Inversion Acceleration, Part 3

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the concluding part in a three-part article, originally appearing in the May/June issue of Dollars & Sense. Parts 1 and 2 are available here and here.

The Pushback

In an age of fast-eroding economic security, corporate inversions have stirred vast public anxieties and outrage over corporations that seem both rootless and ruthless. Public anger over inversions is mounting, as household incomes continue to fall for tens of millions of Americans and worry about the offshoring of capital and jobs becomes more widespread. An August 2014 poll by Americans for Tax Fairness revealed that more than two-thirds of likely voters disapprove of corporate inversions— 86% of Democrats, 80% of independents, and 69% of Republicans.

Surprisingly, one of the loudest voices to emerge against inversions has been Fortune’s Allan Sloan. Sloan penned a cover story titled “Positively Un-American,” warning, “We have an emergency, folks, with inversions begetting inversions.” Even though Sloan advocates long-term changes that would tilt the tax system further in a pro-corporate direction, he called for immediate action by the Congress and President Obama to stem the tide of inversions. “I still think we need to stop inversions cold right now,” he wrote, “to keep our tax base from eroding beyond repair.”

Besides the drain to the U.S. tax base, Sloan expressed concern about the impact of inversions on Americans’ view of corporate America: “It also threatens to undermine the American public’s already shrinking respect for big corporations.”

The recently announced Johnson Controls inversion dealt a major blow to public trust in America’s largest corporations, reflected in calls by Democratic presidential candidates Bernie Sanders and Hillary Clinton for stiff regulation on inversions.

Johnson Controls’ announcement gave Sanders and Clinton a chance to tap a strong vein of public sentiment. Lashing out at the company in a January 25 media release, Sanders called it and its new partner Tyco “corporate deserters.” Sanders declared, “Profitable companies that have received corporate welfare from American taxpayers should not be allowed to renounce their U.S. citizenship to avoid paying U.S. taxes.”

Clinton blasted Johnson Controls on January 27 at an Iowa campaign stop, stating “I will do everything I can to prevent this from happening, because I don’t want to see companies that thrive, use the tax code, the gimmicks, the shenanigans … to evade their responsibility to support our country.” She also began using a TV commercial aired in Michigan and elsewhere, showing her speaking in front of the Johnson Controls headquarters to denounce the corporation’s inversion.

A Cure Worse Than the Disease

Up until now, conservative Republicans’ control of the House of Representatives has blocked even modest legislation from gaining any traction, despite public outrage against inversions. Using the standard Republican soundbite about the high corporate tax rate driving U.S. firms and jobs overseas, Sensenbrenner, wrote in an op-ed in the Milwaukee Journal Sentinel: “Despite the negative effects the departures of these companies are having on the American economy, it is difficult to blame corporate leaders when you crunch the numbers.”

Similarly, influential hedge-fund tycoon Carl Icahn, although acknowledging the dislocation and insecurity generated by inversions, exempted corporations from any obligation to the United States and laid the blame at the feet of Congress for failing to cut corporate taxes. “Chief executives have a fiduciary duty to enhance value for their shareholders,” he argued in a New York Times opinion piece. “The fault does not lie with them but with our uncompetitive international tax code and with our dysfunctional Congress for not changing it.”

Icahn expressed hope that the public’s sense of urgency about stopping inversions could be shunted away from its current anti-corporate trajectory and instead stampede Congress into lowering corporate tax rates this year. He wrote in the New York Times, “How will representatives and senators, with an election year approaching, explain to their constituents why they are out of work because their employers left the country, when it could so easily have been avoided?”

In pressing for lower corporate taxes in the name of heading off more inversions, corporate and financial figures like Icahn and Republicans are backed by some influential Democrats and self selfdescribed liberals who share an elite consensus on corporations’ absolute “right” to switch their nationalities and to offshore jobs and capital. New York Times business columnist Jeffrey Sommer summarized this consensus in 2014, inadvertently illustrating the vast gulf between elite opinion and majority sentiment. “At this stage of globalization,” Sommer declared, “… most American consumers, investors and politicians have tacitly accepted that if a company is profitable, doesn’t violate the law and produces appealing products and services, it can operate wherever and however it likes.”

