Policy Matters

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The Pace Of Tax Inversion Deals "Is Quickening," With 12 Deals Since 2012, Although A 2004 Law Attempted To Stop Them. "About 41 U.S. companies have reincorporated in low-tax countries since 1982, including 12 since 2012. Eight plan to do so in the coming year. A lot of drug companies are doing it, and low-tax Ireland is a popular corporate home. The pace is quickening despite a 2004 law that legislators had promised would end the practice, and despite two decades of efforts by the Internal Revenue Service to rein it in. Nowadays, most companies achieve inversion by acquiring a foreign company at least 25 percent their size." (Zachary Mider, "Tax Inversions: How U.S. Companies Buy Tax Breaks," Bloomberg, 7/18/2014)

According To The New York Times, Recently Completed Inversions Are Expected To Take $20 Billion In Taxes From The U.S. Government In The Next Decade. "Inversions completed to date are expected to sap the Treasury of nearly $20 billion in taxes in the next decade. And that’s just the beginning. At a recent hearing of the Senate Finance Committee, the Democratic chairman, Ron Wyden, said that up to 25 companies, encouraged by big banks that earn lucrative fees on the deals, are currently considering relocating overseas to cut their tax bills." ("The Tax Dodge Goes On," The New York Times, 8/5/14)

As A Result Of Walgreen's Decision To Back Out Of An Inversion, The U.S. Will Save $4 Billion In Tax Revenue. "Their decision means that the United States government won’t lose an estimated $4 billion in tax revenue. That money alone could fund six months of Head Start, providing a preschool education to nearly a million low-income children. Walgreen’s reversal is a victory for the American people and a testament to the power of groups that advocated tirelessly against the proposed inversion, including Americans for Tax Fairness, Campaign for America’s Future, and the United Food and Commercial Workers." (Katrina vandal Heuvel, "If Congress Won't, Obama May Have To Address Inversion," Washington Post, 8/13/14)

The Tax Foundation Finds That Corporate Inversions Are "Predicted To Cost Only 0.5 Percent Of The Corporate Tax Based Over Ten Years." "According to the JCT analysis of the “Stop Corporate Inversions Act of 2014,” a bill that aims to limit the ability of corporations to invert for tax purposes, this bill will raise $20 billion over the next ten years. Compare this to the $4.5 trillion the CBO predicts the corporate income tax will raise over the same period. In other words, corporate inversions are predicted to cost 0.5 percent of the corporate tax base over ten years." (Kyle Pomerleau, "Everything You Need To Know About Corporate Inversions," Tax Foundation, 8/4/14)

Tom Falk Of KMB Believes That Inversions Would End If We Had A 1) Lower Corporate Tax Rate, 2) Simpler Tax Code, And 3) A Territorial Tax System. "Tom Falk, chairman and chief executive of Huggies diaper-maker Kimberly-Clark Corp. KMB -0.10% , said that fewer companies would pursue inversions if the U.S. had a lower overall corporate tax rate, a simpler tax code and moved to a territorial taxation system so that only income earned within the border could be taxed at U.S. rates…"If you did all of those things, the need for a lot of the inversions would drop away," Mr. Falk said in an interview Tuesday." (Kristina Peterson, "Congress Split On Taxing Of Corporate Inversions," WSJ, 7/22/14)

Harvard Professor Of Both Finance And Law, Mihir Desai, Advises Switching To A Territorial Tax Regime. "First, switch to a simple territorial regime (where income only faces local taxes) from the current worldwide regime. As described above, the current system is generating little revenue and causing numerous distortions. Moreover, taxing only profits earned within one’s borders, rather than globally, has a sound theoretical justification. Worldwide regimes with credits for foreign taxes paid were historically motivated by the intuition that foreign direct investment involves one-for-one substitution between domestic and foreign destinations and that productivity differences across firms don’t exist." (Colleen Walsh, "Getting A Handle On Inversion," Harvard Gazette, 8/18/14)

Out Of 52 Companies That Have Inverted, Only 19 Have Outperformed The S&P 500, Says The Washington Post. " Looking back three decades at 52 completed transactions, the review showed 19 of the companies have subsequently outperformed the Standard & Poor's 500-stock index, while 19 have underperformed. Another 10 have been bought by rivals, three have gone out of business and one has reincorporated in the United States. (Kevin Drawbaugh, "'Inversions' Don't Always Benefit Investors," Washington Post, 8/19/14)  

