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Thursday, November 17, 2016

Clinton's lead now more than a million votes UPDATED

As I explained last week, Donald Trump was elected to the Presidency despite having fewer votes than Hillary Clinton. She has already set a record for the biggest popular vote victory despite losing the Electoral College; according to CNN, she now (11/17/16 5:00am EST) leads by about 1,045,000 votes, roughly twice the margin of Al Gore's victory over George W. Bush in 2000. This equates to 0.8% of the popular vote.

Moreover, Clinton's lead will only increase in the coming days. The CNN infographic cited above shows that only 78% of California's votes (where Clinton leads by roughly 3 million votes) have so far been counted. Her raw vote margin will continue to climb there until the votes are all counted.

People have raised two primary arguments against my position that having the Electoral Vote trump the popular vote is undemocratic. The first takes the view that Trump won under the rules as they are: If the popular vote were determinative, he would have campaigned more in California, New York, Texas, and other population centers, and, in his mind at least, he would have recorded an even bigger victory. The problem for this claim, as Josh Marshall has pointed out, is that Clinton would have also campaigned more in those states. Increasing voter turnout usually improves Democratic electoral fortunes, so electing the President by popular vote means that Democratic margins would increase, not decrease.

The second argument claims that focusing on the Electoral College as the reason for Clinton's loss lets her off the hook for her weaknesses as a candidate and a campaigner. And there is no doubt that she had her weaknesses. The problem with this view is that the existence of the Electoral College is a necessary condition for her to have lost. None of her campaign's other problems would have led her to lose the election if the Electoral College did not overweight the Wyomings of this country relative to the Californias. This structural disadvantage that populous states face is one of the biggest threats to democracy in America. And we've got to do something about it, soon.

Update: It's now over 1.5 million, according to CNN.  California still only has 83% tallied. Some sources have Clinton's lead over 2 million now. Something is seriously wrong with this picture.

Cross-posted at Angry Bear.

Wednesday, November 9, 2016

Need Readers' Advice

Yesterday, a non-plurality of the voters chose a new President. Just like in 2000, the Electoral College is not going to the candidate with the most votes. As this new President has also shown himself to not share our democratic ideals, I find it difficult to have much respect for him. Indeed, I am considering not calling him by his name, ever. But perhaps I am just reacting out of the immediate shock.

Therefore, I am asking you to respond to the poll at the top of the page regarding what I should call him. The choices are: He Who Shall Note Be Named (assuming I get J.K. Rowling's permission); Reality Show Host; his actual name; and Other (please specify). I need a reality check here.

Thanks for taking the time to give your advice.

Election of popular vote loser proves necessity of abolishing Electoral College

For the second time in just 16 years, the new President is actually the loser of the national popular vote (click on "Popular Vote"). This is the fifth time this has happened in U.S. history; the last time it happened prior to 2000 was in 1888. As children, we were all taught to believe in democracy and majority (or as we later learned, sometimes just plurality) rule. But with the way that rural and low-population states are overrepresented in the Senate and, hence, the Electoral College, the United States has persistent problems in achieving democratic outcomes in presidential elections and in passing legislation (the overrepresentation of small states in the Senate is amplified by the use of the filibuster).

As I write this (Nov. 9 at 3:53 EST), Hillary Clinton presently has a 219,000 vote lead, according to CNN (see link above). Yet she has lost the Presidency because low-population states are overrepresented in the Electoral College. How do we avoid such affronts to democracy in the future?

The best, and most straightforward way to do this would be to abolish the Electoral College entirely. This would make it impossible to repeat this travesty again.However, the Amendment process is a difficult one, requiring 2/3 majorities in the Senate and House of Representatives, and approval by 3/4 of the states.

There is an alternative, though it might not be permanent. This is called the National Popular Vote bill, which would take the form of an interstate compact that would come into effect when it was ratified by states wielding at least 270 electoral votes. The concept behind the bill is simple: The states which are members of the compact pledge to award all their electoral votes to the winner of the national popular vote (50 states plus the District of Columbia), rather than the winner of the popular vote in their own state. This would ensure that the popular vote winner also won the Electoral College. However, this solution might not be permanent, if one or more of the signees passed legislation withdrawing from the compact.

