Eurostat, the European Union's statistical agency, reports that unemployment continues to worsen in the Eurozone, adding further evidence for the failure of the world's biggest experiment in austerity. When we last checked in in March, the January data had just been released. This week's release takes us to the end of March.
Select Unemployment Rates
Date Eurozone Spain Greece Portugal Ireland UK USA EU-27
1/2012 10.7% 23.3% 19.9% 14.8% 14.8% 8.3% 8.3% 10.1%
3/2012 10.8% 24.1% 21.7% 15.3% 14.5% 8.2% 8.2% 10.2%
Note: Greece and UK figures are for November 2011 and January 2012, rather than January and March
Source: Eurostat, 2 May 2012
Overall, Eurozone and EU unemployment continue to worsen, although there were reductions in the UK and Ireland. However, both Britain and Ireland returned to recession, along with Belgium, Greece, Italy, the Netherlands, and Portugal.
While Friday's jobs numbers were disappointing, the U.S. is still moving in the right direction, though hardly fast enough, with positive job growth and a falling unemployment rate at 8.1%.
The good news, for both Europe and the U.S., is that Europeans are beginning to wake up to the failure of austerity. The Dutch government has collapsed over its austerity measures, and it appears that Nicholas Sarkozy will go down to defeat for the same reason. As Krugman counterposes to these results, the Right in this country is keeping up a steady drumbeat for austerity It's important that we beat back such calls, or even millions more people will suffer needlessly when their policies increase unemployment.
UPDATE: And Sarkozy goes down in another defeat for the austerity caucus.
Saturday, May 5, 2012
Thursday, May 3, 2012
Living Wage Law Passes in New York City
On Monday, New York's City Council passed a living wage ordinance, reports Good Jobs New York's Bettina Damiani. The 45-5 vote means the Council can easily override a threatened veto by Mayor Michael Bloomberg (New York Post, May 1, via Nexis subscription service).
As I analyzed in Competing for Capital, the Living Wage movement attempts to reform, rather than abolish, economic development subsidies. The basic idea is the same as performance requirements in international investment negotiations, i.e., that a company that receives subsidies has to provide additional benefits to the city providing those incentives. As its name suggest, the most common demand is that subsidized firms have to pay a specified wage that is higher than the usual minimum wage. According to Living Wage NYC, over 140 cities in the U.S. have living wage ordinances, and the idea has spread to the U.K., Canada, and New Zealand.
In New York's case, the law specifies that companies receiving at least $1 million in subsidies must pay $10/hour if they provide health benefits, or $11.50/hour otherwise. This is not a lot of money in New York City, yet a study by the Fiscal Policy Institute, Good Jobs New York, and the National Employment Law Project found multiple cases where subsidized projects paid even less, such as the Bronx Gateway Mall, which the study found had starting wages of $8.80 per hour. According to the study, the city spends over $2 billion annually on economic development incentives.
Mayor Bloomberg blasted the measure as a "jobs killer," language reminiscent of minimum wage critics. We should remember that, according to Paul Krugman (Conscience of a Liberal) recent studies of the minimum wage do not uphold the long-claimed negative effects of the minimum wage on jobs. In fact, work beginning with that of David Card and Alan Krueger (now the chair of the Council of Economic Advisers) deftly picked apart previous studies in a process known as meta-analysis.
The biggest drawback to the New York law is that it was narrowly drawn by Council Speaker (and probable mayoral candidate) Christine Quinn in order to appease business interests. In fact, according to the Post story, it would affect "at least 600 employees a year," which is hardly a big number in New York. But we can count on advocates to try to expand its scope in the next few years.
As I analyzed in Competing for Capital, the Living Wage movement attempts to reform, rather than abolish, economic development subsidies. The basic idea is the same as performance requirements in international investment negotiations, i.e., that a company that receives subsidies has to provide additional benefits to the city providing those incentives. As its name suggest, the most common demand is that subsidized firms have to pay a specified wage that is higher than the usual minimum wage. According to Living Wage NYC, over 140 cities in the U.S. have living wage ordinances, and the idea has spread to the U.K., Canada, and New Zealand.
