Category / Taxation

The law and the window* May 27, 2013 at 1:10 pm

Laws are only imperfectly aligned with public morality. We (nearly) all agree, for instance, that theft is wrong, but a substantial number of people don’t see speeding as immoral. Moreover, even when something is legal, it isn’t necessarily moral. Indeed, as Louise Weinberg points out, there is in US law “a rather large legacy of judicial opinions struggling with immoral law—the old cases on slavery”.

Eventually, if the gap is big enough, the law is changed. Slavery was abolished, after all. This process is neither certain nor swift, but it is a foolish corporation who gets on the wrong side of it. Behaving legally does not necessarily protect against reputational damage, as Barclays has found out†. What you don’t want to do, then, is wait until the day before the law changes to get your house in order.

It’s therefore odd to hear that Google’s Eric Schmidt

has continued to defend his company’s tax position, saying if Britain wanted to collect more tax, it should change the law. In a phrase less snappy than the more celebrated “don’t be evil”, Schmidt said Google had “a fiduciary responsibility to our shareholders”

Yes, he does have a responsibility; but that extends to not destroying the company’s reputation too. Now obvious there is a calculation here – will outrage about tax structuring go away? My guess is that it won’t, and that companies that behave legally but in a way that comes to be generally seen to be unethical, will suffer. We can’t yet predict if current events represent a paradigm change in public morality, of course; nor can we say how Google or Apple or any of the others will be seen in future. But Schmidt and his peers have a duty to at least ask themselves the question. As Jonathan Weil says (apropos Apple), tax structuring may soon be seen as indicative of a more general lack of trustworthiness. That is something that no manager should accept lightly for investor trust, once lost, is not easily regained. You quickly become the unpleasant and unacceptable face of capitalism. Companies like Google and Apple, which desperately need to be seen as hip, should think very hard before they risk carrying that label.

*That’s the Overton window.

†Repeatedly: you’d think after the apartheid scandals they would treat more carefully, but no, there was Libor, and tax structuring, and mis-selling and… They weren’t the only ones, of course.

If taxing equity-holder-owned corporations does not work, what does? May 21, 2013 at 5:14 am

David Cameron has finally* written to the Crown Dependencies asking them to buck up their game on international tax. I don’t have high hopes. Many of these places have based their business models on secrecy, tax avoidance, and perhaps even the whiff of money laundering. Asking them to help the UK get its rightful tax revenue is roughly equivalent to asking them to hand back a substantial fraction of their GDP. We can achieve something here, of course, but it is going to take something more coercive than a letter to get it.

Let’s be optimistic, though, and say that Cameron, perhaps as part of a G-20 initiative, succeeds. So what?

Chris Dillow makes a fascinating, and provocative observation, observing that a new paper finds that, in Germany:

a 1 euro increase in [corporate] tax liabilities yields a 77 cent decrease in the wage bill.

In other words, companies just pass over three quarters of their new tax burden on to workers. Dillow then asks if taxing profits is infeasible, what policies would increase equality? One of his answers is radical:

Another possibility is … to abolish capitalism and profits. Granted, nationalizing companies so that the state can grab their profits might be like buying an airline to get free hot towels. But I suspect that worker-owned firms would provide a more stable tax base than profits do now. If workers owned firms, they could no more enrich themselves by shifting the burden of profit taxes onto workers than they could by moving their wallets from their left-hand pocket to the right-hand one.

Now, this really is left field, but I do like his thinking. Certainly the proposition that key service providers, like google, or vodafone, or the banks, should be in private hands is by no means proven. We could even nationalise them by issuing tracking stock that grants a share in their profits, like a share, but with no voting rights. What equity investors mostly want, after all, is a share of profits; companies routinely ignore their wishes anyway, so having the government in charge would not materially affect things. Indeed, you could simply change the legal nature of what a share is without having to buy anything: Marxism by corporate finance reform. It will never happen, of course, but that doesn’t stop it from being a good idea.

*I was far from the first to agitate about this, and my post was over four years ago.