At present, states comprising 61% of the needed 270 electoral votes have signed on to the agreement. This is made up of ten states plus the District of Columbia, with 165 electoral votes. A quick glance at the list shows the biggest potential problem: Every one of them voted for Secretary Clinton last night (although it should be noted that the Republican-majority New York State Senate voted in favor of the bill 57-4). Although there is some bipartisan support for the bill, Republicans in other states could decide that keeping the Electoral College is a partisan advantage, making it impossible to get enough states to sign on.

And yet, one of these (or something with equivalent effect) solutions is needed. American democracy is being degraded by our inability to elect as President the candidate with the most votes. It has now happened in two of the last five Presidential elections, and continues to be a threat for the foreseeable future.

Cross-posted at Angry Bear.

Wednesday, October 12, 2016

New study casts more doubt on data center subsidies

A new report by Good Jobs First confirms what has been long-suspected: Data center megadeals of over $50 million in subsidies create very few jobs at a cost per job that easily exceeds $1 million. Indeed, the average for 11 megadeals going to tech giants like Google, Apple, Facebook, and Microsoft came to $1.8 million ($2.1 billion/1174) nominal cost per job.

As I have discussed before, such a figure far exceeds what a typical automobile assembly plant will receive, even though the latter creates far more, and better-paying, jobs than server farms do. An auto facility will receive something around $150-200,000 per job, and it will bring along suppliers to boot (though, unfortunately, sometimes the suppliers will also receive incentives).

The new study finds that by far the most important site location consideration is the cost of electricity and, increasingly, whether the electricity is generated by renewable sources like wind or solar. Thus, many of the biggest data centers are located in states like North Carolina (cheap coal-fired plants), Oregon and Washington (cheap hydropower). States with cheap electricity do not need massive subsidies, but they provide them, anyway.

At least, they usually do. As I have related before, American Express in 2010 announced a $400 million data center in North Carolina, without incentives. But fear not, Amex had not forgotten about using the site selection process as a rent-seeking opportunity. The reason it did not seek incentives, as far as anyone can tell (don't forget about the inherent information asymmetry here), is that the company knew it was going to close a 1900-job call center in Greensboro, which would trigger clawbacks on the data center if it received subsidies for it. So in that case North Carolina gave no incentives for the server farm.

Not only that, Google knows how to build and expand data centers without incentives. Of course, that's in Europe. The Netherlands Foreign Investment Agency confirmed for me that it gave no subsidies to Google for a $773 million, 150-job center opening in Groningen province next year. I was unable to get affirmative confirmation on projects in Ireland, Finland, and Belgium, but none of them show up in the EU's Competition Directorate case database, so presumably they did not receive incentives either.

 The study concludes with sensible recommendations: Transparency where it doesn't exist, capping incentives at $50,000 per job, and knowing when to get out of subsidy auctions for these projects. Maybe simpler still, I would suggest that economic development officials just say no.

Friday, September 16, 2016

That's what I'm talkin' about! (Ireland)

I have argued many times (most directly here) that, contrary to the claims of nearly all Irish policymakers, low taxes are not what makes the Irish economy tick. The country experienced 30 years of low taxes with no gain on average European income; it was only after 1987 that other policy changes (education, EU-funded infrastructure, and Social Partnership) led to gains on the EU average. Thanks to a Tax Justice Network blog post, I now have a great illustration to show this in living color.

The graph below plots Irish income per capita as a percentage of the EU average from about 1955 to 2012, with important dates noted as vertical lines. Notice that Ireland doesn't get above 60-65% until after 1990. In addition, the Commission-enforced increase in the corporate income tax rate from 10% to 12.5%, which took effect in the early 2000s, had no impact on the Celtic Tiger's spectacular rise in income per capita relative to the EU average. This means Ireland had higher growth when the tax rate was 12.5% than when it was 0%!

Q.E.D.



ireland-gnp-graph


Source: Tax Justice Network, link above
Cross-posted at Angry Bear

Tuesday, August 30, 2016

European Commission orders Apple to repay Ireland $14.5 billion in illegal tax benefits

Today the European Commission slapped down tax avoiding Apple and low-road economic developer Ireland with a $14.5 billion state aid repayment order. Yes, you read that right: Apple has to pay Ireland €13 billion in back taxes, plus interest, covering the years 2003-2014. According to the Commission's order, Apple's effective tax rate in Ireland ranged from 1% in 2003 to 0.005% in 2014, far below Ireland's statutory 12.5% corporate income tax rate.