Treating corporate investment decisions as sacrosanct regardless of their impact on the public welfare, key Democratic figures like Sen. Charles Schumer (D-N.Y.) and Senate Minority Leader Harry Reid (D-Nev.) are calling for a “tax holiday” on the foreign profits of U.S. corporations. They essentially seek to replicate the holiday declared in 2004 to encourage corporations to “repatriate” foreign profits to the United States by giving them a radically discounted tax rate. The “tax holiday” idea is a particularly counterproductive measure. First, tax holidays reinforce corporations’ use of tax deferrals as they create an incentive for the companies to wait for Congress to capitulate and offer discounted tax rates.

Second, these top Democrats’ backing of a new corporatetax holiday is particularly indefensible given the disastrous outcome of the 2004 holiday. “Advocates said it would create 660,000 new jobs,” pointed out David Cay Johnston. “Didn’t happen. Pfizer brought home the most, $37 billion, escaping $11 billion in taxes. Then Pfizer fired 41,000 workers.”

A Real Solution

If corporate tax avoidance is to be stopped, the most immediate step is ending corporations’ ability to endlessly defer taxes on income which they claim to have generated overseas.

Offshore tax havens enable corporations to routinely engage in a practice called “profit stripping.” With this practice, taxable earnings in the United States are stripped—with costs allocated to the U.S. units and earnings attributed to firms’ foreign subsidiaries. “This kind of accounting alchemy actually works, turning the black tax ink of profit into red ink of debt,” Johnston explained. “You appear as a pauper to government but valuable to investors.”

“Most of America’s largest corporations maintain subsidiaries in offshore tax havens,” reported Citizens for Tax Justice. “At least 358 companies, nearly 72 percent of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014.”

This means a loss of an additional $90 billion to the Treasury, according to Citizens for Tax Justice, apart from the cost of inversions.

It is relatively easy to envision reforms that would give the U.S. tax code a badly needed updating— suited to the current era dominated by the global operations of multinational corporations— to foreclose maneuvers like inversions and the deferral of taxes on foreign earnings.

But serious action on inversions and major loopholes will likely prove impossible as long as our political democracy continues to be eroded by a torrent of campaign contributions from the multinational corporations exploiting the existing tax system.

Until that link—between those who write the big campaign checks and those who write our laws and tax code—is irrevocably broken, our political system will remain impervious to majority sentiment for stiffer taxes and restrictions on corporations’ inversions and the offshoring of capital and jobs.

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Inflation Targeting and Neoliberalism, Part 3

Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. This is the concluding part of an interview in which he discusses the rise of “inflation targeting” around the world. The first two parts are available here and here.

Gerald Epstein

Alejandro Reuss: In your view what would be a preferable approach to central bank policy—what priorities should central banks have and how should they go about achieving these aims?

Gerald Epstein: Central banks should be free and open, in conjunction with their governments, to identify the key problems facing their own countries, the key obstacles to social and economic development, and developing tools and targets that are appropriate to dealing with those problems. And these are going to differ from country to country. So, for example, in South Africa, my colleague Bob Pollin, James Heintz, Leonce Ndikumana, and I did a study a number of years ago: We proposed an employment-targeting regime for the central bank. The Reserve Bank of South Africa, in conjunction with the government of South Africa, would develop a set of policies and tools—such as credit allocation policies, subsidized credit, lower interest rates, capital controls to keep the capital in the country, more expansionary and targeted fiscal policy—so that monetary policy and fiscal policy would work hand-in-hand to lower the massively high unemployment rate in South Africa. That’s an example of an alternative structure for monetary policy and one that has worked for other developing countries. So, for example, in South Korea in the 1950s ,1960s, and 1970s, the central bank supported the government’s industrial policy—by lending to development banks that would lend to export industries, by subsidizing credit for export industries, and they would do this as part of the government plan to develop the economy. I call this developmental central banking, that is, central banking that in combination with the government is oriented to developing the country using a variety of tools—interest rates, credit allocation tools, etc..