In New York's case, the law specifies that companies receiving at least $1 million in subsidies must pay $10/hour if they provide health benefits, or $11.50/hour otherwise. This is not a lot of money in New York City, yet a study by the Fiscal Policy Institute, Good Jobs New York, and the National Employment Law Project found multiple cases where subsidized projects paid even less, such as the Bronx Gateway Mall, which the study found had starting wages of $8.80 per hour. According to the study, the city spends over $2 billion annually on economic development incentives.
Mayor Bloomberg blasted the measure as a "jobs killer," language reminiscent of minimum wage critics. We should remember that, according to Paul Krugman (Conscience of a Liberal) recent studies of the minimum wage do not uphold the long-claimed negative effects of the minimum wage on jobs. In fact, work beginning with that of David Card and Alan Krueger (now the chair of the Council of Economic Advisers) deftly picked apart previous studies in a process known as meta-analysis.
The biggest drawback to the New York law is that it was narrowly drawn by Council Speaker (and probable mayoral candidate) Christine Quinn in order to appease business interests. In fact, according to the Post story, it would affect "at least 600 employees a year," which is hardly a big number in New York. But we can count on advocates to try to expand its scope in the next few years.
Monday, April 30, 2012
Whiny Apple Pioneered Avoidance Strategies, Books Fictional Tax Rates
If you haven't yet seen The New York Times article on Apple, go read it. I'll wait. It's a blockbuster.
As I wrote last month, Apple whines about the fact that it has to pay taxes. But of course, it does much more than whine. It sets up subsidiaries in tax haven states like Nevada to avoid U.S. state taxes, and establishes foreign tax haven subsidiaries in order to avoid U.S. and other government's taxes. Then, through the magic of transfer pricing, profits made in high-tax jurisdictions becomes taxable only in Nevada, Ireland, Luxembourg, etc. The Times reports estimates by Martin Sullivan that this saves Apple $2.4 billion a year in U.S. federal taxes alone, not to mention what it save in U.S. states or foreign countries. This is a conservative estimate, based on only 50% of its profits being due to U.S. operations. A more realistic 70% allocation of profits to the U.S. would mean that Apple's federal tax bill would be $4.8 billion higher, according to Sullivan.
Based on extensive interviews with former Apple executives as well as accountants for other firms, Charles Duhigg and David Kocieniewski show that not only does the company practice extensive legal avoidance of its taxes, but that the firm pioneered several of the most important tax avoidance techniques out there:
Here's the kicker: Even "cash taxes" is not a figure that accurately represents a given year's tax payments, according to The Times.
As Richard Murphy points out, while Apple's tax strategy is no doubt all legal ("perfectly legal," as in the title of David Cay Johnston's great book), "It's also profoundly unethical." Apple largely rejects its duty to help pay for living in a civilized society, even as state (like its home of California) and national governments flounder with debt. Its behavior forces one or more of three outcomes, as I have written many times before: shifting the tax burden to others, more government debt, or program cutbacks. Apple's behavior shows that it's clearly okay with that.
The solution starts with Murphy's innovative "country-by-country" reporting, which does not require the tax havens to cooperate because all the information would be supplied by the company. Then, as I noted in November, we need worldwide unitary taxation to strip out the artificiality of companies' allocation of assets and profits. We could treat Apple's (and Microsoft's, and...) "ownership" of patents in Ireland as the fiction it is, and force these companies to pay their fair share of taxes.