This could not have happened to two more deserving parties. Apple, of course, constantly whines about taxes and is a pioneer in creating the most arcane tax avoidance strategies imaginable, such as the establishment of subsidiaries it claims are taxable *nowhere*.

Ireland has for over 50 years followed a low-road economic development strategy based on low taxes and high investment subsidies. When I interviewed numerous government officials there in 2009, almost all of them (literally, just one exception) were convinced that the country's economic success in the "Celtic Tiger" era (approximately 1990-2007) was due to its low-tax strategy. This argument overlooked the fact that the first 30 years of the strategy's use saw no gain whatsoever on EU average income, i.e., Ireland grew no faster than the average of the first 15 EU Member States (or EU-15, for short). It was only when Ireland used "higher road" strategies -- free high school, building new technological universities, social partnership, and a large infusion of EU-funded infrastructure -- that the country really began to take off.

While it is no surprise that Ireland and Apple reacted angrily to today's decision and will appeal the case to the Court of Justice of the European Union, the reaction of the U.S. Treasury is more puzzling. Basically, as John Judis explains at Talking Points Memo, the United States is defending Apple as a national champion that the Europeans shouldn't be charging additional taxes. Instead, Judis argues, the United States should be cheering on the EU pressure on tax avoidance and apply more of its own.

Critics of the decision argue that the Commission's Directorate-General of Competition has no expertise in tax cases. However, as one of the commenters there pointed out, this is properly a state aid (subsidy) case. Indeed, DG-Competition has been tackling fiscal aid cases such as this for 20 years. It was a previous DG-Competition investigation that in 1998 ruled Ireland's 10% tax rate to be not just a subsidy, but an operating subsidy, i.e., not based on investment but ongoing operations. The Commission really does know what it's doing here.

As a result, Ireland is now under pressure to abandon its well-known tolerance of murky tax arrangements, and Apple is finding itself at risk for aggressively creating tax avoidance gambits. It's a great day for honest taxpayers.

Mike Pence subsidizes offshorers

The Indianapolis Star reports (h/t Greg LeRoy) that the Indiana Economic Development Corporation (IEDC), which is headed by Governor/Vice-Presidential nominee Mike Pence, has given millions of dollars in incentives to companies that have subsequently offshored jobs to countries including China, Mexico, Taiwan, and Japan.

Not only that, but the 10 companies that outsourced the jobs sent more jobs abroad from Indiana, 3800, than their agreements with the IEDC required them to create, 1087. For this, the companies were initially awarded $24 million. Moreover, four of the 10 companies failed to reach their job commitments and were subject to clawbacks and termination of future payments under their agreements.

This is a startling mix of good practices and terrible practices. On the good side of the ledger, the state uses both performance-based incentives and clawbacks. Not only that, the cost per job is quite reasonable compared to most states, a mere 24,000,000/1087 = $22,079 per job.

The fly in the ointment is that Indiana does not measure job creation goals against a company's pre-existing state workforce, but against its workforce at the project site location only. Thus, Vera Bradley added about 30 jobs at its headquarters in the Fort Wayne area while laying off 250 at another Fort Wayne-area facility, and is considered to be in good standing on its incentives. How can I put this charitably? This is idiotic. As we can see, the ten companies ran rings around the IEDC and got $24 million for creating -2713 jobs.

It's not like other states aren't aware of this problem, so why isn't Indiana paying attention? According to one source quoted by the Star, among the states that prohibit what Indiana has allowed are immediate neighbors Ohio and Michigan, near neighbor Missouri, and also North and South Carolina.

To top it all off, IEDC does not make companies' job performance numbers public. (Banging my head on the table...) Thus, it is impossible to independently monitor the performance of subsidy awards. If not for the existence of federal trade adjustment assistance application data, the Star could not have done this study at all. Fortunately, the data were there, and we are treated to one more instance of the widespread underperformance of subsidy recipients.

And remember: Pence is the guy that Donald Trump chose as his running mate.

Friday, July 22, 2016

A bet with Tim Worstall on Apple's state aid repayment

Tim Worstall, a contributor at the Forbes Magazine website, wrote a column Thursday wherein he challenges all comers to a bet on the outcome of Apple's state aid case I discussed Sunday. He repeated the challenge to me specifically in the comments section of my post, and I accepted. It's for bragging rights only (I think I'd prefer for the prize to be a beer next time I go to London, oh well).

