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Friday, October 19, 2012

Romney's Accountants Busted in New Tax Justice Network Study

When Mitt Romney released the second of his tax returns last month, he also gave us a summary of his 1990-2009 taxes prepared by his accounting firm, PricewaterhouseCoopers (PwC). The whole point of that exercise, aside from trying to distract people from demanding the actual returns, was to muddy the waters and hide behind the supposedly strong reputation of PwC: an accounting firm would never lie, would it?

Of course, this is a silly question on its face. Who do you think designs abusive tax shelters, other than tax accountants and tax attorneys? Now, in a new study by the Tax Justice Network, we see that there is a positive correlation between a jurisdiction's (remember, not all tax havens are independent countries) secrecy index and the number of banks and Big Four accounting firms (PwC, Ernst & Young, KPMG, and Deloitte) per capita present there. The report documents one "leveraged partnership transaction" that PwC both designed and then pronounced to be legally valid (in what is usually termed an "opinion," for which it was paid $800,000), which the U.S. Tax Court strongly criticized as a "conflict of interest" when it upheld the Internal Revenue Service's squashing of this arrangement.

More specifically, we find that the Cayman Islands had the third most Big Four accounting offices per 1000 population at 0.95, compared with just .001 per 1000 for the United States (see Graphs 4 and 5, p. 24, in the report). This density is almost 100 times higher in the Caymans than in the U.S. The Caymans also had more than twice as many banks per 1000 as any other country, at 4.5 per 1000, compared to .023 per 1000 for the U.S. (Graphs 1 and 2). The graph below shows Big Four offices per 1000:
Source: Tax Research UK

Note, too, that Bermuda (which the Romneys also have used) comes in at about .06 per 1000 population, or about 60 times the U.S. rate.

Similarly, we find that comparing the secrecy score of the 20 worst tax havens with the Tax Justice Network's broader list of 71 tax havens and with the G-20 nations shows a much higher mean and median secrecy score in the tax havens than in the non-havens, as the next graph shows.
Source: Tax Research UK

As Richard Murphy, one of the authors of the report, comments at Tax Research UK:
This research lets us conclude that working in conditions of secrecy has become an inherent part of the work of bankers and accountants. It suggests that this has led to a culture of creative non-compliance with laws and regulations, which is likely to increase the potential for, and volume of, crime. At the same time, banks’ and Big 4 firms’ lobbying for laws and regulations that reduce transparency is likely to have resulted in further opacity in the world’s financial system.
This, then, is the world in which Mitt Romney travels, a world in which accounting firms actively seek to create tax avoidance opportunities with little concern for whether they step outside the law's boundaries, and in so doing facilitate the transfer of the tax burden from the 1% to the 99%. In my opinion, PwC's assurances about Romney's tax situation are not worth the paper they're printed on.

Bonus question for President Obama to pose in the third debate: Why is the "McCain precedent" (2 years of tax returns) more important to you than the George Romney precedent (12 years of returns)?

Wednesday, October 17, 2012

Fortune 500 Deferring $433 Billion in Taxes

According to a new report today from Citizens for Tax Justice, the 285 members of the Fortune 500 that have parked money overseas would owe an estimated $433 billion in taxes if and when it is repatriated. No wonder these companies are working so hard to get a "repatriation holiday" even though the one given in 2004 did not yield  any significant new investment, but lots of dividends and stock buybacks.

The new report list 10 companies with $209 billion parked overseas that report the taxes they would owe on these profits (only 47 do so). These companies all report that they would owe 32-35% on their money, which indicates they have not paid any taxes abroad on it; in other words, the money is in tax havens.

Note that some estimates place these figures even higher; in March, I reported that Apple's overseas stash was estimated at $64 billion.

Based on the entire 47 companies that report their estimated tax bill, CTJ came up with an average tax rate of just over 27%. Multiplied by the $1.584 trillion in overseas cash held by the 285 corporations (up from about $1 trillion estimated in March) yields the figure of $433 billion in taxes that would be due if the income were repatriated or the deferral provision for overseas income ended.

What does it all mean? As U.S. companies continue to enjoy record profits, they are declaring them to be foreign profits at a high rate, as we can see in the increase from the March to October estimates. Numerous tech and financial companies have stashed literally tens of billions of dollars, each, in offshore tax havens, which drain billions a year from tax coffers that must be made up with higher taxes on the middle class, larger budget deficits, or cuts in programs. And as we have seen from the two tax returns Mitt Romney has released, there is one tax system for the 1% and another one for the rest of us.

Monday, October 15, 2012

The Folly of Subsidizing Retail

Next to giving subsidies for a company to relocate, or to prevent it from locating, the lease defensible common use of investment incentives is for retail. Why should this be? Let me count the ways.

Most importantly, retail is a derivative economic activity, as David Cay Johnston says. A location's population and income determine how much retail it can support. For this reason, the apparent job creation of retail subsidies is completely phantom, as sales and jobs are simply transferred from older stores to newer locations. The best proof of this is contained in a groundbreaking study by the East-West Gateway Council of Governments, the regional planning agency of the St. Louis metropolitan area.

East-West Gateway's study found that from 1990 to 2007 (i.e., before the financial crisis), the over 100 local governments of the St. Louis metro area had collectively provided over $2 billion in subsidies for malls and other retail facilities. Most of this was in the form of tax increment financing, a popular local subsidy tool in both Missouri (to the tune of $339 million annual average from 2004 to 2006; see p. 7 in the source) and Illinois. Yet, by the end of this 17 year period, there were only 5400 more retail jobs in the metro area than at the beginning. This would total $370,370 per job if the jobs were created by the subsidies; however, it is more likely that they are simply due to income growth in the region. (Note to reporters: This would be a great study to replicate in your area.)

Second, retail jobs are not all that good. Here is a custom graph from FRED showing the nominal wage trend for all production and non-supervisory workers (blue) and for production and nonsupervisory workers in retail (red). As you can see, the wage gap has been increasing for 40 years. As of September, the exact figures were $13.86/hr. for retail vs. $19.81/hr. for all private industries. Moreover, given that the overall total as shown in the graph actually represents a decline in real wages, the decline in retail is much more pronounced.

FRED Graph

In addition to the low pay, retail workers rarely get benefits. According to a new report, only 29% of retail workers get health care benefits, even though half of retail employees have college degrees and 70% are over age 24.

Third, retail does not generate much secondary employment, the way manufacturing does. It does require warehouse jobs, but those generally get subsidized, too, as in the case of Wal-Mart.

The bottom line, then, is simple. Retail is a derivative economic activity that generates almost no new spinoff activity, and local governments (except perhaps in poor areas with food deserts) should not subsidize it. As we have seen in St. Louis, local governments have proven perfectly capable of wasting billions of dollars for temporary gains in sales tax revenues. It's time to stop the madness.