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Friday, January 20, 2012

Romney's Cayman Explanations Don't Tell the Whole Story, Says Tax Haven Expert

Brian Beutler at Talking Points Memo has a story purporting to tell us the "real deal" on Mitt Romney's investments in secret Cayman Island corporations. Surprising, given the ABC News (which originally broke the story) and Wall Street Journal articles he links to, Beutler nowhere mentions that these accounts are secret, in accordance with Cayman Islands bank secrecy provisions, which are some of the toughest in the world.

Worse still, Beutler gives the impression that there is nothing unusual about Romney's use of these accounts. He writes:
The offshore funds story is about a strategy investors use not to defer income and reduce their tax burden, but to attract foreign investors who want to avoid U.S. taxation.
“One of the reasons to have a Cayman Islands entity is so that foreign investors will not get hit with U.S. income, and that’s consistent with our general tax policy,” says Victor Fleischer, a tax professor at the University of Colorado Law School. This can give American investors who offshore a competitive advantage over those who don’t, and can cost the Treasury revenue, but it’s on the level.
 I contacted Richard Murphy, head of Tax Research UK and an internationally known expert on tax havens. He called this argument "ludicrous."
Remember, there is nothing of significance  in Cayman, and no money of any significance is made in Cayman. Nor is there indigenous wealth. So all money coming into the US from Cayman came from somewhere else. Now where is the most likely source? I'll wager it's the USA. So money flees illicitly out of the US to Cayman so it can come back in a supposedly tax free structure - that's called "round tripping." Not all is that way - some will come from South America and very little from Europe - wrong time zone  - but the sole reason for Cayman secrecy is mainly to hide the round tripping and that's the most venal tax sin. So to argue that you're luring money in requires you to lure money out of somewhere first - and there's the weakness in the argument presented - precisely because that dimension of the story is ignored in all the reports on this issue.
 In other words, following this logic, if Romney (and Bain) secretly put millions of dollars into the Cayman Islands to attract funds into the U.S., as he has claimed, he's ignoring or not saying where he thinks those funds came from, and that's the weakness in his position. It's at least possible that those funds were round tripping as Murphy suggests, and in that case the so-called foreign investment is in fact just U.S.-based investment repackaged to look like foreign investment with all the tax advantages that attach to that.

The round-tripping phenomenon is well-known in China, where Chinese investors put money into a Hong Kong or other location, and then send the money right back to China so it can claim subsidies not available to domestic Chinese companies.It's entirely possible that U.S. citizens have done the same using the Cayman Islands, and Romney does not appear to be addressing that issue.

Amazingly, the Romney camp claims that the Caymans are not a tax haven. Beutler's article misses the entire round-tripping aspect and focuses too much on legality. While at present there is no indication that he broke any laws, Romney's actions highlight that there is one tax system for the 1%, and a different one for the rest of us. As David Cay Johnston put it, the real scandal in U.S. tax law is what is "Perfectly Legal."

Wednesday, January 18, 2012

The Case Against SOPA and PIPA in Plain English

If you read the Internet much at all, you have probably heard (or seen) that Wikipedia and many other websites are blacked out today in protest of the Stop Online Piracy Act (SOPA) and the Protect Intellectual Property Act (PIPA). James Kwak at the Baseline Scenario today posted an easy-to-understand explanation of some of the main problems with this legislation.

The main issue is that these bills would give copyright holders the power to impose draconian penalties on websites for apparent violations of copyright -- with no due process. How draconian? Just by sending a letter, they could force PayPal or credit card companies to cut off payments to websites.

Moreover, websites could be held accountable not just for their own content, but for comments on their website (and any links in them), for the contents of websites they link to, and for comments on the websites they link to (and links in them). Can you say "burdensome regulation"? So I would have to monitor all the comment sections of every website I link to, most of which are much bigger than this one, in order to be sure there were no copyright violations in them. Under current law, all I'm required to do is take down copyright violations that occur on this website after notification by the copyright holder. Big difference!

As I discussed in late October, there has been a strenuous effort by intellectual property rights (copyrights, patents, trademarks, etc.) holders to enshrine and expand their powers through the use of trade law over the last 20 years. SOPA and PIPA should be seen as another manifestation of that effort. George Washington University political scientist Susan Sell has written some of the most important work on this subject (see her book Private Power, Public Law) and, lately, Matt Yglesias has frequently written about intellectual property bullying by the United States.

These laws would tilt the playing field on intellectual property even further than the current unfair reach of IP laws. I'll just conclude with the device Kwak starts his post with, Google's home page today:

Monday, January 16, 2012

S&P 500 Company Aon to Flee Taxes by Redomiciling in London

Giant insurance firm Aon has decided to break new ground in corporate redomiciling by moving its headquarters to the United Kingdom from Chicago. As Richard Murphy writes, this is because the City of London is a tax haven, and because the UK does not tax worldwide income like the U.S. does. According to the Financial Times (via Murphy due to paywall):
Aon is to become the first ever US S&P 500 company to become domiciled in the UK after the insurance broker unveiled plans to shift its headquarters from Chicago to London.
 Murphy points out that the company could pay as little as 5.75% in taxes, depending on how it structures its corporate empire. Aon is already well-positioned to take advantage of British tax laws, with subsidiaries in such UK-related tax havens as the Isle of Man, Gibraltar, the Cayman Islands, the British Virgin Islands, Bermuda, and Guernsey.