Worstall's angle is that he believes winning the bet shows he has a better understanding of the issues than I do.That's conceivable, but not necessarily true. In particular, he challenges my emphasis on
Ireland's creation of a corporate entity that is taxable nowhere, and the possibility that the company negotiated a tax rate far below the country's already-low 12.5% corporate income tax rate.
The thing is, we have strong evidence for what the case is about: The Commission decision that started this Article 108(2) detailed investigation. So let's turn to the decision and see what the Commission says it is investigating.

As paragraph (or "recital" in legalese) 6 states, this investigation revolves around transfer pricing (i.e., between different Apple subsidiaries) agreements called "advance pricing arrangements" or APAs. APAs are precisely the result of negotiations. Here is what the New York Times says about Apple Operations International:
Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland — where Apple had negotiated a special corporate tax rate of 2 percent or less in recent years — but keeps its bank accounts and records in the United States and holds board meetings in California.
Worstall is correct that these negotiations do not change the official tax rate of 12.5%; what they change is the effective tax rate. What the APAs do is reduce the amount of earnings of Apple Operations Europe (a wholly-owned subsidiary of Apple Operations International) and Apple Sales International (a wholly-owned subsidiary of Apple Operations Europe) -- I'll get to the details in a moment -- and these artificially derived profit numbers are then taxed at the standard rate of corporate income tax, 12.5%. To get the effective tax rate of under 2%, as cited by the NYT, is to claim that the tax paid (12.5% of the amount of profits as determined under the APAs) is actually less than 1/50th of the true profits these subsidiaries earned.

To take a numerical example, let's say that Apple Operations Europe made $625 million in 2015. However, under its advance pricing arrangement, let's say AOE is only deemed to have $100 million in profits for the year (we'll see how in a minute). AOE then pays 12.5% tax, or $12.5 million, in Irish corporation taxes. But 12.5/625=2%, so its effective tax rate is 2%.

So, when Worstall says this state aid case is not about a negotiated tax rate, he is not replying to what Apple's critics are actually saying.

How does Apple get its profit determined for the two subsidiaries with APAs? There are four separate rulings by the Irish government, two in 1991 (one for each company) and two in 2007 (one for each company). We'll take the 1991 APA for Apple Operations Europe as our example to show the main ideas. According to paragraph 31,
the net profit attributable to the AOE branch would calculated as 65% of operating expenses up to an annual amount of USD [60-70] million and 20% of operating expenses in excess of USD [60-70] million.
 When you think about this for a minute, you realize that this is a very odd formula for calculating "profit." Usually, we'd think about it as sales minus costs. This formula does not mention sales at all! So it's not surprising that it could give a figure far from what we would consider the true profit of Apple Operations Europe. For the record, AOE's 2007 formula does mention sales of intellectual property (paragraph 32), but neither the 1991 or 2007 formula for Apple Sales International uses sales in its calculation (paragraphs 33-34). Ho-kay!

Indeed, in its detailed analysis, the decision says that the formula for AOE was "reverse engineered" to allocate a specific profit number to the subsidiary (paragraph 61).

What about the non-tax resident company structure? Again, Worstall denies it's relevant here. But in fact, both Apple Operations Europe and Apple Sales International (and Apple Operations International, for that matter, though it's not a direct target in the case) are incorporated in Ireland but are not tax-resident there (paragraphs 25 and 27). These are the only Apple subsidiaries in Ireland that are not tax-resident in Ireland (paragraph 19). So this case wouldn't exist without this very unusual corporate structure.

To sum up, I believe that Worstall has misunderstood the reasons for the case given in the decision to open a detailed investigation. As I pointed out two years ago, if the Commission opens an investigation, it almost always finds that state aid was given, and that it is not compatible with the common market. So I am quite confident Apple will lose the case. Unless the Commission unexpectedly changes its mind on the importance of regulating fiscal aid, I am also confident that I will win my bet with Worstall. We'll know soon enough.

Sunday, July 17, 2016

We will soon know if Apple is ordered to pay billions in EU state aid case UPDATED

$19 billion? $8 billion? A few hundred million? Estimates are all over the map regarding the European Commission's imminent decision on whether Apple received illegal, unnotified state aid (subsidies) from Ireland. As I mentioned two years ago, two factors go into the Commission's claim: Ireland's creation of a corporate entity that is taxable nowhere, and the possibility that the company negotiated a tax rate far below the country's already-low 12.5% corporate income tax rate.

