Ted Cruz's Tax Haven Past

A version of this post was previously published at US News and World Report's "Economic Intelligence" blog: http://www.usnews.com/opinion/blogs/economic-intelligence/2013/10/25/ted-cruz-will-vote-against-tax-haven-reform
Reprinted here under the terms of my contract with US News and World Report.

Time (h/t TPM) reports that Texas Senator Ted Cruz invested $6000 in a company with his college roommate/debate partner, David Panton, which has turned into at least $100,000. While this is true on paper and required Cruz to make multiple amendments to his Senate financial disclosures, the story is of more interest to me for Cruz’s use of a tax haven company.

The tax haven in this case is the British Virgin Islands. Caribbean Equity Partners Limited was founded by Panton, Cruz, and two other partners in 1998. Cruz’s $6000 plus help starting the firm gave him a 10% ownership stake, according to a spokesperson for Cruz in response to my email inquiries. The other partners owned 30% apiece, she said.

Caribbean Equity Partners Limited consisted of two separate units, Caribbean Equity Partners Limited (Jamaica) and Caribbean Equity Partners Limited (BVI). Cruz held stock in both of them. In the Jamaica corporation, he held 100 regular shares plus 250 Class “C” Preference Shares. He held 5000 shares of the British Virgin Islands-incorporated company. This information comes from a Certificate of Divestiture dated January 6, 2003, filed when his wife, Heidi Cruz, took a job in the Department of the Treasury, one of many documents published by Time (see link above). The Cruz spokesperson confirmed his ownership in both companies.

This divestiture, about five years after the company was founded, netted Cruz $100,000, consisting of $25,000 in cash and a $75,000 promissory note from a different company, CEP Investments Holdings Limited. This firm is headquartered in Jamaica but domiciled for tax purposes in the British Virgin Islands, Cruz told Time. He also told the magazine that it is “effectively” a promissory note from Panton, as the company is owned by Panton. Based on what the Time story describes as an “oral provision” with Panton to pay reasonable interest on the note, it has now grown to over $100,000 in value as noted in an October 1 amended disclosure and confirmed by the Cruz spokesperson. As the promissory note shows, it was originally scheduled to have been paid December 31, 2003, but according to Cruz’s spokesperson he and Panton have an oral agreement to postpone payment indefinitely. (For this reason, his $6,000 investment may never grow beyond the $25,000 he has already collected.)

Cruz’s ownership of a firm with a tax haven-based unit does not augur well for him to oppose tax havens, as did some Republicans in the past. Notably, former Senator Norm Coleman (R-Minnesota) co-sponsored the Stop Tax Haven Abuse Act of 2007. Moreover, we find from opensecrets.org that Cruz has received campaign contributions from Goldman Sachs (where his wife now works) PAC and Credit Suisse Group PAC, in addition to tens of thousands of dollars from employees of the two companies. According to the Government Accountability Office, as of 2009 Goldman Sachs had 29 tax haven subsidiaries, including 15 in the Cayman Islands and one in the British Virgin Islands. Credit Suisse, of course, is a Swiss bank under criminal investigation for assisting at least some of its American clients to commit tax evasion.

Bottom line: Senator Cruz is almost certainly a vote against tax haven reform.

Cruz’s spokesperson also issued a statement: “This story is much ado about nothing.  It concerns a 15-year-old business venture from which Sen. Cruz entirely divested more than a decade ago.  He holds no equity interest in any Caribbean business, and has not had any such interest, compensation, or income for more than 10 years. Upon divesting from the venture in early 2003, the Senator received a partial payment and also a promissory note from his business partner and college roommate.  That promissory note--on which [Time’s] entire article is based-- is technically still owed (and thus was voluntarily disclosed), but it has never been paid and Sen. Cruz has never attempted to collect on it.”

Columbia U. Conference on Investment Incentives

On November 13 and 14, the 8th Annual Columbia International Investment Conference will be held in New York City. Sponsored by the Vale Columbia Center on Sustainable International Investment, the conference is titled: "Investment Incentives -- the Good, the Bad, and the Ugly: Assessing the Costs, Benefits, and the Options for Policy Reform."

The meetings will focus primarily on location subsidies for foreign investment, and primarily in developing countries. But there will also be plenty of coverage of North America and the European Union, as well as discussion of global institutions and regimes. Louise Story, author of the very valuable New York Times series, "The United States of Subsidies," will moderate the first panel.

As the conference materials lay out in greater detail, "The aim of this year’s Conference is to advance our understanding about the role that incentives have played in attracting and retaining foreign direct investment; the policy rationales supporting or discouraging various types of incentives; the strategies that may be more effective at achieving the objectives of host governments; and the potential for future coordinated action on these issues."

