Reuters blog archive
from Anatole Kaletsky:
While the world is transfixed by the U.S. budget paralysis, fiscal policies have been moving in several other countries, most notably in Japan and Britain, with lessons for Washington and for other governments all over the world.
Let's start with the bad news: Shinzo Abe’s decision to increase consumption taxes from 5 to 8 percent next April. This massive tax hike, to be followed by another increase in 2015, threatens to strangle Japan’s consumer-led growth from next year onwards, since Abe looks unlikely to offset this massive fiscal tightening with stimulative measures that would maintain consumers’ spending power. Even if Abe delivers on his vague promise to compensate with business tax reductions, these will only aggravate the over-investment and corporate cash hoarding that have long distorted the Japanese economy. Meanwhile, the government’s willingness to risk economic recovery in the cause of fiscal discipline implies that those of us who believed Abe was making an unconditional commitment to do whatever it takes to achieve economic recovery were simply wrong. Now that the forces of budgetary austerity have reasserted themselves, Japan’s probability of ending its decades of stagnation is much reduced.
Now for the good news: a change of attitude to debt and borrowing is transforming Britain from the second-weakest G7 economy (after Italy) into a world champion of growth. As recently as last April, the British government was attacked by the International Monetary Fund’s chief economist for “playing with fire” by trying too hard to reduce its budget deficits. This week the IMF World Economic Outlook praised Britain’s rapidly improving economy and upgraded 2013 growth projections by 0.5 percentage points, to 1.4 percent. That may not sound like much, but this improvement comes when almost every economy is being downgraded -- and compared with last year’s miserable 0.2 percent growth rate, it feels almost like a boom.
Does this experience prove that David Cameron was right to persist with his unprecedented program of spending cuts, tax hikes and fiscal austerity? The answer is no, for two reasons.
from Felix Salmon:
I have a piece up at Architect Magazine on Cooper Union, and the real (if slim) possibility that it will lose the tax break from which most of its current income flows. Cooper Union will get $18 million this year in "tax equivalency payments" stemming from its ownership of the land under the Chrysler Building -- money which would normally flow to New York City in the form of property taxes, but instead gets diverted to Cooper Union for its own uses. Do the math, and that works out to about $18,200 per enrolled student -- a much greater subsidy than New York City provides to any of the students being educated at its own colleges.
Doug Turetsky, of New York City's State's Independent Budget Office, says that if Cooper is going to start charging tuition, then "the public purpose of the unusual tax breaks now mostly a thing of the past," and New York should start collecting property tax on the Chrysler Building rather than letting Cooper Union use all that money for itself. So far, there's no indication that the attorney general agrees with him; as I say in my piece, the time for the AG to crack down on Cooper was in 2006, rather than now, when the removal of the tax break would mean certain death for the college.
from Lawrence Summers:
No one is satisfied with the U.S. corporate tax system. From one perspective the main problem is that at a time when corporate profits are extraordinarily high relative to GDP, tax collections are very low relative to GDP. And many very successful companies pay little or nothing in taxes at a time when the budget deficit is a major concern and when hundreds of thousands of defense workers are being furloughed and lotteries are being held to determine which children Head Start can no longer afford to help. From another perspective, the main problem is that the United States has a higher corporate tax rate than any other major country and, unlike other countries, it imposes severe taxes on income earned outside its borders. Many argue that this unfairly burdens companies engaged in international competition, discourages the repatriation of profits earned abroad, and--because of the patterns of investment that result--benefits foreign workers at the expense of their counterparts.
These two perspectives on corporate taxes seem to point in opposite directions with respect to reform. The former perspective points towards the desirability of raising revenues by closing loopholes, whereas the latter perspective seems to call for a reduction in corporate tax burdens. Little wonder, then, that corporate tax reform debates are so divisive. Many can get behind the idea of “broadening the base and lowering the rate,” but consensus tends to collapse when the issue becomes the means to broaden the base. Indeed a principal objective of many business-oriented reformers seems to be narrowing the corporate tax base by reducing the taxation of foreign earnings through movement to a territorial system.
from Felix Salmon:
Last week's Munk debate featured one of those strange-bedfellow moments, when Paul Krugman agreed with Art Laffer that the tax rate on capital gains should be the same as the tax rate on income. (In fact, Laffer went one step further than that, saying that even unrealized capital gains should be taxed at the same rate.) Normalizing the capital-gains tax rate so that it's the same as the income-tax rate is an easy way to bring a lot of money into the public fisc -- some $161 billion per year, according to the CBO. So why aren't we doing it?