As you may remember from earlier posts, if the Commission rules against Apple, the sanction it will impose will be the repayment of the illegal subsidies, with interest. Some estimates of Apple's tax savings are astronomical (the New York Times reported an estimate Apple saved $7.7 billion in 2011 alone), which creates the possibility of an extremely high repayment order. On the other hand, recent cases have seen relatively low repayments, such as the mere 30 million the Commission ordered Starbucks to repay the Netherlands last year. Still, it is perfectly possible that the Commission used smaller cases as a way to establish the legal precedent regarding fiscal aid before dropping the bomb on Apple.

It's worth noting, as reported by Bloomberg, that the largest state aid repayment order ever made was approximately €1.4 billion charged to √Člectricit√© de France, followed by two orders in the €1 billion range. When this decision is announced, we may see a new record by a large margin. Or maybe we won't. Either way, the Commission will be giving us a clear sign regarding how seriously it intends to treat fiscal aid abuses.

Update: For a little perspective on fines, Chillin' Competition (via email) points out that the European Commission has just imposed an anti-trust fine on four truck manufacturers of over 2.9 billion , a new record.

Cross-posted at Angry Bear.

Wednesday, June 29, 2016

New book on investment incentives will help shape policies debates for years to come

This past week I received my chapter author's copy of a new book from Columbia University Press, Rethinking Investment Incentives: Trends and Policy Options. Based initially on the November 2013 conference on investment incentives at Columbia Law School, the contributors were put through their paces to upgrade their conference presentations into proper papers. The result is what Theodore Moran of Georgetown University calls in the Foreword "a who's-who of experts across this broad span of topics." He predicts, and I concur, that the work presented in this book will help drive policy discussions around the globe.

The book is divided into four parts. The first discusses theoretical debates on definitions and the effect of these incentives on (especially) foreign direct investment. The second section provides a global overview of the use of incentive incentives, both in major economies and in developing countries. Part III includes practical tools for ensuring program effectiveness as well as value for money. This includes a chapter on cost-benefit analysis, a methodology of which I am highly skeptical. As I have written before, if you end this analysis at the state (or city!) border, you miss many of the indirect job losses inflicted at competing companies by the addition of new subsidized competition. Indeed, according to economist Tim Bartik, very few subsidy programs have positive *national* effects, even if they have positive local effects that will be the only thing considered in the cost-benefit analysis.

Finally, the fourth part of the book considers ways to reduce the competitive use of investment incentives to attract investment. My chapter falls in this section, considering the control of subnational incentives in Australia, Canada, and the United States. (Spoiler: Most of the record is not pretty; Australia was an exception but the policy expired in 2011.) A variety of supranational regulatory efforts, including most notably that of the European Union, are considered in a chapter by Lise Johnson.

Have I teased you enough yet? This book is a must-have if you are interested in investment incentives and economic development; co-editors Ana Teresa Tavares-Lehmann (University of Porto, Portugal), Perrine Toledano, Lise Johnson, and Lisa Sachs (all of the Columbia Center for Sustainable Investment) are to be congratulated for the fine product.

Tuesday, May 31, 2016

Subsidy Tracker Reaches Major Milestones

Subsidy Tracker, the free subsidy database created in 2010 by Good Jobs First, has reached major milestones in its coverage of state, local, and federal subsidies.

This month's enhancements to the database bring it to a once-unimaginable 500,000 individual incentive awards with a cumulative nominal subsidy value of $250 billion! That's starting to add up to real money!

I explained two years ago how to use the data from Megadeals or Subsidy Tracker to compare a proposed economic development incentive package with past subsidies given in the same industry to get some idea whether the proposal represented a gross overpayment for a given investment. This method relies on finding good matches by industry, location, unemployment rate, and so on. The more deals available to search means your chances for finding good comparables improves proportionately. This can only enhance the ability of citizens' groups, labor organizations, etc., to independently analyze proposed costly incentive packages.

As Philip Mattera, Good Jobs First Research Director, says, the steady expansion of Subsidy Tracker "reflects the improvement in government transparency over the past decade." I can personally remember when the first statewide transparency law was passed in Minnesota in 1995; transparency has improved exponentially since then, although there is much progress that still needs to be made.

One notable recent innovation in Subsidy Tracker is a matching system to determine the ultimate corporate parent of subsidy recipients. According to Mattera, it now includes 2,606 parent companies, a threefold increase since 2014. This is critical information, given that so many companies hide their corporate connections through misleading names.

