful, unpatriotic, insidious, or worse. In other words, the rationale against inversions is an appeal to emotion. But the real driver of that antipathy is that their escape from U.S. taxation creates a bigger tax burden for the rest of us. I believe that if the money weren’t the issue, the emotion wouldn’t be there.
Not too long ago, America was the destination of choice for individuals and companies. I don’t recall any of this emotion in reverse. America has accepted foreign investment, including wealthy foreign individuals and foreign companies wanting to domicile here, with open arms. In fact, these types of immigrants were considered America’s due for being the freest, most business-friendly nation on earth. We would have regarded the idea that they were “economic deserters” with respect to their home countries as bizarre or unhinged. America has generally accepted foreign individuals much more grudgingly and with suspicion, but we never thought of immigrants as wronging their country of origin just for leaving. Neither did their former compatriots, with one exception.
The long-awaited climate accord was signed in Paris. President Obama is taking a victory lap. The NYT breathlessly announced the implications for business:
It will spur banks and investment funds to shift their loan and stock portfolios from coal and oil to the growing industries of renewable energy like wind and solar. Utilities themselves will have to reduce their reliance on coal and more aggressively adopt renewable sources of energy. Energy and technology companies will be pushed to make breakthroughs to make better and cheaper batteries that can store energy for use when it is needed. And automakers will have to develop electric cars that win broader acceptance in the marketplace.
Perhaps. As long as investors, utilities, technology firms and auto makers can make money doing these things. Unfortunately, the climate deal does not prescribe any plan or policies to assure this, nor does it repeal the laws of economics, or the still-desperate need for global economic development. The obvious way to spur these results would be to implement a stiff tax on carbon, but that wasn’t a part of the deal, either.
With a carbon tax, all the other results listed above would follow. And if such a tax replaced income and sales taxes, it would achieve the key objectives of carbon reduction without stalling the economy, aside from dislocations in the energy sector. Politicians on the right wouldn’t propose such a replacement carbon tax because they don’t want to risk their support from oil companies, and many of them believe the problem of global warming is overstated. People on the left wouldn’t propose it because they are generally against replacing income taxes with something as “regressive” as a carbon tax. They would much prefer to add another layer of taxation, and use that money for their parochial purposes, including picking winners and losers in the technology development game, and to impose numerous new regulations on producers to restrict their emissions. Many of these people believe that central planning can get you as good results as market forces.
Unfortunately, the right has surrendered the discussion of climate change to the left, which means that to the extent that we get even ineffectual interventions, they are all but certain to hurt economic growth. People living in beachfront mansions may notice a two degree increase in global temperatures more than a two percent slowdown in economic growth. But people living in low-lying economies will be much more sensitive to an economic slowdown. Seventy five years ago, the Philippines and South Korea were at about the same place economically. The difference, with South Korea today having ten times the per capita GDP, was just two percent per year faster growth over that period. Which of these countries today is better able to weather warmer temperatures, rising waters, and more frequent storms?
The world may be warming with serious consequences ahead. Those who disagree with that prognosis are called “deniers.” What do we call those who deny the economic impact of their proposals? The last time we were told, “The experts are in complete agreement; give me a trillion dollars and control of one sixth of the economy,” things did not work the way their models predicted.
Few statements better illustrate the dismissive condescension of a government official in a headlong power-grab:
Whatever one believes about the merits of the Patient Protection and Affordable Care Act (aka ObamaCare), or whichever way the Supreme Court decides this law, the question of constitutionality was real. The concerns were there throughout the deliberations, in bipartisan opposition to the law, and in its lingering unpopularity to this day. But if one is blinded by their authoritarian ambitions, such concerns remain invisible to them.
Well, Ms. Pelosi, many of us were in fact more concerned about a dramatic and potentially unconstitutional expansion of government power over the most private part of our private lives than we were dazzled by the promise of unfettered access to low cost health care. We were serious about that concern. We didn’t deserve to be treated like dirt to be brushed off.
“Every single day, I’m pushing this economy forward, repairing the damage that’s been done to the middle class over the past decade and promoting the growth we need to get out people back to work,” Obama said.
Contrast with this, from one of Hayek’s discliples:
There were two great triumphs, two things that I’m proudest of. One is the economic recovery, in which the people of America created — and filled — 19 million new jobs.
An accident of history places Federal Express and UPS under different federal laws governing labor relations. UPS is under the National Labor Relations Act while FedEx is under the Railway Labor Act, which is slightly more forgiving in enabling one to resist a unions’ organizing campaign. A bill in Congress is looking to level the playing field by allowing UPS to also be governed by the RLA. Just kidding; could you imagine a Democratic Congress doing such a thing?
Of course, the Democrats in Congress, aka, the other union employees, are trying to pull FedEx under the NLRA. It’s easy to see why UPS would be lobbying hard for such a change. They know that they are at a tremendous competitive disadvantage with their unionized work force versus the largely non-union FedEx. One can also see why the Teamsters union would favor a shift that would make it easier to win a cut of a new, large employer’s payroll.
The House bill would place some of FedEx’s drivers and other employees under the National Labor Relations Act, allowing employees to organize locally. UPS drivers are governed by that law. The Teamsters union has said the bill would ensure fairness across the industry.