Not all countries would do the same thing. It not only depends on the country, but also on the problems of the historical conjuncture. So take the United States for example. Right now we do have for the Federal Reserve a dual mandate, which some Republicans are trying to get rid of, for high employment and stable prices. But the financial intermediation system is broken because of what happened in the crisis. Interest rates are down to zero but banks aren’t lending to the real economy. People aren’t able to borrow from banks for small businesses and so forth. The Federal Reserve, through quantitative easing, bought a lot of financial assets but it’s probably time for the Fed to develop new tools, to give direct credit to small businesses, for infrastructure development, etc.

It is the case now, with the crisis and with negative interest rates, or very low interest rates, central banks are being much more experimental trying to develop new tools, new approaches. But they’re all doing it under the guise of inflation targeting. European central bankers were doing all these wild monetary experiments, but their goal was really just to get inflation up to 2%. In fact, what’s happening is that this inflation targeting is no longer the guiding post for central banks. They have to him have much broader sets of tools and targets to get out of this terrible slump that most of these economies are in.

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Inversion Acceleration, Part 2

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the second part in a three-part article, originally appearing in the May/June issue of Dollars & Sense. Part 1 is available here.

Why Inversions?

The crucial motive in transferring corporations’ “nationality” and official headquarters to low-tax nations is that inversions shield the “foreign” profits of U.S. corporations from federal taxation and ease access to these assets. This protects total U.S. corporate profits held outside the United States—a stunning $2.1 trillion—from any U.S. corporate taxes until they are “repatriated” back to the United States.

Major corporations benefit hugely from the infinite deferral of taxes purportedly generated by their foreign subsidiaries. “If you are a multinational corporation, the federal government turns your tax bill into an interest-free loan,” wrote David Cay Johnston, Pulitzer-Prize winning writer and author of two books on corporate tax avoidance. Thanks to this deferral, he explained, “Apple and General Electric owe at least $36 billion in taxes on profits being held tax-free offshore, Microsoft nearly $27 billion, and Pfizer $24 billion.”

Nonetheless, top CEOs and their political allies constantly reiterate the claim that the U.S. tax system “traps” U.S. corporate profits overseas and thereby block domestic investment of these funds. But these “offshore” corporate funds are anything but trapped outside the United States. “The [typical multinational] firm … chooses to keep the earnings offshore simply because it does not want to pay the U.S. income taxes it owes,” explains Thomas Hungerford of the Economic Policy Institute. “This is a very strange definition of ‘trapped’.”

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After the “Battle of the Century”

What next for debt crisis management?

Bodo Ellmers

Bodo Ellmers is Policy and Advocacy Manager at the European Network on Debt and Development (Eurodad).

In late April, the ‘battle of the century’ between the government of Argentina and a group of vulture funds reached an inglorious end. The government of Argentina finally surrendered and paid the vulture funds in full, at a price tag of more than US $10 billion. The consequences are severe: Argentina started a new cycle of indebtedness; the vulture funds’ predatory business model has been further strengthened and threatens to affect more and more nations; and future debt crisis management in general is in a mess. Now this battle has been lost, the question remains: what next for debt crisis management?

Argentina: back to markets or back to debt crisis?

Argentina had to borrow the money it needed to pay the vultures, thus it returned to financial markets after more than a decade of absence. To the surprise of many financial market observers, the bond issue of the former pariah state was hugely oversubscribed. In the largest emerging market issuance ever, Argentina managed to raise US $16.5 billion in three different bond series that yielded on average 7.2%. This successful return has the caveat that it starts a new cycle of indebtedness. While the government of Argentina hopes that the ‘normalisation’ of financial relations will attract foreign investment, none of these borrowed dollars will be invested productively. The lion’s share of more than US $10 billion went to pay the vulture funds; the smaller share replenished Argentina’s depleted currency reserves, i.e. mainly to refinance capital flight.