Treasury Secretary Jacob J. Lew Advocates For Enact Immediate Legislation, Retroactive To May 2014, To Prevent Companies From Moving Overseas. "The best way to address this situation is through business tax reform that lowers the corporate tax rate, broadens the tax base, closes loopholes, and simplifies the tax system. But, even as we work to do that, we should prevent companies from effectively renouncing their citizenship to get out of paying taxes. That is why President Obama included in his Fiscal Year 2015 Budget a proposal to ensure that companies could not change their corporate tax domicile without a change in control of the company itself." (Secretary Jacob J. Lew, Treasury, Letter To Sens. Wyden, Camp, Levin, and Hatch, 7/15/14)

 The Viard-Toder Plan Aims To Solve Corporate Inversions By Getting Rid Of Corporate Income Tax And Increasing Taxes On Shareholders. "There is a third option, which I also wrote about in April: abolishing the corporate income tax and increasing the tax burden on shareholders. The economists Alan Viard and Eric Toder have a plan to do this; they would offset repeal of the corporate tax by taxing dividends and capital gains at the same rate as ordinary income, and by taxing those gains every year, not just when the stock is sold." (Josh Barro, "Inverting The Debate Over Corporate Inversions," The New York Times, 8/6/14)

 Andrew Ross Sorkin Cites A Report That Says U.S. Multinational Firms Aren't Burdened By 35 Percent Tax Rates; Rather, They Pay 12.6 Percent On Average. "All of that’s true, but Professor Kleinbard contends that most United States multinational companies don’t pay anywhere near 35 percent. Companies paid, on average, 12.6 percent, according to the Government Accountability Office, which last measured it in 2010, by deliberately stashing piles of cash abroad." (Andrew Ross Sorkin, "Tax Burden In U.S. Not As Heavy As It Looks, Report Says, The New York Times, 8/19/14)

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Heritage Policy Analyst Salim Furth gets it wrong in stating, “Ex-Im is failing to fix a phantom problem.”  Mr. Furth, in a Think Tank post on Monday, says that Ex-Im is not fixing a market failure, because if it were, “the bank would face a high rate of default and cost taxpayers even more.”

The fact is, the Ex-Im Bank is not a subsidy. It levels the playing field in a world of international trading distortions. Moreover, market failures can occur outside of measuring default rates, and that is why Ex-Im is needed. Here are three reasons why:

First, small businesses do not have legal recourse in the event of nonpayment. Because their receivables are foreign, private finance is discouraged by regulatory capital requirements to make the loan. This does not necessarily mean nonpayment will occur, but that it could occur. Effectively, an Ex-Im guarantee allows the deal to go through. So, even though the default rates are low, it’s impossible for private finance to make the loan without that assurance.

Second, foreign export credit assistance in places like China far surpass that of the U.S. Ex-Im Bank. There are agreed-upon rules in Organization for Economic Cooperation and Development member countries so that the global market price is in line with private financing. Outside of OECD, and in developing markets, these rules do not apply. Taxes, export credit assistance, and other foreign subsidies contribute to the setting of the global market price. The U.S. Ex-Im Bank simply allows U.S. firms to compete in foreign markets at this globally set price. While an ideal world would not have these distortions, the world that we live in does. The Ex-Im Bank is needed to off-set these distortions. This has nothing to do with default rates.

Third, some projects, because of their long-dated maturities and importance to the broader economy (think large-scale energy projects, such as power plants), require exporters and suppliers to have sovereign backing. The project leads require the assurance that companies will be around over the course of the project, which can last years, and so guarantees are needed beyond private insurance. Again, this is not a question of default, but a requirement of certain projects. In a world of foreign export credit assistance, it has become a staple of project finance.

Silicon Valley and a lot of the modern tech scene are tackling problems that that the actual creators find important to solve. Tired of unreliable transportation? Start a car service like Uber where you can rely on both quality, smooth transactions and timeliness. Tired of expensive hotels that don't cater to your needs? Start an accommodations service like Airbnb where niche markets can be serviced. The list continues, even for things the 0.1% don't need, like basic education and low-cost entertainment. 

I'm just throwing this out there, but what if the problems that a majority of the U.S. has created for itself (dilapidated infrastructure, inefficient energy, etc.) don't need to be solved? What if...people were to live differently?

Urban dwellers are different animals, and in many ways, they don't need the necessary expansionary infrastructure and loads of energy that people use when they live far from work or other social activities. When they do, their tax revenue should cover it. If not, they shouldn't get it. Living in urban areas also allows people to easily share, so there's greater marginal value per unit. 

If you prefer the rural life, just know there are consequences to that decision. Prices should adjust accordingly. 