Although transparency remains an elusive goal, it's worth celebrating successes when they occur. Cheers!

Cross-posted at Angry Bear.

Sunday, May 8, 2016

Kansas City event analyzes the border war

As I noted last time, there is finally a real possibility that the $200+ million job piracy border war between Kansas and Missouri could have a real, legally binding truce. As we wait to find out if this materializes, American Public Square in Kansas City is sponsoring a public forum Wednesday, May 11, at the Plaza Branch of the Kansas City Public Library at 6:00pm.

"Cents and Sensibility" will examine the pluses and minuses of economic development subsidies, turning to research on the effects and effectiveness of these incentives, whether it can be justified to give subsidies to private enterprises, and who benefits from subsidy programs.

I will be taking part in this event, which has an interesting format: no presentations, just questions from the get-go, and a roving reporter who acts as a real-time fact checker. The other panel participants are:

Bill Hall, President, Hall Family Foundation
Michael Farren, Research Fellow, Mercatus Center, George Mason University
Moderator: Dr. Scott Helm, Director of the MPA program at UM-Kansas City's Henry W. Bloch School of Management
Roving Reporter: Steven Steigman, Chief of Broadcast Operations, KCUR 89.3

Be there or be square!

Monday, April 18, 2016

Breakthrough in Kansas-Missouri Border War

Via @goodjobsfirst, we learned Friday that Kansas Governor Sam Brownback had made a major response to Missouri's proposed jobs truce in the Kansas City region.

As regular readers may recall, studies have shown that more than $200 million has been spent moving jobs back and forth across the state border in the Missouri and Kansas counties surrounding Kansas City. This is to create 0 new jobs. Despite this being perhaps the country's second-largest border war after the New York City area, Governors Jay Nixon (D-Missouri) and Brownback (R-Kansas) in December 2012 both told New York Times reporter Louise Story, on camera, that they had no plans to end the incessant job piracy.

Nevertheless, in July 2014, Nixon did an about-face, signing a bill from the majority-Republican legislature to end the availability of state subsidies to be used for such job poaching. Unlike the voluntary no-raiding agreements I have discussed on previous occasions (Council of Great Lakes Governors, NY-NJ-CT, Kansas-Missouri, and even Australia's Interstate Investment Cooperation Agreement), this has the force of law. The four counties making up Kansas City would be completely barred from using state subsidies to give relocation subsidies to companies in four bordering Kansas counties, if Kansas passes comparable rules.

Now, facing an August 2016 deadline in the Missouri law for the truce to take effect, Brownback ordered the Kansas Department of Commerce to disapprove PEAK (Promoting Employment Across Kansas) subsidies for job piracy, and asking for legislation to formalize this policy.

Brownback's proposal differed from the Missouri law by allowing PEAK subsidies (and the corresponding Missouri Works program) to be used for piracy if a company invested at least $10 million in new construction. While this means really large projects would not be affected by the truce, it would kill off the dozens of deals made by what Brownback called "lease jumpers," who simply move from a leased facility in one state to a leased facility in the other to cash in on the subsidy programs.

Good Jobs First today lauded the progress on the truce, noting the five years of both public and behind-the-scenes work by Hallmark and 16 other prominent Kansas City companies to promote sanity. Good Jobs First, of course, has conducted a great deal of research on job piracy, including the 2013 report, The Job-Creation Shell Game. Executive Director Greg LeRoy expressed hope that this potential agreement would be "a wake-up call" for the National Governors Association, which he called "MIA" on the issue of job piracy since 1993.

This is not yet a done deal. However, the proposal to meet legislation with legislation would create an unprecedented advance in stopping job piracy.

Monday, April 4, 2016

It's official - Icelandic bankers have been jailed

If you've been following this blog over the last few years, you know that Iceland took the dramatic step of prosecuting top officers at the country's big 3 banks, all of which were allowed to go bankrupt in the wake of the 2008 financial collapse. Unlike Ireland, it did not turn bank debt into government debt, which increased Ireland's debt by close to 100% of gross national product (GNP) overnight. Though hit hard by the 50% drop of the krona, Iceland has managed a remarkable, though still incomplete, recovery marked by its renewed ability to borrow in foreign currency with less than a 1% risk premium and by achieving unemployment rates that Eurozone countries can only envy.