As I wrote last month, Apple whines about the fact that it has to pay taxes. But of course, it does much more than whine. It sets up subsidiaries in tax haven states like Nevada to avoid U.S. state taxes, and establishes foreign tax haven subsidiaries in order to avoid U.S. and other government's taxes. Then, through the magic of transfer pricing, profits made in high-tax jurisdictions becomes taxable only in Nevada, Ireland, Luxembourg, etc. The Times reports estimates by Martin Sullivan that this saves Apple $2.4 billion a year in U.S. federal taxes alone, not to mention what it save in U.S. states or foreign countries. This is a conservative estimate, based on only 50% of its profits being due to U.S. operations. A more realistic 70% allocation of profits to the U.S. would mean that Apple's federal tax bill would be $4.8 billion higher, according to Sullivan.
Based on extensive interviews with former Apple executives as well as accountants for other firms, Charles Duhigg and David Kocieniewski show that not only does the company practice extensive legal avoidance of its taxes, but that the firm pioneered several of the most important tax avoidance techniques out there:
Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.Not only that: Apple paid, according to The Times article, $3.3 billion in "cash taxes" on its $34.2 billion of worldwide profits, for a 9.8% tax rate, as opposed to the $8.3 billion the company's 10-K report said it paid. As the article notes:
“The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”Some commenters on my article last month actually cited these 10-K figures as proof that nothing was amiss at Apple. As it turns out, the company's reporting has other major gaps. Its 2011 10-K Annual Report states that it has only two "significant" foreign subsidiaries, both based in Ireland. Apparently its Luxembourg subsidiary -- with over $1 billion in 2011 sales, according to The Times -- is not significant. Nor are its subsidiaries in the Netherlands and the British Virgin Islands, despite their importance in keeping Apple's worldwide taxes low. Because Apple only deems its Irish subsidiaries "significant" and does not report on any others' existence, the Government Accountability Office report of 2008 on tax haven subsidiaries was misled into saying that the company had only one such subsidiary. We can only wonder how many other tax haven subsidiaries are omitted from companies' SEC filings.
Here's the kicker: Even "cash taxes" is not a figure that accurately represents a given year's tax payments, according to The Times.
As Richard Murphy points out, while Apple's tax strategy is no doubt all legal ("perfectly legal," as in the title of David Cay Johnston's great book), "It's also profoundly unethical." Apple largely rejects its duty to help pay for living in a civilized society, even as state (like its home of California) and national governments flounder with debt. Its behavior forces one or more of three outcomes, as I have written many times before: shifting the tax burden to others, more government debt, or program cutbacks. Apple's behavior shows that it's clearly okay with that.
The solution starts with Murphy's innovative "country-by-country" reporting, which does not require the tax havens to cooperate because all the information would be supplied by the company. Then, as I noted in November, we need worldwide unitary taxation to strip out the artificiality of companies' allocation of assets and profits. We could treat Apple's (and Microsoft's, and...) "ownership" of patents in Ireland as the fiction it is, and force these companies to pay their fair share of taxes.
Saturday, April 28, 2012
U.S. Leads Rich Countries in Mortality Rate for 10-24 Year Olds
In a depressing example of poor health outcomes in the United States, The Economist (via The Incidental Economist) shows that for 10-24 year olds, the mortality rate (deaths per 100,000 population) is considerably worse in the U.S. than in comparable rich countries (24 other OECD members plus Cyprus, Malta, and Singapore).
At about 59 deaths per 100,000, the U.S. rate was double that of South Korea, Sweden, Germany, Switzerland, Japan and the Netherlands, and almost triple the rate of Singapore. As the graph below shows, the U.S. has the highest level of deaths from traffic accidents (though not much higher than Portugal, New Zealand, or Greece). However, as the story points out, the U.S. has by far the highest rate of deaths in this age group due to violence: 8.9 per 100,000, which appears from the graph to be about three times the rate for second-place Israel. The story notes that the violent death rate in Britain is only 1/18th that of the U.S. for this age group.
The U.S. is further back on the suicide rate, where New Zealand is worst at about 12 per 100,000, followed by Finland at approximately 11, and Japan and Ireland about 10.
