Tax Justice Network Inaugurates Podcast Series, TaxCast

The Tax Justice Network has just begun making podcasts on issues of tax havens, tax evasion, and so forth. Called TaxCast, the first podcast contains the following:

In our inaugural TaxCast, we discuss the implications of the Vodafone vs India landmark tax case, compare Bill Gates and Mitt Romney’s attitudes to taxation and visit the Occupy camp outside St Paul’s Cathedral in London.

 You can subscribe to the TaxCast RSS feed at http://taxcast.libsyn.com/rss 

Expensive Subsidies Help State and Local Governments Drag Down Recovery

The release of gross domestic product data on Friday highlighted how the contraction of state and local governments has been a drag on economic recovery since the end of the official recession. As Nicholas Johnson of the Center on Budget and Policy Priorities explains, 2011 was the third straight year that state and local government output has fallen, reaching -2.3% in 2011, the worst since 1944, as shown in the chart below.




Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009.

As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.

It's important to emphasize that from a national point of view, this spending actually creates very few new jobs. While a multi-hundred-million incentive may appear to attract a new automobile assembly plant in one state, this will be offset by reduced sales from existing plants, which eventually leads to one closing (James Rubenstein, in 1992, indeed found a one-to-one relationship of auto plants opening and closing in North America). Similarly, local governments in the St. Louis metropolitan area poured over $2 billion in subsidies to retail between 1990 and 2007, with the net increase in jobs, 5400 ($370,370 per job!) not exceeding the percentage increase in local income, according to a report by the regional planning organization, the East-West Gateway Council of Governments. In other words, no jobs were actually created by these incentives, as the growth in retail would have occurred anyway due to income growth.

While it would not offset the entire state/local budget deficit, cutting subsidies would go a long way toward that goal, allowing the "Fifty Herbert Hoovers" to rehire workers and cut less from their budgets. Moreover, it would reduce income inequality slightly by ending these transfers from average taxpayers to subsidy recipients who are richer on average.

Basics: America's Relative Decline in Health in One Table

I've reported before on how the U.S. has seen less life expectancy growth than other rich countries, while at the same time increasing health care spending at a more rapid rate. Another way to see America's relative decline in health outcomes is through the evolution of life expectancy compared to all rich countries over a longer period of time. The World Bank's World Development Indicators database goes back to 1960 and its most recent figures are for 2009. We can see, then, what has happened over a 49-year period.

The table below includes all members of the Organization for Economic Cooperation and Development, excluding former Communist countries (most of which were not independent in 1960) and Israel (for which World Bank data does not go back to 1960). Of the 27 OECD members included, only four (Denmark, Iceland, Netherlands, and Norway) have seen less growth in life expectancy since 1960, and Sweden's growth has been the same at 8.3 years. Only two OECD members today have a lower life expectancy than the U.S., and both (Mexico and Turkey) are much poorer than the U.S. South Korea and Chile, both developing countries in 1960, have now surpassed the U.S. in life expectancy.

While health outcomes have certainly improved over the last 50 years, we can see from the table just how small those gains are relative to what other countries have been able to achieve. And remember, these gains have come at much greater economic cost.

Country Name		2009	1960	Increase
Australia		81.5	70.8	10.7
Austria		80.1	68.6	11.5
Belgium		79.7	70.1	9.7
Canada		80.7	71.1	9.5
Chile		78.8	57.0	21.7
Denmark		78.6	72.2	6.4
Finland		79.7	68.8	10.9
France		81.1	69.9	11.2
Germany		79.8	69.6	10.2
Greece		80.2	68.7	11.5
Iceland		81.5	73.4	8.0
Ireland		79.5	69.7	9.8
Italy		81.4	69.1	12.3
Japan		82.9	67.7	15.3
Korea, Rep.		80.3	53.0	27.3
Luxembourg		80.1	68.3	11.8
Mexico		76.5	57.0	19.4
Netherlands		80.5	73.4	7.2
New Zealand		80.3	71.2	9.1
Norway		80.8	73.5	7.2
Portugal		78.7	63.0	15.7
Spain		81.5	69.1	12.4
Sweden		81.4	73.0	8.3
Switzerland		82.0	71.3	10.7
Turkey		73.4	48.3	25.2
United Kingdom		80.1	71.1	8.9
United States		78.1	69.8	8.3

Jon Stewart Delivers the Goods on Mitt Romney's Taxes

Mitt Romney claims to simply have been following the law in how he paid his taxes for 2010 and 2011. As we have seen, he was able to use the carried interest loophole (taxing hedge fund managers' fees as if they were profits and therefore subject to the 15% capital gains rate rather than being ordinary income) to reduce his tax rate below 14%. But how is that loophole still in existence, despite a bipartisan effort to kill it in 2007?

