That quote is in reference to Obama’s proposal to enhance the U.S.’s global taxing power over corporations incorporated here.
Here’s how it works now. P&G and Unilever can set up a soap plant in Ireland and sell soap in India. Unilever pays the Irish tax rate of 12.5% on its profits. P&G pays the same, but retains an additional 22.5% tax liability with the United States. P&G will have to cough up that cash as soon as it brings it back to the U.S. Lo and behold, they see an opportunity to build a warehouse in Ukraine, or a call center in Bangalore. They use their foreign profits to do this, paying a net tax that is exactly the same as Unilever’s for all these activities.
Obama says he wants that tax money now. As soon as P&G makes it. On money that never reaches the U.S. In Obama’s rose world, P&G is “shirking its responsibility” to the American people by shielding their profits from among the highest corporate taxes on Earth. Obama’s does not consider that the American government is shirking its responsibility to American companies by charging them among the highest rates on
Earth for the use of the house brand.
There’s actually a funny part to this story: Obama believes that this change in policy will encourage more jobs in the U.S. That’s right, by taking more of P&G’s foreign profits away from them, they will build that warehouse in Utah or that call center in Buffalo.
Only the U.S. has the arrogance to levy taxes on a global basis. This arrogance is born of the liberal hubris that these companies have nowhere else to go (“they wouldn’t dare reincorporate in Bermuda”), or that contemplating it constitutes a sort of treason. It is born of the conviction that a extra few billion in the hands of Congress is better for Americans than having it in the hands of American companies. They really believe that.
The really funny thing is that Obama believes the people telling him that he will actually see all those taxes rolling in. If history is any guide, some of those companies will, in fact, reincorporate in Bermuda, or Ireland, or Holland. It doesn’t cost much for even a fairly large, global company, certainly less than 20+ percent of their foreign profits per year. The ones that don’t re-incorporate outside of the U.S. will, instead, spin off their international divisions to their shareholders. Others will use any of dozens of other loopholes, presumably more expensive measures than they must use today, to keep from getting raped by Congress. Under no circumstances do I believe that Unilever or Arcelor or Nestle or any of the other challengers to our major businesses will reincorporate in Delaware and move their headquarters to New York. The few businesses that suck it up for whatever reason will simply have to adapt to becoming uncompetitive in a hungry world, resulting in less profits here to tax.
And we will not see a significant increase in tax revenue from our multinationals.
The American Republic will endure, until politicians realize they can bribe the people with their own money.
– Alexis de Toqueville
We have seen how effective it is for people running for office to promise goodies to “the people” while pretending that it would be paid for by other people. This fakery works perfectly well with one layer of democracy. How much better can this corrupting mechanism work when you add a second layer of democracy?
Well, for the first time, the biggest source of state tax revenue is…federal tax dollars. Here is how it works: After the state has taxed your sales, income, and property, and spent that money on police, schools, and medicaid fraud, they still have a huge gap to fill. The federal government, financed largely by your income taxes, steps in to fill it. Yes, the tax dollars that you sent to Washington, D.C. gets rerouted via some incomprehensibly complicated, and very costly bureaucratic maze to your state capital, to be spent on whatever your (relatively) local politicians say is good for you.
It’s one thing to accept your local politicians telling you that you can’t figure out for yourself what your money should be spent on, that you can’t be expected to act as responsibly or charitably as your assemblyman or senator. It’s quite another thing for the federal government to say, in essence, that your state is not taxing and spending enough of your money, and so they (the feds) will tax you more and give your state more to spend.
Of course, the federal government is in fact shifting tax dollars from one state to another. The responsible (and largely Republican) citizens of Montana and Texas are paying for the profligacy of (largely Democratic) California and New York. Because that is the new American Way!
Good bankers have an incentive to go to the places that offer them the most. That’s simple.
Banks, like all companies have a powerful incentive to keep their best producers. Right now, American banks with little prospect of soon repaying TARP are losing talent to hedge funds, foreign banks, and other non-government owned entities in droves.
The government has the incentive to avoid embarrassment about how much bankers get paid in times when banks are in trouble. Officials have necessarily focused on large institutions, especially TBTF firms, and have crafted all sorts of brain-damaged rules to try to contain the pay of bankers at those firms. However, those rules don’t distinguish good bankers from poor ones within these large institutions. That’s because compensation regulation is driven by headlines, while compensation is more complicated than headlines can capture. Which gets us to another incentive.
The media has an incentive to provide blaring headlines, which is how they sell stories. One way to do that is to tap into the deep vein of envy that exists among the masses. Most readers love to hate the “rich,” especially if they feel they can blame the rich for themselves being worse off.