The issuance was a perfect deal for investors. It soon turned out that Argentina had sold the bonds too cheaply. Prices surged in the first few days, allowing the banks that were the bookrunners to make quick profits. JP Morgan celebrated: “These yields don’t exist anywhere else in the world in countries with such low levels of debt.”

Argentina’s citizens are paying the price for their government’s strategy of pleasing foreign investors. The recent removal of exchange restrictions has resulted in a 40% currency devaluation and a spike in inflation. Subsidies on essential services have been removed and, by March 2016, 32,000 public service workers had been laid off.

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Inflation Targeting and Neoliberalism, Part 2

Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. This is the second part of an interview in which he discusses the rise of “inflation targeting” around the world. The first part is available here.

Alejandro Reuss: Hasn’t it been a central concern on the part of elites in capitalist countries, at least in those where there is representative government, that the majority could impose its will and force policymaker to prioritize full employment and wage growth (as opposed to, say, “sound money”)? Has the transition toward inflation targeting been accompanied by institutional changes to “wall off” monetary policy from those kinds of popular pressures?

Gerald Epstein: Yeah, I think that’s a very important point here. Inflation targeting ideas have also been often accompanied by the idea that central banks should be “independent”—that is, independent from the government. I think you’ll find that these two things go hand-in-hand. If you look at the whole list of central bank rules that the International Monetary Fund (IMF) and others have advocated for developing countries, the argument goes like this: You want to have an independent central bank. Well, what should this independent central-bank do?It should target inflation. Well, isn’t this anti-democratic? No, what we’re really saying is that central bankers should have instrument independence, that is, the ability to decide how they’ll achieve their target, The government should set the target, but what should target be? Well, the consensus is that the target should be a low rate of inflation. So that’s a nice little package designed to prevent the central bank from doing such things as helping to finance government infrastructure investment or government deficits. It’s designed to prevent the central bank from keeping interest rates “too low,” which might actually contribute to more rapid economic growth or more productivity growth, but might lead to somewhat higher inflation.

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Inversion Acceleration, Part 1

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the first part in a three-part article, originally appearing in the May/June issue of Dollars & Sense.

Corporate “inversions”—the fast-accelerating phenomenon of major U.S. firms moving their official headquarters to low-tax nations through complex legal maneuvers—are causing an annual loss of about $100 billion in federal tax revenues.

But new rules imposed in early April by the U.S. Treasury Department scuttled the mammoth $162 billion deal between pharmaceutical giant Pfizer and Allergan, based on relocating the official headquarters to low-tax Ireland. The Treasury rules are designed to inhibit “serial inverters”—corporations that repeatedly shift their official headquarters to cut U.S. taxes—and to discourage “earnings stripping,” where firms use loans between their American units and foreign partners to reduce U.S. profits subject to federal taxation. The collapse of the Pfizer-Allergan inversion suggests that the Treasury regulations may constitute a major barrier to some future inversions. However, with firms like Johnson Controls and Tyco moving ahead with their inversion plans, stronger measures will clearly be needed to halt the tide.

U.S. corporations have pulled off about 60 inversions over the last two decades, according to Fortune. In the last five years alone, corporations have executed 40 inversions, the New York Times stated.

This fast-rising dimension of corporate globalization has immense implications for Americans. The industrial powerhouse Eaton Corp. (#163 on the Fortune 500), Medtronic, Accenture (formerly the consulting wing of Arthur Andersen), Burger King, and AbbVie (the world’s 11th-largest drug maker) are among the firms that have repudiated their U.S. nationality and shifted their official headquarters to lowtax nations. The annual toll to the U.S. Treasury from corporate inversions is about $100 billion, based on the studies of Reed College economist Kimberly Clausing. This impact is likely to worsen significantly in the near future. Another dozen or more inversions are currently under consideration, according to conservative New York Times business columnist Andrew Ross Sorkin.