For "other" causes of death (disease plus non-auto accidents; thanks to commenter Marc Brown at The Incidental Economist for clarification of this point), Portugal narrowly leads the United States.
What does this mean for policy? Certainly automobile use is not going to change much any time soon, absent huge increases in gas prices and better mass transit and high-speed rail. Of course, as Thomas Friedman has advocated, the U.S. could force the price of gas up by raising the gasoline tax by $1-2 per gallon, but no one in a position to make this even possible advocates it. America's gun policies, similarly, will not change any time soon. According to a survey by Hepburn et al. (2006), Americans currently own somewhere between 260 to 305 million firearms. If the Supreme Court upholds the constitutionality of the Affordable Care Act, health insurance coverage will increase, perhaps slightly lowering mortality rates for some diseases.
In the near term, then, it appears unlikely that the mortality rate will change very much. Sorry that there's nothing less depressing to report. I'd be interested to hear your views on these issues, since obviously I have just scratched the surface here.
At about 59 deaths per 100,000, the U.S. rate was double that of South Korea, Sweden, Germany, Switzerland, Japan and the Netherlands, and almost triple the rate of Singapore. As the graph below shows, the U.S. has the highest level of deaths from traffic accidents (though not much higher than Portugal, New Zealand, or Greece). However, as the story points out, the U.S. has by far the highest rate of deaths in this age group due to violence: 8.9 per 100,000, which appears from the graph to be about three times the rate for second-place Israel. The story notes that the violent death rate in Britain is only 1/18th that of the U.S. for this age group.
For "other" causes of death (disease plus non-auto accidents; thanks to commenter Marc Brown at The Incidental Economist for clarification of this point), Portugal narrowly leads the United States.
What does this mean for policy? Certainly automobile use is not going to change much any time soon, absent huge increases in gas prices and better mass transit and high-speed rail. Of course, as Thomas Friedman has advocated, the U.S. could force the price of gas up by raising the gasoline tax by $1-2 per gallon, but no one in a position to make this even possible advocates it. America's gun policies, similarly, will not change any time soon. According to a survey by Hepburn et al. (2006), Americans currently own somewhere between 260 to 305 million firearms. If the Supreme Court upholds the constitutionality of the Affordable Care Act, health insurance coverage will increase, perhaps slightly lowering mortality rates for some diseases.
In the near term, then, it appears unlikely that the mortality rate will change very much. Sorry that there's nothing less depressing to report. I'd be interested to hear your views on these issues, since obviously I have just scratched the surface here.
Wednesday, April 25, 2012
April TaxCast is Available
The Tax Justice Network has just released the April edition of its podcast, TaxCast (via Tax Research UK). Among the highlights:
In the wake of the Indian Supreme Court's decision on Vodaphone, India will retroactively change its tax laws to make Vodaphone's tax dodging illegal. Britain's Chancellor of the Exchequer, George Osborne criticizes India over this despite recently doing the same thing himself! (The United States has also passed tax laws with retroactive effect.) In addition, India has pledged to adopt a general anti-avoidance principle strong than anything OECD countries have done.
The European Parliament has passed a resolution calling for country-by-country reporting of corporate accounts (Publish What You Pay), criticizing the weak EU tax information exchange agreement with Switzerland, and setting automatic information exchange as the desired basis for fighting tax evasion and avoidance.
And much more...Check it out!
In the wake of the Indian Supreme Court's decision on Vodaphone, India will retroactively change its tax laws to make Vodaphone's tax dodging illegal. Britain's Chancellor of the Exchequer, George Osborne criticizes India over this despite recently doing the same thing himself! (The United States has also passed tax laws with retroactive effect.) In addition, India has pledged to adopt a general anti-avoidance principle strong than anything OECD countries have done.
The European Parliament has passed a resolution calling for country-by-country reporting of corporate accounts (Publish What You Pay), criticizing the weak EU tax information exchange agreement with Switzerland, and setting automatic information exchange as the desired basis for fighting tax evasion and avoidance.