This brings us full circle in the ecology of incentives. Headline-driven media does not allow fine distinctions between good and bad bankers. The compensation constraints intended to punish whole firms or industries invariably punish those that deserved their pay. These deserving ones feel the same outrage at being punished for their success that the envious masses feel about the underserving ones getting paid anything at all. In a bad environment, the best ones leave first.
Alas, there is a tension between economic news, which is sold with headlines, and economics, which is inherently nuanced. That is why readers and presidents prefer one-handed economists. Which is why only hacks do well in the media and in any administration. The good ones do their best under the constraints of politics, pick up some real world experience, and go back to the cocoon of their ivory towers.
Fritz Henderson is nominally in control of GM. He’s, you know, the CEO. In theory, that means he also has a fiduciary duty to his investors. So, when he gets a proposal from certain of his creditors that they will not accept getting flucked sideways by accepting 10% for their $27 billion in debt while other, more Democrat-like creditors would be getting 39% for giving up $10 billion in junior claims, why, he’s supposed to consider their arguments against some standard, preferably a reasonable one.
Henderson’s response: Sorry, I can’t give more than 10 percent to the bondholders.
“It’s outside of what the Treasury has told us they would support,” Henderson said. “It’s about as factual as I can be.”
Translation: The politicians are in control. And we all know who controls them.
President Obama said he was looking for someone who has “empathy for ordinary Americans” in a Supreme Court justice. I was taught that the role of judges in our system of checks and balances was to interpret the law. The legislature makes law. Empathy is a good thing in lawmakers. Laws affect everyone, and one should appreciate their effect on others when creating them. The executive implements and enforces the law. There are lots of ways to apply rules, and we’d like to think that they are being implemented in the most humane and reasonable way possible. Judges interpret the law. What does empathy mean in the context of interpretation? Here’s what he meant:
Judicial empathy: Ignoring the law to achieve an outcome the judge desires.
You will note that is more or less the same as the definition of judicial activism.
Senator Specter (R then D-PA) might be instructive on this point, explaining why a blatantly discriminatory approach to selecting judges would work best:
We have a very diverse country. We need more people to express a woman’s point of view or a minority point of view, Hispanic or African-American, so that somebody who has done something more than wear a black robe for most of their lives.
I would like to know what the woman’s point of view is with respect to: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.” Is there a Hispanic or African-American way to read: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause?”
Specter is a liar. Given a choice between Janice Rogers Brown and any of a passel of liberal white males, the sharecropper’s daughter doesn’t have a chance with the Democrats on the Senate Judiciary committee, and he knows it. Neither would a conservative Hispanic against a liberal white male.
Senator Leahy proposes an even more disingenuous standard. He’s looking for “somebody who can reflect the feelings of real Americans.”
As opposed to the Americans on the other side of the political debate, no doubt.
Unfortunately for Obama, the government doesn’t control the whole financial sector yet. If it did, then it could have forced all of Chrysler’s lenders to bend over for the country.
As of last night’s deadline, we were part of a group of approximately 20 relatively small organizations; we represent many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler. Combined, these loans total about $1 billion. None of us have taken a dime in TARP money.
As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help. Indeed, we have made significant concessions toward this end — although we have been systematically precluded from engaging in direct discussions or negotiations with the government; instead, we have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.
…We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests. Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well established legal framework and cannot be rationalized as being commercially reasonable.
This was signed: “The Committee of Chrysler Non-Tarp Lenders”
Translation: We know you want the capitalists to subsidize the workers. We read Marx, too. You might be able to get away with those kinds of demands with the banks under your control using whatever forms of financial waterboarding you’re employing on them. But that’s not how we’re going to play this. Our vision of what’s fair doesn’t involved screwing our investors for your politically favored constituencies. Don’t like it? Tell it to the judge.
Citigroup Inc., soon to be one-third owned by the U.S. government, is asking the Treasury for permission to pay special bonuses to many key employees, according to people familiar with the matter.
We’re talking tens of millions for certain people. Choose your outraged retort:
Now that you’ve gotten it out of your system, put yourself in Geithner’s shoes. Phibro generates a huge amount of profit for the Citibank. It’s not the machines. It’s not the building or furnishings. It’s not the computers. It’s the people. The people create the profit. As with anything else, it’s most likely that 20% of the people create 80% of the profit. If you don’t pay the key 20%, they walk. You lose 80% of the profit. So, we can enjoy our two minute hate, the clever rantsabout evil bankers, and emotional complaints about how bankers are no more special than the “working man.” Then someone has to decide what to do about bonuses.
I think the right answer may be to spin off the unit; Citibank is unwieldy and inherently unprofitable. They need to get leaner. They need to undo the failed “financial supermarket” strategy that got them here if there is any chance of creating a profitable remnant. That, or pay enough to keep the best.