Fortune senior writer Allan Sloan, who has been outraged by inversions despite his overall pro-corporate stance, points to powerful vested interests who stand to gain: “There’s a critical mass of hedge funds, corporate raiders, consultants, investment bankers, and others who benefit from inversions.” (The collapse of the Pfizer-Allergan deal could cost just the major banks as much as $200 million, the New York Times reported.) These interests and their political allies have incessantly claimed that American-based multinational corporations are driven to repudiate their U.S. nationality in order to escape “burdensome” U.S. corporate tax rates that they call “the world’s highest.”

In reality, actual federal corporate taxes on 288 profitable corporations —as distinguished from the official 35% rate almost all firms easily avoid—were actually only 19.4% in the 2008-2012 period, a 2014 Citizens for Tax Justice (CTJ) report revealed. This placed the U.S. 8th lowest among the advanced nations in the Organization for Economic Cooperation and Development (OECD), the CTJ found.

A just-released CTJ study went further in its scope and included state and local taxes as well as federal levies in comparing the U.S. with other OECD countries. It found combined U.S. corporate taxes at 25.7%, ranking 4th lowest in the OECD, based on U.S. Treasury figures. The OECD average is 34.1%. Only Chile, Mexico, and South Korea had a lower total burden as a share of GDP.

Despite this reality of low corporate taxes, a growing number of large multinational firms have concluded that repudiating their U.S. “citizenship” and inverting is the most effective means of cutting their tax burdens, avoiding possible reforms that could potentially hike their tax bills, and most importantly, gaining direct and unregulated access to untaxed “offshore” funds.

The 35% Myth

The fundamental realities of U.S. taxes on multinational corporations are obscured by an elite debate fixated on the official statutory rate of 35%, which is relentlessly cited as a barrier to U.S. competitiveness.

House Republican James Sensenbrenner (R-Wisc.), for example, wrote in a recent Milwaukee Journal Sentinel opinion piece, “The current rate paid by American companies is 35 percent—the highest corporate tax rate among developed countries.”

This narrative—endlessly recited by leading corporate and media elites, along with virtually all Republicans and a number of Democrats, has come to dominate much of the national dialogue. Robert Pozen, a senior fellow at the liberal Brookings Foundation, urgently called for a sharp cut in the 35% statutory rate, claiming broad bipartisan support in Congress. “If there’s one policy agreement between Republicans and Democrats, it’s that the 35% corporate tax rate in the United States should be reduced to 28% or 25%,” he asserted. “The current rate, highest in the advanced industrial world, disincentivizes investment and encourages corporations to relocate overseas.”

Even President Barack Obama, while an outspoken foe of inversions, perversely weakened his own case against them by speaking of “companies that are doing the right thing and choosing to stay here, [and] they get hit with one of the highest tax rates in the world. That doesn’t make sense,” as he told a Milwaukee audience in a typical comment.

Obama has thus inadvertently reinforced the conventional wisdom among U.S. elites that is used to justify inversions, as outlined by John Samuels of the International Tax Foundation. “Today, with most of their income and almost all of their growth outside the United States, U.S. companies have a lot more to gain by relocating their headquarters to a foreign country with a more hospitable tax regime,” declares Samuels. “And conversely they have a lot more to lose by remaining in the United States and having their growing global income swept into the worldwide U.S. tax net and taxed at a 35% rate.”

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Drought But Why

Sunita Narain

Jhabua, late 1980s. This tribal, hilly district of Madhya Pradesh resembled moonscape. All around me were bare brown hills. There was no water. No work. Only despair. I still remember the sight of people crouched on a dusty roadside, breaking stones. This was what drought relief was all about—work in the scorching sun to repair roads that got damaged each year or dig pits for trees that did not survive or build walls that went nowhere. It was unproductive work. But it was all that people had to survive the cursed time. It was also clear that the impact of drought was pervasive and long-term. It destroyed the livestock economy and sent people down the spiral of debt. One severe drought would set back development work for years.