And much more...Check it out!
Tuesday, April 24, 2012
Social Security Hurt by Republican Jobs Obstructionism
The Center for Economic and Policy Research (CEPR) published its commentary on Monday's release of the Social Security Trustees Report, which found that the Social Security trust fund would be exhausted in 2033. CEPR rightly blames the recession for the deterioration of Social Security's finances. As I argued last September with regard to falling health care coverage, the new results from the Trustees show the need for a jobs agenda.
In fact, in just four years, the estimated trust fund exhaustion date (intermediate assumption) has gotten eight years closer. It was 2041 in the 2008 report, 2037 in the 2009 report, 2037 in the 2010 report, and 2036 in the 2011 report. Jared Bernstein charts these trends going back to 1985:
Source: Trustees Reports. via Jared Bernstein.
The CEPR analysis highlights just how crucial jobs are to Social Security's solvency:
Yet what is the Republican response to this situation? At the federal level, there has been universal opposition to anything that might create more jobs as long as Obama is President. At the state and local level, as Paul Krugman points out, 70% of the decline in public sector jobs has come in Texas and in the states where Republicans took control of government in 2010.
What we see from the Trustees Report is that as jobs and income decline, Social Security is directly harmed. And I'm starting to have the feeling that for the Republicans, this is a feature, not a bug.
In fact, in just four years, the estimated trust fund exhaustion date (intermediate assumption) has gotten eight years closer. It was 2041 in the 2008 report, 2037 in the 2009 report, 2037 in the 2010 report, and 2036 in the 2011 report. Jared Bernstein charts these trends going back to 1985:
Source: Trustees Reports. via Jared Bernstein.
The CEPR analysis highlights just how crucial jobs are to Social Security's solvency:
As workers have found themselves without jobs, Social Security has received fewer contributions. The 2007 Trustees' Report projected 169.0 million workers in 2011 earning $6.5 trillion in taxable earnings. Last year, there were only 157.7 million workers earning $5.5 trillion.In other words, there was a $1 trillion shortfall of income in 2011 alone compared to the pre-recession baseline. If this doesn't highlight the need for much greater action on the jobs front, nothing does.
Yet what is the Republican response to this situation? At the federal level, there has been universal opposition to anything that might create more jobs as long as Obama is President. At the state and local level, as Paul Krugman points out, 70% of the decline in public sector jobs has come in Texas and in the states where Republicans took control of government in 2010.
What we see from the Trustees Report is that as jobs and income decline, Social Security is directly harmed. And I'm starting to have the feeling that for the Republicans, this is a feature, not a bug.
Saturday, April 21, 2012
Greg Mankiw Doesn't Understand Competition for Investment
Greg Mankiw's column in
Sunday's New York Times makes
the case that competition between governments is a good thing, that
it makes them more efficient in the same way that competition among
firms does. He paints it as also being about choosing
redistributionist policies or not, with Brad DeLong and Harold Pollack both ably making the case that of course governments should
engage in redistribution.
As
author of Competing for Capital,
however, I am more interested in the question of whether government
competition for investment leads to more efficient outcomes. The
answer, in short, is that it does not. Indeed, competition for
investment leads to economic inefficiency, heightened income
inequality, and rent-seeking behavior by firms (a further cause of
inefficiency).
Mankiw
claims:
...competition
among governments leads to better governance. In choosing where to
live, people can compare public services and taxes. They are
attracted to towns that use tax dollars wisely....The argument
applies not only to people but also to capital. Because capital is
more mobile than labor, competition among governments significantly
constrains how capital is taxed. Corporations benefit from various
government services, including infrastructure, the protection of
property rights and the enforcement of contracts. But if taxes vastly
exceed these benefits, businesses can – and often – move to
places offering a better mix of tax and services.
