And so it begins.
The UK elections are over, and though neither major party won a clear majority, the conservative Tories intend to try and form a government with the Liberal Democrats. Business news has focused heavily on this election hoping for a clear path forward on cutting government spending, and to gauge the prevailing political appetite for cutting government services. (British election: What it means for the UK and the US)
On a show taped Thursday, Charlie Rose hosted an interview with Byron Wien (Blackstone Advisory Services LP), Barton Biggs (Traxis Partners) and Roger Altman (fmr Deputy Treasury Secretary, then founder and chairman, Evercore Partners). They focused on the the market glitch, but they couldn’t help quickly moving from this to what markets think worries them: the tension between levels of government debt (evidently, their own thin capital requirements and the elevated loads of consumer debt, which benefits banking, is much less worrisome), and the political turmoil expected from getting rent-seeking proposals they want: funding reductions for society’s safety net.
After a discussion on the stock market glitch, which lead to a discussion of underlying worries about Greece’s sovereign debt crisis, which lead to the inevitable doom-filled climax: the US budget deficit:
Charlie Rose: “And so what should the president be doing, Roger…the President of the United States?”
Roger Altman: “Well of course he’s put together a deficit reduction commission, and it’s going to report by December first. We’ll see what it comes up with. I’m actually not optimistic that the commission will reach consensus. But I am optimistic that it will put forward a blueprint for a package of spending restraint and revenue increases that would address this. And then in 2011, the president may take, I think he will, make an effort to put together at least the first step in that regard. I happen to think that will be a Social Security agreement, rather than addressing the whole thing in one step, but I think the president is going to, in 2011, try to demonstrate his seriousness about this, in order to stave off what otherwise, as I’ve said, could be the type of ugly and punitive impact on the United States which could blow up his whole presidency.”
Byron Wien: “But Roger we’re runnng a trillion six in budget deficit this year. And it’s going to be over a trillion next year and the year after. Maybe for a few years. Are we willing to cut the social programs, Medicare, Social Security, defense? That’s what you have to do. You really have to attack the major portions of the budget deficit. You can cut out foreign aid, the national endowment of the arts, the earmarks…you won’t get anywhere. You won’t get anywhere if you do that. You’ve got to really go at some critical programs.”
Barton Biggs: “We don’t want to be too pessimistic. I mean, there are other ways we can get out this, the world can get out of this dilemma. And the United States financial statistics looked very similar to this in 1947. And how did we get out of it? We grew our way out. We had substantial growth in both real GDP and nominal GDP. And so one way we get out of it is by controlling the deficit but by growing the economy getting some inflation. And we’re going to have some inflation.”
Roger Altman: “But Barton there’s one big difference. We had this much debt in relation to the size of our economy in 1947 because we had financed an enormous war effort, and the arsenal of democracy. It was by definition temporary, thank god. We’ve gotten into this problem for entirely different reasons. And if you put aside World War II, we’ve never been on a path to have debt in relation to the size of our economy of this amount since record keeping started in 1792. Ever. Now we’re on the path there, and the question is, how long will the markets allow us to stay on that path? I think some intermediate term period of time, but not indefinitely. And this is the biggest risk to President Obama’s entire presidency.”
Byron Wien: “The United States is also in a very different competitive position today, than it was in 1947. World War II had devastated Europe and Asia, the United States had an intact manufacturing capability. It maintained industrial leadership from 1945 ’til 1980. At that point, Europe was back on its feet, Japan was producing automobiles and consumer electronics products we wanted to buy, and we began to lose our competitive position. Today, China and India and other countries are much more formidable competitive force than any country in the world was at that point in time.”
The underlying assumption these bankers and traders (who know each other very well) take for granted is that the only solution to our own economic woes is the enforcement of fiscal discipline. Reducing benefits to Medicare, Social Security, and other social programs (and defense – I imagine traders and bankers regard the fact that the US spends as much on its military as the rest of the world put together as much unnecessary waste as we do here. It is way past time this was discussed.) We’ve heard it all before, and we’ll here this many times again in the coming months: essentially a revival of Reagan’s “welfare queen” message. According to business, the news from Greece these days has but one lesson (by chance, its on my TV right now, once again). Deficit reduction must consist of cuts to entitlement program spending. That’s what we have in store, and this is what we are told is the “inevitable” lesson from Greece.
Get ready to hear lots more of this.
The Other Side of the Coin
But then there is this: What The Top U.S. Companies Pay In Taxes:
“As you work on your taxes this month, here’s something to raise your hackles: Some of the world’s biggest, most profitable corporations enjoy a far lower tax rate than you do–that is, if they pay taxes at all.
