Opinion

Ben Walsh

from Counterparties:

Inverted tax logic

Ben Walsh
Jul 30, 2014 21:42 UTC

Tax arbitrage trend stories are rare – the last time we had one was the summer of 2012 when carried interest was all the rage. Now we have another. Corporate America’s hottest new tax avoidance strategy is the inversion. This structure has everything: acquisitions of non-U.S. domiciled companies, presidential umbrage at a lack of C-suite patriotism, unreliable data, proposed but unlikely to ever be enactedlegislation, and Mark Cuban twirling a basketball and tweeting his opinion.

Matt Yglesias explains the nuts and bolts of how tax inversions work. American Company A acquires Non-American Company B. If Company B is based in a country with lower corporate tax rates than the U.S. – and it probably is because the U.S. has the highest statutory rates in the developed world – “the merged company will probably domicile itself for tax purposes in Company B's country. In a pure tax inversion... Company A would be acquiring Company B not so much to obtain its technology or its brand or its supply chain but its tax status.”

Unlike most trend stories, this one has solid data backing it up. Reuters’ Kevin Drawbaugh reported in April that since 2008, about two dozen companies completed tax inversions, “versus about the same number over the previous 25 years.” Drawbaugh says the most desired tax residences are Britain, Canada, Ireland, the Netherlands, and Switzerland. The UK is particularly attractive for pharmaceutical companies, the WSJ reports, because patent-related revenue is taxed at just 10 percent, versus the 35 percent nominal U.S. corporate tax rate.

So what can or should be done? Treasury Secretary Jack Lew has proposed effectively ending this type of acquisition. Lew, along with the Economist and seemingly everyone in Washington, D.C., thinks the better solution is comprehensive corporate tax reform.Paul Krugman thinks a wide-ranging debate on corporate taxes is fine, but shouldn’t stop quick action on inversions.

There is solid evidence that tax inversions do lower the amount of taxes companies pay to the U.S. Martin Sullivan studied the rise of inversion and the fall of effective tax rates in the oil and gas industry. And tax inversions, he noted, don’t happen in a vacuum. They’re also, “accompanied by planning techniques that strip income out of the United States.” Corporations are simply paying a much, much smaller share of taxes than they used to. Tax inversions are just part of that trend. — Ben Walsh

from Counterparties:

Weeding out the prison population

Ben Walsh
Jul 28, 2014 22:13 UTC

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The New York Times’ editorial board – America’s barometer of what cautious, moderately liberal elites are supposed to think  – wants America’s war against weed to end. States, they say, should be allowed to make their own marijuana policies. And states already are: nearly three-quarters have reformed their marijuana laws to legalize all use, medical prescriptions, or cut the consequences of possession.

Reforming America’s marijuana laws, along with the rest of its war on drugs, seems like the just thing to do. Vox’s German Lopez writes that based on a study by the American Civil Liberties Union, “blacks were 3.73 times more likely to be arrested than whites for marijuana possession, with the black arrest rate at 716 per 100,000 and the white arrest rate at 192 per 100,000 in 2010.” Lopez shows that racism is endemic in the enforcement of drug laws, affecting everything from sentence lengths to the neighborhoods targeted by police SWAT teams.

The policing costs alone of enforcing the criminalization of marijuana are almost $8 billion annually. America spends a staggering $80 billion on prisons and jails each year: with just 5 percent of the world’s population, it has 25 percent of the world’s inmates (17 percent of all people in U.S. prisons are there for drug offenses. In federal prisons, the number is a jarring 50 percent.)

from Counterparties:

A guide to Paul Ryan’s anti-poverty plan

Ben Walsh
Jul 24, 2014 21:42 UTC

Like Ronald Reagan, Paul Ryan thinks that we’ve lost the war on poverty. Ryan, the chairman of the House Budget Committee, released a draft anti-poverty plan today. About 45 million Americans are living in poverty — making less than $23,850 for a family of four — and Ryan’s proposal would “shift the federal government's anti-poverty role largely to one of vetting state programs to distribute aid,” Reuters’ David Lawderreports. Benefits would be distributed by a single agency or charity group, and recipients would be required to set up and follow a contract to receive benefits.

James Pethokoukis pithily scores the approach as “Thomas Aquinas 1, Ayn Rand 0” — more caritas, and less ruthless, laissez faire libertarianism. Josh Barro says the plan is a huge change for Republican policy because it’s not a spending cut. Instead, “as drafted, it would not increase or decrease federal spending on anti-poverty programs.”Reihan Salam describes today’s proposals as “the most ambitious conservative anti-poverty agenda since the mid-1990s,” and argues that Ryan’s main objective is “combatting entrenched poverty” by offering a “a useful distinction between situational poverty, in which individuals fall on hard times” briefly, and “generational poverty.”Research shows more Americans are affected by the former, but Ryan argues policy does not sufficiently address the latter.

Jared Bernstein, a former White House economist, disagrees with Ryan’s assumption that U.S. anti-poverty programs are structurally flawed, arguing that there is nothing “fundamentally wrong with the safety net.” Government programs cut the poverty rate almost in half compared to the pure market outcome, he says. More than that, Bernstein highlights the point made by the Center of Budget and Policy Priorities’Robert Greenstein: the safety net is a great investment in the long-term outcomes of its beneficiaries and should not necessarily be tied to short-term requirements of a contract.

from Data Dive:

Facebook leaves niche competitors behind

Ben Walsh
Jul 23, 2014 20:38 UTC

These are good times for Facebook. The social media site reported second quarter earnings of $0.42 per share and revenue of $2.91 billion on Wednesday afternoon. Analysts polled by Thomson Reuters expected $0.32 in earnings per share and revenue of $2.8 billion. The company's stock is up just under 1% in after hours trading. Reuters' Stephen Culp charts Facebook's share price relative to the S&P 500 and five of its competitors. The comparison is striking and decidedly in Facebook's favor.