Building on a recent New York Times story*, Jon Stewart spilled the beans on Romney tonight. On "The Daily Show" (via Mediate, h/t @Phostir), Stewart poses and answers that question. Starting at 3:27 into the clip, Stewart notes Romney's claim to be simply following the tax laws as written. He hows a 2007 video of co-sponsor Sen. Charles Grassley (R-Iowa) talking about how heavily lobbied it was. At 4:51, Stewart answers the question of who was fighting repeal: The Private Equity Council, started in 2007 by, among other firms, Bain Capital. He then plays a clip of Romney himself telling a TV reporter he "doesn't think it's a good idea to raise taxes" in response to a question about this bill.

What Stewart has laid bare for all to see, of course, is exactly how much influence Romney had on the laws that today he claims simply to be following. I'm shocked, shocked... Occupy Wall Street proven right once again.


* "As Romney Campaign Advances, Private Equity Becomes Part of the Debate," NYT, Jan. 11, 2012, p. A17, via Lexis-Nexis Academic.

New Reports Highlight Bad Companies, Variable State Subsidy Enforcement

In case you missed it, two reports came out last week highlighting two of my favorite topics, tax havens/tax avoidance and economic development. The first is "Representation Without Taxation," a report identifying the Dirty Thirty companies that paid more for lobbying than they did in taxes. The second is "Money Back Guarantees for Taxpayers," a study of state enforcement of subsidized companies' job commitments.

"Representation Without Taxation" was published by the U.S. Public Interest Research Group and Citizens for Tax Justice. It combines data on the taxes of the 280 Fortune 500 companies that were profitable in every year from 2008 through 2010 with what they spent on lobbying. Of the Dirty Thirty, they write:

These companies so deftly exploited carve outs and loopholes in the tax code that all but one of them enjoyed a negative tax rate over the three year period of the study, while spending nearly half a billion dollars to lobby Congress on issues including tax policy. Altogether they collected $10.6 billion in tax rebates from the federal government.

Ordinary American taxpayers and small businesses must pick up the tab when major corporations avoid their taxes. Spread out over every individual tax filer in America, the taxes avoided by the Dirty Thirty break down to an average of $481 per taxpayer over the three years.

Remember, this is just for 30 companies! On the list are well-known names like General Electric (a $4.7 billion refund on $10.5 billion in U.S. profits, $84 million in lobbying!), DuPont, Verizon, Boeing, Wells Fargo, and Mattel. At least 22 of the firms had subsidiaries in tax havens.

I disagree with the report's use of the term "tax subsidy" to describe the results of tax avoidance, but I wholeheartedly agree with its major recommendations to fight tax havens: end deferral of foreign profits, treat U.S.-controlled foreign subsidiaries as domestic for tax purposes, and reporting profits country by country rather than in consolidated fashion (Publish What You Pay).

Good Jobs First released "Money Back Guarantees for Taxpayers," a look at states' use of clawbacks against subsidized companies that fail to keep their job promises. The result was a "good news, bad news" pattern: On reporting job performance, the good news is that 90% of 238 programs studied require it, but the bad news is that in 78 cases there is no verification of the job numbers. On clawbacks, the good news is that 178 programs had penalties and another 41 were pay-for-performance (the subsidy is not paid until the jobs are created), but the bad news is that for 84 programs, the penalties can be waived.

I should note the recent trend by some companies to demand "no clawbacks" in their agreements, as for example in the recent case of Electrolux in Memphis.

The worst news is that states disclose very little of their enforcement action: For example, only 38 programs publish the names of companies that don't fulfill their job commitments, and a mere 14 programs publish information on which companies are penalized and how much.

Combining scores for what states require from subsidy recipients (from last month's Good Jobs First Report "Money for Something") with clawback scores, the states with the best programs are Vermont, North Carolina, and Nevada. The three worst are DC, Alaska, and North Dakota.

As you can see, we have plenty of work cut out for us in both of these issue areas. Both reports should find their way to your virtual library

Feedburner Feeds Now Available

I've been doing some technical updating this weekend. As a result, you can now subscribe through Feedburner in your reader or via email. Apparently, there is now an option to redirect the existing subscriptions into the Feedburner feed. Please let me know in comments if you have any experience with this sort of thing and whether it's a good idea or not.

In addition, I have added a set of links to my most popular posts. Because for some reason Blogger Stats went down when I had "The Massachusetts Miracle" posted, it does not show up in proper #3 slot (according to my Google Analytics data). I guess that's technology...

I hope you enjoy these features!

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."