Evan Soltas does his best to answer that question with his "Defense of the Capital-Gains Loophole". Here's the meat of his argument:
from John Lloyd:
For the giants of Silicon Valley, the fall from freedom’s children to social pariah has been something of a Shakespearean reversal of fortunes. Google, Apple and Facebook might be Lear, Othello and Macbeth in the suddenness and completeness of their fall from a grace that was bequeathed to them by the generations that found their technologies liberating, empowering and even beautiful.
These companies are nothing like the robber barons that were rebuked by the U.S. government a century ago. They are not locking out workers or running sweatshops. On the contrary: They’re hiring people. Led by Facebook founder Mark Zuckerberg’s advocacy group FWD.us, they are agitating for immigration laws to be loosened so they can hire clever Chinese, Indian and other citizens and pay them lots of money. Those lucky enough to get into their now-sprawling campuses gain access to a kind of gold-plated welfare state where choices of delicious food, health centers and dental clinics are theirs for the using.
from Edward Hadas:
Apple is the latest multinational to feel the heat on cross-border tax management. The news that the tech giant used Irish law to lower U.S. tax payments should not have been surprising. After all, “Do no evil” Google had no second thoughts about recording what were essentially British sales as Irish, for the sake of a lower tax rate. It’s hardly likely that Apple, which has cultivated a certain anti-establishment air, would have hesitated.
Indeed, until a few months ago, I don’t think there was a corporate treasurer anywhere who would have taken justice into account when deciding on tax strategy. At most, there might be worries about bad publicity, but the well-established corporate practice of tax dodging had generated little attention.
from The Great Debate:
French President Francois Hollande’s predicament is, oddly enough, akin to one Alice faced in Lewis Carroll’s 19th century classic.
A year after taking power, Hollande is buffeted by the lowest popularity of any modern Gallic leader, a record number of jobless, a recession and shriveled business investment – while still needing to cut his budget deficit to hit European targets.
from Felix Salmon:
Every investigative journalist occasionally dreams of what she might be able to do with monster resources and subpoena power. The answer looks something like Carl Levin, whose latest report on Apple's tax strategies is Pulitzer-worthy stuff. When Apple CEO Tim Cook testifies in front of Levin today, it's going to be one of the most uncomfortable grillings of his life. Steve Jobs could be intense -- but Carl Levin, in full flow, is truly formidable.
The first discrepancy I'd love to see Levin clear up is a simple factual one: how much income tax does Apple pay? The various tax years and fiscal years are rather confusing, but in its testimony, Apple says that its income tax payments to Treasury were "nearly $6 billion" in FY2012, for "a US federal cash effective tax rate of approximately 30.5%". (Those numbers imply taxable income of about $19.6 billion.)
Here are comments from a U.S. Treasury official on Secretary Jack Lew’s meeting with incoming Acting IRS Commissioner Daniel Werfel this morning, following a scandal of political targeting that cost the previous acting commissioner his job. Treasury officials knew about the problem as early as last June, according to this report in the Wall Street Journal:
Secretary Lew met with incoming Acting IRS Commissioner Werfel this morning and directed him to conduct a thorough review of the organization in an effort to restore public confidence in the IRS and ensure the organization is providing excellent and unbiased service to the taxpayer. Secretary Lew also requested that he take actions immediately as appropriate, and that within the next 30 days, Werfel report back to the President and him about progress made in three areas: 1) ensuring staff that acted inappropriately are held accountable 2) examine and correct any failures in the system that allowed this behavior to happen and 3) take a forward-looking systemic view at the agency’s organization.
from Chrystia Freeland:
Pity Barack Obama. Everything in his life experience prepared him to be the president who would take on the big challenge of the 21st century: rising income inequality and the hollowing out of the middle class.
His peripatetic youth taught him about the price of plutocracy. In an interview unearthed by Zachary A. Goldfarb of the Washington Post, in 1995 Barack Obama, plugging his autobiography, "Dreams From My Father," recalled that experience for the Hyde Park Citizen, his neighborhood edition of a newspaper that bills itself as the "Premiere African American Weekly" in Chicago.