What you wouldn't know, if you just been looking at the headlines (Google "Iceland jails bankers" and you'll see what I mean), is that Iceland had not actually been jailing bankers. Here's a typical one from the BBC, "Iceland jails former Kaupthing bank bosses" (12 December 2013). In fact, nobody went to jail at that time: They were convicted, but all four Kaupthing officials appealed their sentences. If you search similarly titled stories, you will see that headline "jailings" were either convictions, or an affirmation of these lower court decisions by the Icelandic Supreme Court, neither of which actually led to immediate jailings. Indeed, one of the "Kaupthing Four," as they are now called, was living in Luxembourg (he had headed Kaupthing's Luxembourg branch), and I wondered to myself if could even be compelled to return to Iceland to serve his sentence.

Now I am happy to report that the Kaupthing Four are finally in jail in a minimum-security prison with only one road connecting it to the outside world, including the former CEO of Kaupthing's Luxembourg unit who was outside Iceland when his conviction was upheld. There have been an additional 22 convictions now at various stages in the appeals processes, and special prosecutor for the banking crimes, Olafur Hauksson, indicted five more bank officials for fraud and manipulating stock prices just last month.

As Kaupthing was Iceland's largest bank before the crash, jailing its top officials sends a reassuring sign that the rest of those convicted will eventually follow suit. Iceland thereby establishes a precedent we should continue to urge in the United States, United Kingdom, and elsewhere that bankers are not too big to jail.

A note to readers: Bloomberg reporter Edward Robinson had not replied to a request for some clarifications at the time this story was published. If any of you know when the Kaupthing Four reported to prison, whether there are other bankers already in jail, or other useful news, please send along the information and I'll be happy to credit you. Thanks!

Cross-posted at Angry Bear.

Tuesday, February 2, 2016

New OECD tax agreement improves transparency -- but the US doesn't sign and the US press won't tell you UPDATED

Last week 31 countries signed a new Organization for Economic Cooperation and Development (OECD) agreement providing for country-by-country corporate information reporting and the automatic exchange of tax info between countries under the Multilateral Competent Authority Agreement (MCAA).

Country-by-country reporting, the brainchild of noted tax reformer Richard Murphy,* is a principle that makes it possible to detect tax avoidance by requiring companies to list their activities in each country (nature of business, number of employees, assets, sales, profit, etc.) and how much tax they pay in each country. A company with few employees yet large profits is probably using abusive transfer pricing to make the profits show up in that country rather than another one, to give one obvious example of how the idea works. In the OECD agreement, the procedure is that beginning in 2016 each company will file a report to every country where it does business, then all the countries receiving such reports will automatically exchange them with each other, meaning each of these countries will then have a full view of how much business Google, for example, does in every jurisdiction. The shortcoming to this is that while governments will have this data, the public will not have it (a fact criticized by the Tax Justice Network) due to alleged concerns about confidentiality. However, the European Commission, including its Luxembourgian president Jean-Claude Juncker, is now talking about requiring publication of the country-by-country data for each EU Member State.

Which highlights an important aspect of this agreement: Many major tax havens, including Luxembourg, Ireland, Liechtenstein, Switzerland, the United Kingdom, the Netherlands, Belgium, and Austria have all signed on. But the United States did not sign it. Surprisingly, you can't find this out in any U.S. publication, as far as I can tell. I'm a subscriber to the New York Times, and a search for "OECD tax deal" or "OECD tax" for the past week (it was signed six days ago) yields no results. "OECD" yields one result unrelated to the MCAA. Ditto for the Wall Street Journal. Ditto for my premium Nexis subscription: No U.S. stories on the agreement. You'd almost think they're trying to keep us from finding out. But no, not exactly: The Financial Times was able to get Treasury Secretary Jack Lew himself to comment in its story on the MCAA. He said, “From a US perspective, there are elements of this that don’t require legislation and we’re looking to getting to work right away.”

That's certainly a clue: Some of the changes do require legislation, and getting that from the Republican Congress is not going to happen. In fact, Republicans have always been willing to step up to keep the United States a tax haven for foreigners, and the Bush Administration went out of its way to undermine previous OECD attacks on tax havens offshore, as Australian political scientist Jason Sharman masterfully showed in his book Havens in a Storm.

