Tag Archives: political economy

Ireland, Luxembourg, UK, and EU Commitments

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In a letter to the Irish government published Tuesday, the European Commission, the 28-member bloc’s central antitrust authority, said it had reached the “preliminary view” that tax deals struck in Ireland in 1991 and 2007 in favor of Apple constituted state aid.

1991! No statute of limitations here. That’s a small matter, though. The larger matter is the degree of freedom that sovereign nations have to govern their internal affairs while remaining a part of the European Union.

The beef here, and it’s a similar one involving Fiat in Luxembourg, and Starbucks and others in other constituent nations of the EU (the details vary from case to case), is this. Ireland didn’t impose a high enough tax on Apple’s Irish-earned income to suit the Authorities of the EU. That letter, in the form of a “report,” complained:

The main question in the present case is whether the rulings confer a selective advantage upon Apple insofar as it results in a lowering of its tax liability in Ireland….

The EU long has objected to the low Irish tax rates, insisting that these are somehow unfair to the other member nations, nations that have much higher tax rates. And no, don’t expect those nations to lower their taxes to compete; Ireland must raise its taxes so as to be less competitive.

The EU complained further:

[There were] several inconsistencies in the application of the transfer pricing method chosen when determining profit allocation [and costs had been] reverse engineered so as to arrive at a taxable income.

Because it’s shameful for a company—or a nation—to work to protect the company’s (and so the company owners’) money. It’s not their money, after all, it belongs to the EU. To paraphrase a man from the other side of the Pond, they didn’t earn that. Somebody else made that happen.

As James Stewart, a tax expert at Trinity College Dublin, noted,

There’s no doubt that this is damaging to Ireland. There’s a deeply held belief that our low corporate tax regime is central to Ireland’s industrial policy. The commission letter gives notice that these types of tax rates are under scrutiny. It will be much more difficult for Ireland to give similar deals to other multinational companies.

But that doesn’t matter. Ireland didn’t earn that, either.

The UK needs to watch this situation in Ireland very carefully and to think long and hard about the value of an EU commitment and the cost of EU insistence on intruding into the domestic affairs of its member nations. The importance of the occurrence of the UK’s EU membership referendum has gained immeasurably from this EU behavior, and the outcome of that referendum now is even more important to the vitality of the UK.

Ireland, Luxembourg, and the others, also need to think very carefully about the value they’re gaining from EU membership, and the costs they’re bearing from that membership. What is the EU’s commitment to its members, if it reserves the right to intrude?

The European Commission’s allegations can be seen here.

Democrats and Inversions

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Inversions in this context, to oversimplify, are when American companies buy foreign companies and then relocate their headquarters to that foreign country in order to take advantage of that country’s lower tax rates. That this is part of an American company’s management fiduciary duty to the owners to minimize costs and maximize profits is unimportant to the denizens of the present administration and to too many “Republicans” as well.

President Barack Obama’s Treasury Secretary, Jack Lew, had some thoughts about the evils of inversions.

These transactions erode the US tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans[.]

Of course, Lew and Obama carefully ignore the fact that half of us Americans already pay little or no taxes, “unfairly placing a larger burden on all other taxpayers.”

They also ignore the fact that it isn’t their money in the first place; the money belongs to the companies’ owners.

They also ignore the fact that our “tax base” already is excessively progressive and that it has the highest business rates in the world.

Lew went on:

These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether.

A better way to reduce the economic benefits of inversions would be to do the patriotic thing: lower, drastically, the tax rates on American businesses. Taxes, after all, are at the foundation of our Revolutionary War—not only the stereotypical taxation without representation, but also the point of that demand of representation: so we could keep tax rates from getting out of hand.

If our business tax rates were lowered sufficiently—Ireland, for instance, taxes businesses at 12.5%, compared to our 35% rate—a couple of things would occur. The first would be a cessation of inversions, and if our business taxes were lowered significantly below 12.5% (I’ve been advocating all along for an elimination of taxes on our businesses), foreign businesses would be attracted to the US, bringing with them the jobs they have.

The other thing that would occur involves the $2 trillion that American companies with foreign branches, affiliates, and so on are holding overseas in order to avoid our usurious tax rates. With those tax rates vastly reduced, that money would come home. $2 trillion is a lot of jobs and capital investment (which is more jobs in the nearby future) waiting to happen.

But tax rate reductions are anathema, if not inconceivable, to Democrats.  And to too many “Republicans.”

An Instructive Graph

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This one is from the Census Bureau’s Income and Poverty in the United States: 2013. The headline of the report is that American household median income stagnated for the second straight year and remains, in real terms, 8% lower than it was in the last year before the Panic of 2008. The graph below reflects that.2013MedianHouseholdIncome

What interests me about this graph, though, is not the end result snapshot, but the slopes of the graph’s separate lines, the changing levels of median incomes, as we come out of recessions and panics over the last 50 years.

Notice: coming out of nearly every one those dislocations, either immediately after it was over or shortly after, the slopes are up. Median household income recovered quickly for all groups indicated. To be sure, there were some significant lags in this—blacks often, Hispanics coming out of the 1990 mini-recession, for instance. However, even coming out of the 2000 dot-com bust, incomes “merely” stagnated overall (although with that one, incomes didn’t fall very much, either).

But coming out of the Panic, this administration’s policies have set a new record for holding back a recovery—incomes have not stagnated (would that we’d done that well); they’ve been pushed down.

Obamacare, Errors, and Attitudes

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The AP has an article that goes into the pitfalls and pratfalls that Obamacare faces this fall, 2014 enrollment period. I’m interested in one error in particular and the attitude of one Democrat in particular who voted for Obamacare’s passage.

The error was the overpayment by the Federal government of many of the subsidies it handed out to…defray…the premium costs of having an Obamacare health plan. Overpayments could occur from a plan buyer underreporting income, from ObamaMart not correctly matching income data with subsidy accruals, and so on.

As a result of having discovered those overpayments, the government is trying to recoup them from the recipients. Congressman Bill Pascrell (D, NJ) disagrees with making people pay back part of their premium subsidy.

Why should individuals be punished if they got a bump in salary? To me, this was not the ACA I voted on.

Indeed, why should individuals be punished? Yet they would be, if Pascrell’s attitude prevails, by paying out more subsidy than was due. Oh, wait, the individuals being punished are taxpayers.

Of course Pascrell (and his fellow Democrats) know this; they just don’t care about those individuals. Taxpayers, after all, are just money trees with which to fund Democrats’ voters.