Mankiw doesn't stop to think about what this competition looks like in the real world. To attract mobile capital, immobile governments offer a dizzying array of fiscal, financial, and regulatory incentives to companies in sums that have been growing over time for U.S. state and local governments, as I document in Competing for Capital and Investment Incentives and the Global Competition for Capital. His discussion centers on the reduction of corporate income tax rates, which is surely a part of the competition, but which is no longer an issue when an individual firm is negotiating with an individual government.
At that level, the issues then become more concrete: Can we keep our employees' state withholding tax? Can we get out of paying taxes every other company has to pay? Will you give us a cash grant? The list goes on and on. As governments make varying concessions on these issues, you then begin to see the consequences: discrimination among firms (especially to the detriment of small business); overuse and mis-location of capital as subsidies distort investment decisions; a more unequal post-tax, post-subsidy distribution of income than would have existed in the absence of incentive use (a corollary of the fact noted by Mankiw that "capital is more mobile than labor"); and at times the subsidization of environmentally harmful projects. Moreover, many location incentives are actually relocation incentives, paying companies at times over $100 million to move across a state line while staying in the same metropolitan area, with no economic benefit for the region or the country as a whole (Cerner-OnGoal, now in Kansas rather than Kansas City, is a good case in point).
Once upon a time, about 50 years ago in this country, companies made their investment decisions based on their best estimate of the economic case for various locations without requesting subsidies. On the rare occasion when a company did ask for government support, it was at levels that would appear quaint today. For example, when Chrysler built its Belvidere, Illinois, assembly plant in the early 1960s, it asked for the city to run a sewer line out to the facility--and it even lent the city the money to do it.
Today, companies have learned that the site location decision is a great opportunity to extract rents from immobile governments, and invest considerable resources into doing just that. An entire industry has sprung up to take advantage of businesses' informational advantages over governments--and, indeed, intensify that asymmetry--to make rent extraction as effective (not "efficient"!) as possible.
At that level, the issues then become more concrete: Can we keep our employees' state withholding tax? Can we get out of paying taxes every other company has to pay? Will you give us a cash grant? The list goes on and on. As governments make varying concessions on these issues, you then begin to see the consequences: discrimination among firms (especially to the detriment of small business); overuse and mis-location of capital as subsidies distort investment decisions; a more unequal post-tax, post-subsidy distribution of income than would have existed in the absence of incentive use (a corollary of the fact noted by Mankiw that "capital is more mobile than labor"); and at times the subsidization of environmentally harmful projects. Moreover, many location incentives are actually relocation incentives, paying companies at times over $100 million to move across a state line while staying in the same metropolitan area, with no economic benefit for the region or the country as a whole (Cerner-OnGoal, now in Kansas rather than Kansas City, is a good case in point).
Once upon a time, about 50 years ago in this country, companies made their investment decisions based on their best estimate of the economic case for various locations without requesting subsidies. On the rare occasion when a company did ask for government support, it was at levels that would appear quaint today. For example, when Chrysler built its Belvidere, Illinois, assembly plant in the early 1960s, it asked for the city to run a sewer line out to the facility--and it even lent the city the money to do it.
Today, companies have learned that the site location decision is a great opportunity to extract rents from immobile governments, and invest considerable resources into doing just that. An entire industry has sprung up to take advantage of businesses' informational advantages over governments--and, indeed, intensify that asymmetry--to make rent extraction as effective (not "efficient"!) as possible.
Finally, let's reflect on the force that makes this process happen, capital mobility. The fact that capital has far greater ability to move geographically than labor does, and that governments of course are geographically bound to one place, is a source of power for owners of capital. Modern economists, especially conservatives and libertarians, often have great difficulty acknowledging the role of power in market transactions, though their ostensible hero, Adam Smith, did not. To treat this power as a natural phenomenon rather than a social one, as Mankiw does, is dangerously close to saying that might makes right. But that's not the way things are supposed to work in a democratic society, or a moral one.
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