But that’s the economic decision. That’s what a conscientious board mindful of their fiduciary responsibilities would likely decide. Congress is a different kind of board. What would you do?
And partly because we wish it otherwise so much. The NYT lead is, “The rest of the nation may be getting back to basics, but on Wall Street, paychecks still come with a golden promise. Some highlights:
“I just haven’t seen huge changes in the way people are talking about compensation,” said Sandy Gross, managing partner of Pinetum Partners, a financial recruiting firm. “Wall Street is being realistic. You have to retain your human capital.”
Gross apparently trades in that human capital, so what he says may be taken with a grain of salt. What does a buyer of human capital have to say?
“We need to be able to pay our people,” said Lucas van Praag, a spokesman for Goldman, adding that the rest of the year might not prove as profitable, and so the first-quarter reserves might simply be “sensible husbandry.”
The press continues to work off of overall reported compensation expense, a very high level, messy number that includes benefits for the secretaries as well as bonuses for the honchos, and everything else compensation related. This high level number stays fairly constant as a percentage of revenue, but gets regularly misinterpreted as a harbinger of top level pay.
Still, the compensation expense is the only publicly disclosed figure related to pay at the banks, and it is the best figure for calculating pay per worker.
And, not a terribly useful one. Using “compensation expense” to discern projected executive bonus levels is like using the “gross revenue” line to predict sales of a small product line.
To try to blunt criticism of high pay, some banks have introduced reforms to take back bonuses from individual workers whose bets later lose money.
Your welcome. That would be our handiwork. Our method has other benefits besides blunting criticism, but, hey, whatever brings the clients to bright.
Compensation is among the most cited causes of the financial crisis because bonuses were often tied to short-term gains, even if those gains disappeared later on. Still, as profits return, banks do not appear to be changing the absolute level of worker pay — or the share of revenue dedicated to compensation.
Not saying either of these sentences is wrong, but can you see the contradiction in how they were put together? (Not even counting the foolishness of using conjectures about aggregates in order to comment on specific behaviors.)
But every dollar paid to workers is a dollar that cannot be used to expand the business or increase lending. Some of that revenue, too, could be used by bailed-out banks to pay back taxpayers.
…or support PBS, or buy me a Mojito on a Hilton Head beach… And therein is the premise behind the whole article: these dollars are arbitrarily allocated from a fixed pie among various stakeholders, with managers clearly stealing more than their “fair share,” which appears to be $1.
“The money should go to shareholders,” said Frederick E. Rowe Jr., a member of the pension board in Texas.
…i.e., a shareholder.
As usual for the bankers, Morgan Stanley’s CFO doesn’t help with this comment:
“The number of fat cats making loads of money is much less than you think.”
Not that many fat cats? That should calm reader envy just like that. (Mack, put a muzzle on your man, here.)
Finally, I don’t know how this got into the article. It kind of just pops out of nowhere near the end of the piece, as if the writer was just throwing up the rest of her notes onto the page:
If shareholders do not like compensation policies at banks, they can simply sell their shares.
“The lack of corporate responsibility and accountability to shareholders is one of the core problems we face,” the New York Democrat said. (It was Schumer, but does it really matter which?)
Congress is all for responsibility and accountability… from others. Schumer’s bill would include:
– Requiring “Say On Pay,” based on the fallacy that investors need more input into HR strategy
– Also “Say on Severance,” based on the widespread, but false perception that exiting CEOs of faltering firms get huge severances
– Elimination of staggered boards
– Requiring “Proxy Access”
What all these measures have in common is the increasing federalization of corporate governance. Every single company incorporates under a charter designed and approved by the original shareholders (generally founders). Every subsequent shareholder buys into the company under the existing by-laws in that charter, by-laws that explicitly lay out what rights the shareholders have. These charters and by-laws are adjudicated in the jurisdiction of incorporation, often the state of Delaware, which has highly experienced, highly respected, and predictable courts. Congress wants to trump that with central planning about how all corporations should be governed, by changing the rules for all existing corporations after the fact.
Congress commands a very different level of respect:
The Glass House of Representatives
How much accountability does Congress have when, with ratings like that, they manage to have a re-election rate that rivals the old Soviet Politburo?
The main difference between Congress and corporate boards, of course, is that even with the overwhelming advantages of incumbency, failing boards still get replaced all the time, in the market for corporate control. When a company performs as poorly as our government has, it gets taken over by another company. When a company fails to provide an honest accounting of its assets as badly as Congress has failed, the board is replaced and sued for breach of their fiduciary duties, and those directly responsible go to jail. Congress has no level of accountability that even comes close.
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