The country is once again reeling from crippling drought. But this drought is different. In the 1990s, it was the drought of a poor India. This 2016 drought is of richer and more water-guzzling India. This classless drought makes for a crisis that is more severe and calls for solutions that are more complex. The severity and intensity of drought is not about lack of rainfall; it is about the lack of planning and foresight, and criminal neglect. Drought is human-made. Let’s be clear about this.

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Inflation Targeting and Neoliberalism

Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. In early May, he sat down with Triple Crisis co-editor Alejandro Reuss to discuss the rise of “inflation targeting”—the emphasis on very low inflation, to the exclusion of other policy objectives, in central bank policy-making—around the world. This is the first of three parts.

Part 1

Alejandro Reuss: When we talk about central banks and monetary policy, what precisely is meant by the phrase “inflation targeting”? And how does that differ from other kinds of objectives that central banks might have?

Gerald Epstein: Inflation targeting is a relatively new but very widespread approach to central bank policy. It means that the central bank should target a rate of inflation—sometimes it’s a range, not one particular number, but a pretty narrow range—and that should be its only target. It should use its instruments—usually a short-term interest rate—to achieve that target and it should avoid using monetary policy to do anything else.

So what are some of the other things that central banks have done besides try to meet an inflation target? Well, the United States Federal Reserve, for example, has a mandate to reach two targets—the so-called “dual mandate”—one is a stable price level, which is the same as an inflation target, and the other is high employment. So this is a dual mandate. After the financial crisis there’s a third presumption, that the Federal Reserve will look at financial stability as well. Other central banks historically have tried to promote exports by targeting a cheap exchange rate. Some people have accused the Chinese government of doing this but many other developing countries have targeted an exchange rate to keep an undervalued exchange rate and promote exports. Other countries have tried to promote broad-based development by supporting government policy. So there’s a whole range of targets that, historically, central banks have used.

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When Commodity Prices Fall

C.P. Chandrasekhar and Jayati Ghosh

There was a period in the 2000s when primary commodity prices appeared to have bucked their long term trend of stagnation or decline. As Chart 1 shows, between the trough of December 2001 and the peak of August 2008, the price index for all primary commodities (in US dollar terms) rose by 445 per cent, that is nearly four and a half times.

Chart 1

chandrasekhar and ghosh--commodity prices--fig 1

This increase came after a decade of relative stagnation in nominal dollar prices (which reflected a decrease in relative prices of commodities) over the previous decade. The strength and rapidity of the increase in prices over the 2000s led some analysts to argue that changing patterns of global production and consumption meant that there would be secular tendencies towards increase in such prices in the medium term. In particular, the more rapid growth of and therefore increased demand from China, India and other “emerging markets” was seen to indicate a structural shift in global demand that would generate continued increases in primary commodities prices for some time.

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“Free Trade” In Trouble in the United States

Martin Khor

“Free trade” seems to be in deep trouble in the United States, with serious implications for the rest of the world.

Opposition to free trade or trade agreements emerged as a big theme among the leading American presidential candidates.

Donald Trump attacked cheap imports especially from China and threatened to raise tariffs. Hillary Clinton criticised the Trans-Pacific Partnership Agreement (TPPA) which she once championed, and Bernie Sanders’ opposition to free trade agreements (FTAs) helped him win in many states before the New York primary.

That trade became such a hot topic in the campaigns reflects a strong anti-free trade sentiment on the ground.

Almost six million jobs were lost in the US manufacturing sector from 1999 to 2011.

Wages have remained stagnant while the incomes of the top one per cent of Americans have shot up.

Rightly or wrongly, many Americans blame these problems on US trade policy and FTAs.

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