I will be speaking during the Thursday afternoon panel on the topic of controlling investment incentives (what else?). There will be an outstanding roster of panelists, both academics and practitioners. If you're interested in the topic and will be in the vicinity, you should attend. Registration is free, but also required in advance. You can register at the link above.

Irish Austerity Exodus Continues

The Eurozone experiment in austerity continues to fail as the peripheral countries endure ongoing cuts. Following up on my post of August 15, it's time to look at the most recent Irish immigration data to update it through April 2013 (Ireland records population data from May 1 to April 30) and see how it affects the reported unemployment rate. The picture remains ugly, with emigration climbing once again, from 87,100 in 2011-2012 to 89,000 in 2012-13. Immigration increased by 3200, so net emigration fell by 1300, with net out-migration over the year declining by about 3% to 33,100. Here are the details:

	Year ending
		April 2012	April 2013
	Immigration	52,700	55,900
	Emigration	87,100	89,000
	Net migration	-34,400	-33,100
	of which Irish nationals	-25,900	-35,200

Source: Central Statistics Office Ireland


Take a good look at the last line: Net emigration by the Irish themselves increased by 35.9% and accounts for all net out-migration; there was net in-migration by non-Irish citizens of 2100 in 2012-13. Indeed, the Irish comprised 57.2% of all emigrants in the most recent report.

What was the effect of emigration on the unemployment rate? Once again in 2013, people in the age group closest to what we would consider prime-age workers (15-64, given how Ireland reports immigration by age groups; see Table 4 of the linked report) left the country at a higher rate than children and seniors, with total out-migration for those 15-64 of 35,300. That brings total out-migration for population years 2010-2013 to 126,000.

Since April 2013 data is a much better match for Ireland's official first-quarter 2013 unemployment data than April 2012 was, I am going to repeat my calculation from August, still using Q1 2013 unemployment of 13.7% as my base. Again, there were 292,000 officially unemployed in the first quarter; dividing by 0.137 gives an estimated workforce of 2,131,387. We now add 126,000 to numerator and denominator to get the maximum potential unemployment rate, which would exist if all 126,000 were in the labor force and unemployed: 418,000/2,257,387, or 18.5%.

Even if we add in only those in the most prime working-age group in the Irish statistics, those from 25 to 44 years old, we still find that the imputed unemployment rate exceeds the country's maximum during this crisis of 15.1%. 2013's 12,500 net out-migration in this age group brings the 2010-2013 total to 48,500; adding this to the numerator and denominator gives us 340,500/2,179,887 or 15.6%.

Paul Krugman points out that we can also see this by looking at Ireland's employment rate. Over 2.1 million were employed in the third quarter of 2007; in the second quarter of 2013, the number is still far depressed at 1,869,900, which represents a 1.8% increase from a year earlier.

Finally, the overall picture for the EU and the eurozone has deteriorated over the previous year: EU unemployment rose from 10.6% in August 2012 to 10.9% in August 2013 (most recent month available), while eurozone unemployment rose from 11.5% in August 2012 to 12.0% in August 2013. Both figures were down a hair from several months earlier. But in Greece, new records continue to be set, with unemployment in June 2013 (most recent month available) hitting 27.9%. By contrast, as Eurostat shows, unemployment has steadily declined in the United States and Japan.

Unfortunately and unsurprisingly, the evidence that austerity has failed in Europe still is not affecting EU policy, nor has it stopped the cacophony of voices in the United States calling for more austerity. While Republicans supposedly "lost" the government shutdown crisis, they succeeded in locking in sequester-level government spending until the next crisis, and sequester II will be here soon. God help us.

Cross-posted at Angry Bear.

Median Wealth Increases, but U.S. Still Stuck at 27th in World

The new Global Wealth Report and Global Wealth Databook from Credit Suisse were released last week. According to the Report (p. 3),

Global wealth has reached a new all-time high of USD 241 trillion, up 4.9% since last year and 68% since 2003, with the USA accounting for 72% of the latest increase. Average [mean] wealth per adult reached a new all-time high of USD 51,600, with wealth per adult in Switzerland returning to above USD 500,000.

For the United States, this represents an increase in mean wealth per adult of 11.4% from mid-2012 to mid-2013 (Databook, p. 92). Median wealth per adult increased even faster, from $38,786 to $44,911, or 15.8%, although we should recall that measurement of median wealth is less reliable than that for mean wealth.

Nonetheless, while these data represent improvement for the typical American, there was no change in our ranking relative to the rest of the world. While Kuwait and Cyprus fell below the U.S., Slovenia and, more surprisingly, Greece now have higher median wealth per adult. Thus, the United States remains only 27th in the world.