Unlike Sears, for example, which used the threat of moving to extract up to $275 million in tax breaks from Illinois (and then announced it was shutting 100-120 Sears and Kmart stores nationwide), Aon actually is leaving Chicago, although it is only moving the CEO and about 20 employees while changing its legal place of incorporation.

I hate to sound like a broken record, but it bears repeating: what Aon saves in taxes will be borne by the middle class, either through higher taxes, cuts in government programs, or higher government budget deficits. It's time for the Obama administration to do more about tax haven than just talk about reform; it's past time for action.

Sunday, January 15, 2012

U.S. Health Not #1: Deconstructing Legatum Part 2 of 2

As I reported on December 9, London's Legatum Institute issued the 2011 edition of its Prosperity Index, in which the United States scored #1 in health in the world. As Aaron Carroll said, "color me dubious." Yet despite the seeming incongruity of this result, the Legatum Institute is a well-funded think tank that will not be going away any time in the near future. Moreover, one of the key ideas behind the Index is a good one, that we shouldn't measure countries purely on economic outcomes alone -- and it executes this concept with a strong set of outside advisers including the guy who literally "wrote the book" on social capital, Robert Putnam.

The reason that the health sub-index gas the U.S. #1 is, as Carroll pointed out, due to the fact that health care spending per capita is part of the calculation, and the U.S. outspends the next highest spender, Norway, by 66%. In fact, not only is the U.S. #1, it has an index score that is 16% higher than #2 ranked Switzerland. As I discussed December 23, this is backward, because we should be looking at actual health outcomes, not inputs. In that post, I showed how France exceeded the U.S. on almost all objective outcome measures, was about equal on subjective measures like having natural beauty to appreciate, but of course was far behind on health spending per capita. But the Legatum methodology is backward in another critical way.

The variables that are included in calculating the health care sub-index, and the weights given to them, are chosen by how well they perform in regressions for 1) income per capita (natural log) and 2) answers to a Gallup Poll survey on life satisfaction. (See Methodology here.) This is completely backward on the income side: certainly if a population is healthy, it will earn more per capita, but income is a much more important driver of differences in health outcomes by far. For example, if you look at the CIA World Factbook's table of life expectancy at birth, rich countries are at the top and poor countries  are at the bottom. Income aids health both directly and indirectly (through a country's ability to afford clean water and sanitation, for example). In terms of several of the variables in the health index for the income regression, income in fact reduces malnourishment and enables countries to spend more on health and for components such as inoculations.

Because of the use of a methodology that chooses health variables to consider based on whether they are correlated with income or subjective well-being, Legatum included health care spending, on which the U.S. is a gigantic outlier, and followed the results to their extreme conclusion that the U.S. ranks #1 in health despite lagging behind numerous countries in terms of health status outcomes like life expectancy. This undermines our confidence in their other results despite the laudable goal to get beyond a purely economic metric.

Mitt Romney's Steel Dynamics Took Subsidies Not Once, But Twice, Under Bain's Ownership

Mitt Romney touts the virtues of free markets and the dangers of government intervention, yet when Bain Capital became the largest owner of Steel Dynamics in 1994, the company was already looking for state and local incentives for its first plant in DeKalb County, Indiana, according to the Los Angeles Times (h/t Jed Lewison). The same month Bain invested $18.2 million in the company, June 1994, state and local governments in Indiana approved a $77.84 million incentive package after months of negotiations with the company (Fort Wayne Journal Gazette June 23, 1994, via Nexis, h/t Phil Mattera).

The Steel Dynamics subsidy story doesn't end there, however. Four years later, while still owned by Bain Capital, the company got $18 million in local tax incentives for a structural steel mill in Whitley County, Indiana (AP State & Local Wire, October 21, 1998, via Nexis).

Even after Bain cashed out with an $85 million profit, the company continued its subsidy seeking ways, getting state tax incentives and training grants for an expansion in Indiana in 2005 (M2 EquityBites, December 1, 2005, via Nexis), a $52,886 property tax break in Continental, Ohio, in 2007 (Toledo Business Journal, February 2007, via Nexis), and other deals.

The Bain Capital subsidy saga does not end with Steel Dynamics. Phil Mattera of Good Jobs First has the best rundown, covering a total of nine companies Bain owned, including Sealy Mattress, which received $600,000 to move from Ohio to North Carolina.

As Jed Lewison points out, when Romney talks about "crony capitalism," he ought to be talking about himself. Steel Dynamics has from its outset been a subsidy-generating machine, and Bain dove right into it.