The problem may not be that we need technological gains in these areas so we can consume more resources, but perhaps not use as many resources to begin with.

But this recent op-ed in the LA Times about the financial crisis and the rise of sharing economy got me thinking about it all a bit more:

"...The boom time left us with too much of everything, from cars to second homes to power drills. Now that it’s over, we’ve never had a greater financial need to make use of these assets. An alternative economic and social model has risen from the wreckage of the credit crunch.

"If we buy fewer houses and cars — our largest, most highly financed investments — it will help in the deleveraging of the economy. Fewer mortgages mean less debt for bankers to collateralize; and, according to Zipcar, every shared car takes several others off the road."

Think about that for a moment. It sounds like "more sharing, fewer jobs." 

And at first, that's what is seems like. The problem that America faces today (post crisis) is lack of employment opportunities for lower-income households. While over-consumption funded by mortgage debt is without a doubt a bad thing, I do wonder where jobs will come from in the future -- surely not the traditionally blue-color jobs of construction or auto-manufacturing, right?  

I think there's truth to that -- reduced consumption could lead to fewer lower-income jobs -- but I disagree that it would stay that way over the long-term. 

The sharing economy is not about "more sharing, fewer jobs," but sharing assets in general, which can eventually change what kind of jobs become available. With these jobs, it's about sharing a bigger slice of everything, including the profit pie. When you do that, the "sharing economy" leads to job creation because lower-income households can now afford goods and services they reached for (with leverage) leading up to the financial crisis. Combined with greater education and a culture of sharing, it could lead to better decisions about consumption (travel and leisure?), not less consumption, per se. 

@morningmoneyben ppl u admire/respect think it's outrageous Tim G wld catch flack for this. shapes your view, as do feelings of ppl i admire

— Noam Scheiber (@noamscheiber)

November 18, 2013

Is Scheiber right? That whether you think Geithner's decision is respectable or not is based on your world-view? Yes, I think so.

However, this tweet gets more to the point than Scheiber's article does, which is that his beef with Geithner is nothing more than him expressing his feelings about the financial industry, not Geithner himself. 

Call me crazy, but perhaps Scheiber should write about whether he thinks America is over-financed (fellow TNR'er Robert Solow does). Or better, what careers he thinks Geithner should be doing to better serve the public good; if that's his world-view.

Here's the New York Fed in a 2010 study on the pricing structure of the CPFF:

"The CPFF’s pricing structure and other program requirements helped ensure that the facility played a constructive role in restoring stability to the market. At the same time, they also served to: 1) prevent artificial inflation of issuance beyond what may be absorbed by investor demand under normal conditions, 2) ensure that the facility was used as a backstop in times of stress while also providing a disincentive to issue to the facility under more liquid market conditions, and 3) mitigate the credit risk associated with adverse selection to minimize the Federal Reserve’s exposure to loss relative to its accumulated capital from program fees."

"At its peak in January 2009, the CPFF held more than 20 percent of all outstanding commercial paper. By the time it expired on February 1, 2010, the facility represented only 1 percent of market issuance. The self-liquidating feature of the CPFF is illustrated by the steady decline in the amount of outstanding commercial paper throughout 2009." 

Their Liberty Street Blog says something similar about the PDCF program:

"The terms of the PDCF were designed to make the facility’s usage unattractive in normally functioning markets, so that it would be used only as last-resort funding…In particular, the Fed extended loans at the discount rate, which was set above the fed funds rate (at the same level as the primary discount rate). Because rates in the repo market generally fall below the fed funds rate, borrowing through the PDCF would ordinarily be more expensive than borrowing in the private market. Moreover, the Fed implemented an escalating usage fee, which was imposed on borrowers that used the facility for more than forty-five days. In addition, the haircuts imposed on pledged collateral were monitored and updated to achieve a balance between preventing losses, which required higher haircuts, and helping restore greater liquidity, which required lower haircuts." 

Douglas Elliot of Brookings also offers good insight on this issue in his response to the latest GAO study on Fed lending programs: 

“Completely unsurprisingly, the government support was more favorable than market terms. There is no point in intervening by offering the same terms as the market under crisis conditions. Financial crises cause prices to be distorted. Credit spreads shoot up to unreasonable levels and stock prices collapse temporarily. Offering the same terms as the market provides no help in fighting these distortions and stabilizing the system.

Central banks like our Federal Reserve have dealt with this issue for years, in the context of their role as “lender of last resort”. It is well accepted that lending by central banks under crisis conditions should be on more favorable terms than the market, even though the costs generally still represent a penalty rate compared to more normal conditions.