Republicans have done such a good job at helping out domestic tax havens that the United States is now "The World's Favorite New Tax Haven," according to Bloomberg Businessweek which, in an ironic coincidence, published the story at 12:01AM the day the MCAA was signed (so it didn't report on the signing either). According to the article, foreigners' money is pouring out of Swiss banks into the United States, and Rothschild has set up shop in Reno, Nevada.

A little too ironic...

* As regular readers know, Murphy is someone I frequently cite in these pages.

UPDATE: @AlexParkerDC from Bloomberg BNA was kind enough to send me to a couple of his posts on the OECD's Base Erosion and Profit Shifting (BEPS) negotiations. These suggest that the Obama Administration believes it can implement country-by-country reporting through regulation alone, and had already committed to it in the BEPS process. However, the IRS has proposed not to implement country-by-country until 2017, while the new OECD agreement begins with this year's tax information, as noted above.

Cross-posted at Angry Bear.

Friday, January 15, 2016

Champion Tax Avoider GE Gets Subsidized Relocation to Boston

On Wednesday, General Electric announced that it was going to relocate its headquarters from Fairfield, Connecticut, to Boston beginning in 2016. Even without the headline, you probably already guessed that the relocation was subsidized -- in this case, by both the state of Massachusetts ($120 million) and the city of Boston ($25 million). 800 jobs will move as a result of the deal, but no new jobs will be created.

Massachusetts has been historically a low-subsidy state, helped in large part by its highly trained workforce along with the Boston area's 55 universities and colleges, the latter factor noted prominently in GE's announcement of the move. Yet this is the largest subsidy package ever assembled in the state according to the Good Jobs First Megadeals database (download the December 2015 spreadsheet version here). In fact, the database shows that it is only the fourth package over $50 million in Massachusetts, and the very first above $100 million.

I asked Greg LeRoy, the founder and Executive Director of Good Jobs First, for his thoughts on the deal. His response:
GE’s press release is almost worth bronzing and mounting: the company clearly chose Boston because of its executive talent pool and research assets. Why on earth the state and city felt they had to throw $181,000 per job at the company is beyond me; that’s unconstrained federalism at its worst.        
 This dynamic is one I have discussed often: a company threatens to move to another state and suddenly you have an auction with numerous other states trying to pay a relocation subsidy, while the home is doomed to pay a retention subsidy as a best-case scenario. Frequently, as with GE, the company moves. Either way, collectively the states receive less tax revenue from the company which threatened to flee. Thus, the common question, "Was this a good deal for Massachusetts?" completely misses the point, which is that the country as a whole is worse off, due to the decreased tax revenue for no new jobs.

In this case, as I reported last summer, GE threatened to leave Connecticut over tax increases in the state budget. This is ironic/hypocritical/outrageous (take your pick) because, as the Hartford Courant (h/t Richard Florida) reported, General Electric pays only the minimum Connecticut corporate earnings tax of $250 per year. The Boston Globe (see first link in this post) reports that GE pays essentially no state corporate income tax in any state!

It's tiresome to report yet another egregious example of this kind of corporate blackmail. It is depressing to see Massachusetts, with only 4.7% unemployment in November 2015, give its largest subsidy package ever under such circumstances. It's past time for Congress to solve the job piracy problem once and for all.

Cross-posted at Angry Bear.

Friday, January 1, 2016

Ireland still isn't back

Ireland remains, in some circles, a poster child for austerity's success: It paid off its bailout loan early! It regained its 2007 Gross Nation Income per capita in 2014! Unemployment is only 8.9%! Don't believe the hype.

Paul Krugman recently pointed out that Ireland's employment performance continues to be dismal, especially in comparison with currency-devaluing, banker-prosecuting Iceland. Iceland's employment now exceeds its pre-crisis peak by about 2.5% whereas Ireland is still, 8 years later, 8% below its peak. More specifically, Irish employment peaked in Q1 2008 at 2,160,681; in Q3 of 2015, the figure was still only 1,983,000.

Not only that, but in 2014-2015 (May-April), Ireland continued with net emigration, as 11,600 more people left than came to Ireland. This was a substantial improvement of 9800 over the April 2014 figure, but still the trend is that Ireland is exporting unemployment literally.

Things are obviously getting better in Ireland for those who remain behind. Jobs are being created, and the number of unemployed has fallen. The April 2016 immigration report (the data are only reported once a year) may finally see an end to net emigration. But Ireland is 80% of the way to a lost decade, and isn't out of the woods yet.

Cross-posted at Angry Bear.