Fairness? The union’s argument here is a tacit admission that competition is important, and that the union undermines competitiveness. “It’s only fair that we have a chance to degrade the other guy’s operations to the same level we have done with those companies that we already work for.”
The Senators from FedEx’s home state of Tennessee are set to prevent this change with the threat of a filibuster. The Teamsters should have sold their charms with a more compelling pitch than “share the poison.”
[T]o pay for the costs of winding down troubled financial institutions, the IMF proposed what it called a Financial Stability Contribution”—a tax on balance sheets, including “possibly” off-balance sheet items, but excluding capital and insured liabilities. That tax would seek to raise between about 2% to 4% of GDP over time—roughly $1 trillion to $2 trillion if all G-20 countries adopted the tax.
On top of that, the IMF proposed that nations to adopt what it called a Financial Activities Tax, levied on the sum of profits and compensation of financial institutions. That would be paid to a nation’s treasury to help finance the broader costs of a financial crisis…
The IMF said that a nation didn’t need to put in place a specific resolution authority. Instead, the tax money could go to general revenues and used in case of financial crisis. But the IMF warned that the money would be spent by the time a problem arose.
OK, so let’s see how this would work. Congress levies massive new taxes on every major bank. Congress would then spend that money on…stuff. A financial crisis hits, and certain TBTF banks get into trouble. Congress bails them out, having to borrow gobs of money to do so because the tax revenues that were nominally for “Financial Stability” were in fact spent on…stuff.
So, how is this different from what happened last time? Hard to see. Does it do anything to reduce the systemic risks that regulators insist were at the root of the last crisis? No. Does it strengthen the banks to make them better able to weather such a crisis? Not likely when so much money of their capital–enough to raise between 2% to 4% of GDP–is being sucked out of their coffers. At least if the money were being held in a trust fund instead of dumped into general revenues, it would be there for frenzied politicians to disburse based on the rational workings of the government. But, of course, the money will not be there. It will have been spent not to support the financial system, but to support the reelection of incumbent politicians–the most short-term actors on the planet.
Oh. Yeah. THAT would be the difference.
So the lesson from all this appears to be: When it comes to a justify raising taxes, any excuse will do.
“I don’t want this to be a distraction” to the work of Congress, Ms. Pelosi said. But she also asserted that such violence and threats of reprisal have “no place in a civil debate in our country” and must be rejected.
She is certainly correct that civil debate cannot co-exist with threats of violence. But one can’t help but see the irony of Ms. Pelosi and many other Democrats (and a few Republicans, I might add) not equating the imposition of laws as a threat of violence. Harry Reid, for instance, is totally clueless on that distinction.
The Senate Banking Committee is now taking up the Dodd bill to re-make the financial services sector more into the image of how the government thinks it should be run, e.g., more beholden to Congressmen. Senator Menendez (D-NJ) offered an amendment to include disclosure of pay disparity, i.e., the ratio of CEO pay to the pay of the average (non-CEO) employee in the company. It’s clear that this amendment is meant to inflame passions about CEO pay, and nothing more. It won’t change what CEOs are paid because the premise behind this amendment, like so much else about pay regulation–that CEOs are paid arbitrarily high amounts–is wrong. CEOs are, on average, paid what the market says they’re worth, a law of supply and demand that Congress cannot rewrite or amend, only distort.
One of the many possible distortions that come to mind would be an increasing trend to outsource low-skilled (and, therefore, low-paid) help, either to temp or admin agencies, or overseas. That would help reduce that ratio. It would also help to bring in-house the employment lawyer who will have to make the silly legal distinctions between who is an “employee” for the purposes of this bill. Would a part-time worker be included? Interns? A lawyer skilled at such useless arcana would presumably bump up the average.
Hey, Senator, if you’re looking for useless ratios, why not mandate disclosure of the highest price product sold by a company versus its average priced product? Or something slightly more productive like the ratio of the highest tax versus the average tax jurisdiction they operate in?
I was at a CFO conference on Thursday where the keynote speaker was CFO of the Department of Energy, Steve Isakowitz. You’d think a CFO, even one in government, would talk about things like accountability or controls for spending, especially with $36 billion in stimulus funds dropped into his department’s lap. Instead, this CFO ran a cheerleading session about all the investments the government was making on “green” initiatives and energy independence, which he acknowledged had a history of failure, but not one word about accountability.
At the end of his talk, I got up and asked him: “What controls will you have to monitor the returns on these investments? And how will you keep from crowding out private investment in similar energy projects?”
His answer: “The private sector is not making these investments. In fact, one of our screens for making any particular investment is that the private sector is not financing such projects.”
When I sat down, a couple of the CFOs sitting at my table shrugged and said that it appeared that he didn’t want to answer the question about accountability for returns, or that he chose to answer it with with a highly questionable assertion about lack of private sector involvement.
I felt that his answer was clear. He basically said that the government has created a huge venture capital funds–rivaling Kleiner Perkins, Sequoia, NEA, etc.–and that this fund will only make investments that no private investor would touch.
What upset me wasn’t that he failed to answer my question, because I think he did after a fashion, but that his answer was intended to satisfy a finance audience. And what really upset me is that it appeared, aside from a few of us cranks, that it worked.
Read the First Comment 