The most egregious example is General Electric ( GE – news – people ). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.”
General Electric, whose financial arm, GE Capital, which has “displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain)” would, stripped of GE Capital, have something like a 22% tax liability.
And GE is not alone. Far from it. I’ve seen different figures for this, however in one study, Pak and Zdanowicz can account for $53 Billion in lost tax revenues through egregious transfer pricing abuse alone.
Abuse of transfer pricing is but one way multinational corporations manage their tax liabilities using devices unavailable to ordinary taxpayers. The extent that the federal government loses revenues through various loopholes that business has fought for and won is unknown, but the loss is, by all consensus, enormous.
Viewing The Forest . . .
A survey of corporate tax evasion reveals that the practice has become standard business behavior, and this has been documented in a pair of GAO reports – one: 1996 to 2000 (pdf) and two: an update, including 1998 to 2005 (pdf) – requested by Senators Byron Dorgan and Carl Levin:
“A majority of all corporations reported no liabilities during these years with a higher percentage of FCCs [Foreign Controlled Corporations] doing so than USCCs [US Controlled Corporations], an estimated average of 71 percent and 61 percent, respectively. However, the results were reversed for large corporations with a greater percentage of large USCCs reporting no tax liability.”
From MSN Money Central’s story on multinational corporations sheltering enough revenues overseas to eliminate their entire US tax liabilities:
|Companies with a tax bill of zero:|
|Tax year||Foreign returns||U.S. returns|
|1996||46,791 (67.6%)||1,360,566 (60.3%)|
|1997||50,625 (71.7%)||1,331,638 (60.9%)|
|1998||50,671 (71.8%)||1,335,000 (61.0%)|
|1999||50,149 (72.3%)||1,310,280 (61.2%)|
|2000||50,688 (73.3%)||1,332,239 (63.0%)|
But wait! There’s more!
“Despite that, more than 21% of the $302 billion in tax refunds distributed last year went to corporations, IRS data show.”
There is a reasonable case to make for companies that are young (and this case is made in the second GAO report) and still struggling to develop sustainable revenues, and it may be justifiable for older, more established companies running on low margins, whose products have become more like commodities than what we normally think of with other manufactured goods (think microchips), but US and foreign corporations operating in the US, with huge revenues and global reach are engaging in several kinds of tax arbitrage.
Some oil companies, as it turns out, pay a respectable amount of US taxes, only because many oil exporting states have tax rates higher than those in the US, which doesn’t prevent oil companies from sheltering revenues from countries like Kyrgyzstan in tax havens like the Bermuda or the Cayman Islands, some of the many countries named by the IMF as Offshore Financial Centers (pdf).
Banking is evidently better in the Bahamas too.
The Price Wall Street Must Pay . . .
Which brings me back to the Charlie Rose interview. Not one of these bankers/traders had any thought at all that this de facto tax evasion on the part of multinational corporations was part of the problem, only, I strongly suspect, that fair taxes paid by businesses would lessen American competitiveness (they mean their profitability).
Maybe so. In my view, it is extremely doubtful that the US can grow, and/or inflate our way out of the debt morass we are in. Certainly, the markets won’t believe this until they see it, hence the extreme, record setting volatility in the stock market lately. I remember in the 1960’s and 1970’s, growth in consumer debt levels were viewed with alarm. Alan Greenspan changed that. The economic expansion of the Greenspan era was a myth, based on unrealistic assumptions about everyone’s ability to maintain high levels of
debt Greenspan dollars, and a view of debt itself that was overly benign, equally unrealistic, and business friendly.
If Wall Street hopes that social spending can be cut while their competitive advantages over US taxpayers remain in place without experiencing political turmoil here in the US, I expect they are deluding themselves. The only thing corporations can do that would alleviate this would be to address the lower middle class’ needs. That class that once worked in mills, on assembly lines, and sweated out the long, long hours building local businesses, and who could yet afford to raise a family in a home of their own.
I don’t know how we get there, but that’s the only way out of this mess, and I don’t believe anyone has a roadmap to show us the way. I just don’t think we get there unless everyone, especially Wall Street, gets a haircut. And that haircut includes paying those taxes that the rest of Americans do not have the outlets available to legally avoid.
So if deficit reduction is indeed the central economic issue of the coming years, as market supporters seem to insist, then Wall Street must, at the very least, expect the political price to be to either pay their fair share of taxes or to focus on rebuilding the bottom tiers (the non-management part) of the American middle class, and the picture these facts paint should be front and center in any debate on financial and economic policy.