These data are significant for at least two reasons. First, they highlight the fact that while the United States has a higher gross domestic product per capita than all but four of the 26 countries ahead of it in median wealth per adult (Qatar, Luxembourg, Singapore, and Norway), the long-term trend of economic policies has clearly hurt the middle class. Inequality is a big part of the explanation here: mean wealth per adult in the U.S. is 6.7 times median wealth per adult, the highest ratio in the top 27. By contrast, in #1 Australia the mean-to-median ratio is only 1.8:1. In fact, this ratio is less than 3:1 for 19 of the 26 countries with higher median wealth per adult. In Slovenia, mean wealth per adult is less than 1.5 times median wealth per adult! (All figures calculated from Databook, Table 3-1.)

Second, these low levels of wealth contribute to the coming retirement crisis of the middle class. Americans have low levels of saving, while Social Security still looks vulnerable to the chopping block despite our already high level of elder poverty.

Here are the top 27 countries by median wealth per adult.

Country                                                      Median Wealth
                                                                   Per Adult

1.  Australia                                                    $219,505
2.  Luxembourg                                               $182,768
3.  Belgium                                                     $148,141
4.  France                                                        $141,850
5.  Italy                                                           $138,653
6.  United Kingdom                                         $111,524
7.  Japan                                                         $110,294
8.  Iceland                                                      $104,733
9.  Switzerland                                               $  95,916
10. Finland                                                     $  95,095
11. Norway                                                    $  92,859
12. Singapore                                                 $  90,466
13. Canada                                                     $  90,252
14. Netherlands                                              $  83,631
15. New Zealand                                            $  76,607
16. Ireland                                                      $  75,573
17. Spain                                                        $  63,306
18. Qatar                                                        $  58,237
19. Denmark                                                  $  57,675
20. Austria                                                     $  57,450
21. Greece                                                      $  53,937
22. Taiwan                                                      $  53,336
23. Sweden                                                     $  52,677
24. United Arab Emirates                                 $  51,882
25. Germany                                                   $  49,370
26. Slovenia                                                    $  44,932
27. United States                                            $  44,911

Source: Credit Suisse Global Wealth Databook, Table 3-1

Cross-posted at Angry Bear.

Governing Through Ungovernability

It's 2011 all over again. House Republicans are once more threatening to force the country into default by not raising the government's debt ceiling. Markets are beginning to get nervous with default only a week away. Fidelity, the country's largest manger of money market funds, has sold off all its government debt maturing in late October and early November.

Unlike 2011, the government is shut down, throwing hundreds of thousands of government workers out of work and reducing gross domestic product by billions of dollars. On the good side, President Obama so far has refused to negotiate over the shutdown or the debt ceiling. Of course, he is haunted by his unforced error of negotiating in 2011, giving us the sequester that even a "clean" continuing budget resolution won't fix.

What we see is the Republican usurping governance of the country by making the nation ungovernable if their demands are not met. They lost the Presidency in 2012, they lost Senate seats, they got fewer votes in the House of Representatives than the Democrats did, but with brilliant gerrymandering they still have a House majority.

Amazingly, the Republicans no longer even seem to know what they want for their hostage-taking. At first it was clear, they wanted Obamacare repealed/defunded/delayed. Now, it appears they just want budget cuts, preferably to Social Security and Medicare. Inadequate as those programs are, they are still central to middle class economic security. We can't give them up.

I'm back to where I can't turn on the TV. I live in fear the President will cave as he did in 2011. But what will it take to actually end the crisis? I'm guessing a huge stock market drop will be required. And I think that's exactly what will happen. What do you think?

A $1000/month pension equals $200,000 in savings CORRECTED

On the road today, but my wife referred me to this article by Lynn Parramore* (originally published here) on how the 401(k) "revolution" was a big bust for the middle class, something I have also written about. I just wanted to add one quick point to her discussion.

Parramore references the common recommendation that you have at least $1 million in savings to retire. This is usually related to the "rule" that you can take 4% of your savings per year and not exhaust it. That would give you $40,000 per year in income. However, with low interest rates and flat stock market performance (the S&P 500 just topped its 2000 peak this spring), even 4% may be too high as you run a greater risk of outliving your savings.

The flip side of that rule, which I haven't seen mentioned anywhere else, is that a $1000 per month pension equals at least $300,000 in savings, as $300,000 times 4% is $12,000 per year. If 4% is too high, then its value is even greater. If you can only take 3% of your savings per year safely, it would be equal to $400,000 in savings, for example. about $200,000 in savings, as it wold take about that amount to buy a $1,000 per month annuity (see Lyle's comment below).

