Tag Archives: political economy

Democrats and Tax…Inversions

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Walgreen Co looked hard at doing one of these—buying an overseas company and then reincorporating in that overseas jurisdiction to lower its US tax bill, a bill flowing from a world-leading 35% tax rate. Indeed, Barclay’s had estimated that Walgreen would save $797 million a year in taxes if it carried through. They were brow-beaten out of the move, though, by the Federal government.

Now, Senator Chuck Schumer (D, NY) and his Senate cronies are looking at getting in the way of inversions generally.

The proposal…would restrict the practice of earnings stripping, where US companies borrow money from overseas parents and deduct the interest expense on US taxes.

Other proposals look at blocking outright such inversions.

This is an area where the supposedly low-tax Republican Party isn’t helping. House Republicans don’t want a (short-term) measure to interfere with inversions, but for the wrong reason: it would make U.S. companies vulnerable to a foreign takeover.

This is the Republicans’ own error. They shouldn’t be cracking down on inversions at all; they should be looking to make them economically useless by lowering corporate tax rates, instead. If we had competitive or better business tax rates (Ireland’s, for instance, is 12.5%), foreign companies would be looking to come here with their jobs, their business, their innovation, instead of our companies looking to go there.

Of course Senate Democrats (and their House colleagues) aren’t moving to lower business tax rates as a means of reducing the rate of inversion, either, as tax reductions are inconceivable to Democrats.

A Capital Strike

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Here is an argument for not doing business with the Federal government at all. It’s rapidly becoming not worth the cost—in hassle, in dollars, in business’ ability to control over their own operations. This is another of President Barack Obama’s barrage of Executive Orders, and this is how The Wall Street Journal described it over the weekend:

Under the order signed last week, contractors and subcontractors who receive more than $500,000 in federal money will be obliged to report to government agencies any labor-law violations going back three years. The order covers violations of everything from family and medical leave to federal wage and hour laws in the three years before applying for a contract.

And

When unions are in a collective bargaining fight with a company, they typically file complaints with the likes of OSHA, the National Labor Relations Board and the Equal Employment Opportunity Commission. Under the new executive order, the government will have the ability to revoke the contracts of those with violations. That’s punishment above and beyond any remedies meted out by the NLRB.

That would be another finger on the scales to force settlements on terms favorable to the President’s political allies. If you’re a government contractor, any time a union files an unfair labor practices charge, the pressure to settle becomes overwhelming. Choose to fight and you face not only the civil penalties of violating a law but the risk of having your federal contracts revoked or suspended.

And

[T]he executive order includes a transparency provision that requires contractors to provide their employees with information about pay, overtime pay, and deductions as a condition of receiving a federal contract. The plaintiffs bar has complained that inadequate record-keeping is a stumbling block to their litigation. Now, via the Obama pen, they’ll have more data to feed lawsuits over the Fair Labor Standards Act.

Who needs this nonsense, this continued attack on private enterprise? Maybe it’s time for private enterprise to go back to being private and stop being dependent on government contracts. Maybe it’s time for private enterprise to stop doing business with the Federal government.

After all, this EO applies only to government contractors and subcontractors. So far.

Social Guarantees

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Ilan Brat and Giada Zampano wrote, in a recent Wall Street Journal piece, about job protections and their effects on the prospects of today’s children and young adults in Europe. The whole article is well worth the read for its specifics, but from my perspective, the following is the money quote, from one of those young adults, Ms Serena Violano, a 31-year-old still sharing a room with her older sister in their parents’ home:

For our parents, everything was much easier. They had the opportunity to start their own life. Instead, we don’t have any guarantees for our own future.

Therein lies the core of the failure of “social democracy.” There are no guarantees. There never were any guarantees, for Ms Violano’s parents or for anyone of that generation. Those of Ms Violano’s parents’ generation made their own futures, with no expectation that anyone, least of all government, would guarantee them anything but the freedom of their own choices and efforts. They had no other expectations because they knew that government could make no other guarantees.

The well-intentioned guarantees of social democracy, including the labor “guarantees” of which Brat and Zampano wrote, in the end can only destroy what they purport to guarantee.

The White House as Tax-Writing Authority

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Secretary of the Treasury Jack Lew originally (originally: three weeks ago, in mid-July) acknowledged he had no authority to alter the tax implications of US businesses reincorporating overseas in order to reduce their US tax burden.

Now he’s looking at (not for) ways to “meaningfully reduce the tax benefits after inversions take place” because reducing a company’s cost structure, the legally and fiscally required behavior of any company’s managers, by making use of this “unpatriotic tax loophole” is unpatriotic. I’ll ignore the fact that what’s unpatriotic here is the usurious tax rates charged American companies and the zeal with which this administration attacks American companies for worrying about their bottom line more than they worry about government imperatives in order to get to a different point. As The Wall Street Journal put it,

So now we have a President in an election year looking for a way to raise taxes on corporations after he couldn’t get Congress to agree. Has anyone asked Treasury’s career lawyers or the Office of Legal Counsel? Someone should. And when the next President arrives in 2017, one of his first acts should be to release publicly all of the OLC memos making the legal case for Mr Obama’s many illegal acts, assuming there are any.

And if there are not, the next President should release far and wide the empty file folder that would be this administration’s lack of consultation with the law or with any government lawyers.

A Trade War

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Russia has announced that it won’t buy certain goods from certain of the nations that are sanctioning Russia over its invasion of Ukraine and its fomenting of rebellion in eastern Ukraine. This is a trade war that Russia shouldn’t be expected to win.

For one thing, Russia’s economy is the size of Italy’s and more moribund, so any trade war can only hurt Russia relatively more than it can hurt the far larger economies of the US, the EU, Australia, Canada, even Norway, who are the targets of the Russian boycott.

For another thing, here are some facts related to this boycott.

[Russia has] banned imports of meat, fish, milk and milk products, and fruit and vegetables….  The ban has been introduced for one year

[Russia] may also introduce restrictions regarding imports of planes, navy vessels, and cars…

And

Russia depends heavily on imported foodstuffs—most of it from the West—particularly in the largest and most prosperous cities such as Moscow, where imported food fills an estimated 60-70% of the market. Food and agricultural imports from the US amounted to $1.3 billion last year, according to the US Department of Agriculture, and in 2013 the EU’s agricultural exports to Russia totaled €11.8 billion ($15.8 billion). [This is against GDPs of $17.3 trillion and €13.1 trillion for the US and the EU and ₱75.8 trillion ($2.1 trillion) for Russia.]

A year, though, is plenty of time for the banned sellers to find new markets, which reduces the long-term need to sell to Russia at all. This, in turn, produces a capacity functionally to embargo Russia with respect to those goods—not by explicitly and legally refusing to sell to Russia, but by voluntarily and economically selling elsewhere instead.

A year also is plenty of time for Russia to find other sellers: Latin America, Turkey, other ex-Soviet nations, and so on. Russians won’t starve. However, the reason these other sources aren’t current suppliers is because the boycotted nations can sell into Russia at lower prices than those alternatives. These alternative sellers will, almost necessarily then, cause higher prices in Russian stores.