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It was only back in April that tech stocks, Facebook included, were falling and people were scrambling to explain why.  In the intervening months, Facebook has not been alone in reversing that decline. While its more niche competitors like those charted above have performed poorly on an absolute and relative basis, year-to-date, a host of bigger tech companies' stocks beaten the S&P 500's 7.3% return: Google (up 8.9%); Apple (up 20.2%); Microsoft (up 20.8%). The NASDAQ itself is up 22.7%.

Perhaps the reason why Facebook's stock performance varies so dramatically from the Zyngas and Yelps of the world is because those companies aren't Facebook's real competition.  It's being treated by the market like a tech and advertising behemoth it is, not the single desktop product company it was, with performance in line multi-hundred billion dollar market cap companies. The idea that Mark Zuckerberg is building a "holding company for various properties in world domination," as Joseph Cotterill put it, is close to the consensus view. Or, a slightly less ominous conclusion is that the market really does believe that Facebook is becoming a P&G-style brand holding company that sucks ad dollars from phones around the world.

from Counterparties:

Obamacare’s circuitous path

Ben Walsh
Jul 22, 2014 21:49 UTC

U.S. federal courts don’t agree on whether the federal government is allowed to subsidize health insurance costs. The final decision, which seems likely to be made by the Supreme Court, will have massive political, economic and human impact. Not only does healthcare make up 18% of U.S. GDP, but the idea that the federal government can subsidize insurance is a key to the Affordable Care Act and the health insurance of more than 5 million Americans.

Here’s what happened today: first, the District of Columbia Circuit ruled in Halbig v. Burwell that the subsidies Obamacare has been providing for health insurance in 36 states were illegal. According to the decision, states alone, not the federal government, can provide subsidized health insurance. The court’s reasoning is based on imprecise wording in the law and contains an even worse pizza metaphor. Only 16 states, including California, Massachusetts and New York, have set up markets without the federal government's involvement. Then, Fourth Circuit, which covers a large portion of the Southeast U.S., came to the exact opposite conclusion in King v. Burwell, in part using a tangled pizza metaphor. Any changes in policy are on hold pending appeal of the D.C. Circuit’s decision by the government.

The affordability of Obamacare, for citizens and the government, is at stake here: premiums could rise by more than 76% if states do not create their own markets, depending on the size of the subsidy currently provided in each state. Generally, the poorer the state, the more premiums will rise. Not only would that mean some people who have already purchased health insurance could no longer afford it, it could make providing care to those who remain in the pool more expensive, as healthy people begin to drop their coverage. In healthcare wonk-speak, this is called a death spiral, and it is indeed as bad as it sounds: when only the sick have any incentive to buy insurance, only the sick are insured. That’s not a good business model.

from Counterparties:

Bank of Inchoate Sense

Ben Walsh
Jul 18, 2014 21:24 UTC

Brad DeLong is confused. The Berkeley economics professor has read the Bank for International Settlements' (BIS) – often called the central bank for central banks –annual report and he just cannot understand what its positions on the global economy and monetary policy actually are: “It calls for raising interest rates now... It fears activist expansionary fiscal policy even more than it fears monetary ease... It seems hostile to any increase in the demand for risky assets.”

The BIS’s position, DeLong writes, fits with no current understanding of the the crisis, recession, or current economy. It does not buy into the Janet Yellen or Ben Bernanke view that interest rates should be kept low for a long time (we wrote about Yellen’s response here). Nor is it the view taken by Harvard economist Ken Rogoff and Nomura’s chief economist Richard Koo that we just need to wait for the credit mess of the financial crisis to work itself out. Nor is it DeLong’s own view that the government should get things going by borrowing more money.

Paul Krugman thinks the whole thing is actually really simple. “You need to see this in terms of an attitude, not a coherent model,” he says. Like political philosopher Michael Oakeshott said about conservatism: it’s “not a creed or a doctrine, but a disposition.” Since 2010, Krugman says, the BIS has been advocating against stimulus because it would limit the necessary harm of the recession. That may sound odd, but Krugman says it’s a retread of Schumpeter’s good old-fashioned theory of creative destruction. When the facts changed – most research doesn’t support the skills mismatch explanation of elevated unemployment – the BIS just looked for new reasons to support the same policies, which left it, Krugman writes, without “any method at all... I see an attitude, looking for justification.”

from Counterparties:

Losing participation points

Ben Walsh
Jul 17, 2014 22:18 UTC

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Today, the White House tried to answer one of the thorniest questions about the U.S.’s post-recession economy: why, despite the recovery, has the percentage of working-age Americans that are either working or looking for work steadily fallen? At the beginning of the recession in December 2007, what economists call the labor force participation rate was 66%. It is currently 62.8%, the lowest it’s been since the 1970’s.

About half the answer, the Council of Economic Advisors says, is that America’s workforce is getting older and “older individuals participate in the labor force at lower rates than younger workers.” Another third of the drop is due to pre-recession trends like declining participation by so-called prime age workers, plus the particularly nasty but inchoate effects of the Great Recession, like a big rise in the ranks of the long-term unemployed (economists think this pushes down the participation rate but are not completely sure why). Another sixth of the decline is due cyclical factors (the normal ups and downs of the economy).

Business Insider’s Myles Udland points out that the White House is chiming in on a highly politicized debate regarding just how strong the labor market is. The Obama administration is saying, the WSJ’s Josh Zumburn writes, that “only one-sixth of the decline is clearly attributable to the weak economy.”

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