This shows how important it is to protect pensions where they do exist, primarily at the state and local government level. They are being chipped away at varying rates, mainly but not exclusively in red states. Oregon, for example, looks set to cut state pensions in a special legislative session via reductions in cost of living adjustments similar to the idea of using a less generous inflation measure for Social Security to provide backdoor cuts.

It should be obvious that this is even more true for Social Security, since everyone is eventually eligible for benefits. That is why I have argued that expanding Social Security is the best solution to the coming middle class retirement crisis.


* Disclosure: Lynn Parramore is the editor at AlterNet who commissioned my article there on state and local government subsidies to business.

Cross-posted at Angry Bear.

Nauseating Health Care Idiocy from Forbes

A non-blogging friend points me to this new article at Forbes by Chris Conover purporting to show that the "typical family of 4" will see its health care spending rise by $7450. He quotes the Center for Medicare and Medicaid Services (CMS), saying "in its first ten years, Obamacare will boost health spending by 'roughly $621 billion' [that's the CMS quote]  above the amounts Americans would have spent without this misguided law." How stupid is this? Let us count the ways.

First of all, this is not $7450 per year, but over the entire 10-year (or more likely 9-year; he usually refers to 2014-22) period. So he's hyping shock value that isn't there. As he explains, he divides the $621 billion by total population over the period to give a per capita cost, which he then multiplies by 4 to get the cost to his "typical family of 4." So what we're actually looking at, before we start tearing up his calculation, is ($7450/9)/4 = $207 per capita higher spending per year on average. Recall that in 2011 the United States spent $8174.90 per person on health care (see link on how to navigate to the ultimate source for this data, stats.oecd.org).

Second, Conover doesn't understand present value. He writes, "Of course, all these figures are in nominal dollars. In terms of today’s purchasing power, this annual amount will rise steadily." Of course, it is just the opposite. A dollar in 2022 is worth less than a dollar today. In 2013 dollars, the amount is less than $207 per person per year (how much less depends on what you consider an appropriate discount rate). How does an editor not catch this? I have a screen shot to memorialize the error after it eventually gets fixed.

Third, Think Progress's Igor Volsky is completely right when he quotes Paul van der Water of the Center on Budget and Policy Priorities that none of this will apply to the "typical American family" because that family gets its insurance at work. More money will obviously be spent over time, but it won't be spent at the center of the health insurance distribution, if you want to look at it that way. But Conover can't see this point. Instead, he points the finger at President Obama for promising that the ACA would reduce premiums for the typical family by $2500 per year. Not only do two wrongs not make a right, but...

Point four is that what he says is impossible just isn't: "It’s simply not possible for national health spending to rise by $621 billion and for the “typical” family to expect a $2500 (per year!!!!) premium reduction." I don't know if it will happen, but it certainly isn't impossible. Conover is overlooking the fact that the increase in health spending is being funded in ways that don't come out of individual health care spending. High-income taxpayers ($200,000 single, $250,000 filing jointly) are paying 0.9% points more in Medicare tax and an extra 3.8% on investment income. According to Robert Pear of the New York Times, "The new taxes on wages and investment income are expected to raise $318 billion over 10 years, or about half of all the new revenue collected under the health care law." The medical device tax will raise $29 billion over 10 years, over $100 billion will come from insurance companies, $34 billion from drug companies, and $150 billion from the "Cadillac" tax, according to the Obama administration. (We can debate the wisdom of this tax, but it doesn't fall on the "typical" family.) We're already at $631 billion over 10 years. If we increased these taxes more, yes, we could use the money to fund premium reductions, most plausibly by increasing the income levels eligible for subsidies.

Then, there's the little matter of the newly insured. By 2022, according to the CMS report Conover cites, 30 million more people will have insurance than would be the case without Obamacare. While many of those people will be receiving subsidies, a lot of them will be paying something for their insurance, adding even further to the sources of income that don't come out of what the "typical family" will pay.

Finally, the new 30 million people will be covered very efficiently. $621 billion divided by 9 years is $69 billion per year, divided by 30 million people is $2300 per person per year. While that figure is too low because we won't be insuring all 30 million immediately, remember that 2011 U.S. health spending per capita was $8174.90. Any way you look at it, the newly insured will be costing far less per person than those currently in the insurance system.

There you have it. Forbes' most-read story of the day (with over 26,000 Facebook shares and 3400 tweets as I write this) is simply false. Between all the new taxes and the premiums from the newly insured, you can cover the total increase in health care spending. The typical, already insured family isn't going to see increases due to the rise in overall health care spending. You add 30 million new insured at a far lower cost than what we currently spend per person. And the editors didn't catch a blatant error on present value.

Cross-posted at Angry Bear.