On no longer washing April 8, 2013 at 9:05 am

The stock loan business is, paradoxically getting less dirty because it is no longer washing. No longer washing dividends, that is, in tax arb trades. That is because ESMA has acted. The FT reports:

The profitability of lending programmes has been eroded by new guidelines from the European Securities and Markets Authority, which came into force in February, requiring asset managers to return all the revenues from stock lending, net of costs… New tax harmonisation rules in France, forcing domestic funds to pay the same rate of dividend tax as foreign funds holding French equities, are also expected to damp demand for stock lending during the spring “dividend season”. Dividend arbitrage strategies account for 80 per cent of European stock lending revenues, according to BNP Paribas Securities Services.

Step back for a moment. 80%? Surely that an activity is pretty close to being completely socially useless if four fifths of it is tax-driven? European stock loan is down two thirds from the 2008 peak. This is surely a very good thing. I have no problem with stock loan facilitating shorting, but clearly that useful part of the business wasn’t a big part of it.

Fixing too big to fail February 5, 2013 at 6:31 am

Previously I have suggested a regulatory capital multiplier that is quadratic in balance sheet size over some threshold as an incentive for too big to fail banks to split themselves up. But now Richard Stallman has something I like even more: tax rates that increase with company size.

We tax a company’s gross income, with a tax rate that increases as the company gets bigger. Companies would be able to reduce their tax rates by splitting themselves up.

With this incentive, over time many companies will likely get smaller. They could subdivide in ways they consider most efficient – rather than as decided by a court. We can adjust the strength of the incentive by adjusting the tax rates. If too few companies split, we can turn up the heat.

Big companies can afford clever lawyers. They may try, for example, to pretend to split up into several companies that effectively work together as one. So the new tax law must recognize this and treat such entities as one company that pays the rate for its combined size. As for how to recognize and define such combinations, we can probably borrow solutions from antitrust law.

That is just beautiful. The only delicate part is setting the thresholds. You’d probably have to do that on an industry-by-industry basis, using HH indices to monitor concentration and decide when to increase the size penalty.

When is it better not to plan? January 29, 2013 at 6:50 am

The FT reports that BofA is moving the old Merrill international derivatives business back to London. Long time followers of this story will remember that this used to be booked in London, then was moved to Dublin as a tax arb. The London vehicle then lost more money than you can shake a stick at in the credit crisis, generating $8B of deferred tax assets according to the FT. These DTAs will not be part of capital in Basel III (why they ever were has more to do with Japanese sensibilities than prudent regulatory practice), so BofA now needs to make money in London in a hurry. Hence the move.

One can only wonder how much this Dublin zig zag cost, not just directly but in management time. If the firm had not played tax games, ultimately to little purpose, it would not only have saved money, it would not have had to try to construct a plausible case that its international derivatives business was run out of what is, with the best will in the world, hardly a major financial centre*. One of the lessons of this is that optimization in the presence of uncertainty is difficult, and sometimes not worth attempting. Tax planning for an investment bank that not only deprives a country of significant revenue it would otherwise receive but also relies on actually making money is not just in my view immoral; it is also dangerous.

One wonders, by the way, what the impact of this entity restructuring on BofA’s living will. The removal of Irish regulators will presumably help if, as the FT separately reports, living wills now need to assume a lack of cooperation between supervisors.

Tellingly, the Guardian story on this reports that “decision does not involve moving any individuals as the physical trading of derivatives was conducted out of London”.

Licensing tax advice December 5, 2012 at 9:10 am

We are finally seeing the beginnings of a backlash against the kind of aggressive tax planning that is commonplace among multi-nationals and which has done so much to increase deficits and inequality. In this context, I have a modest proposal: license tax advice.

We could proceed as follows. First, giving tax advice to corporations or providing advice on tax structures would become a licensed activity, with personal criminal liability for breaking the law for both giver and taker. Second, a curriculum of training would be developed including ethics, tax law, accounting, and financial products. An exam based on this curriculum would be developed, and a condition for gaining a license would be passing the exam. There would then be continuing professional development requirements, and a five yearly re-licensing requirement which includes continuing ethics training.

Here’s the kicker. The exam would be really, really hard. Entry to the ‘profession’ of defrauding the government would therefore be controlled. We would also charge a sensible license fee, £50,000 say, and require a performance fund of at least £1 million. 80% of all compensation received by the licensee over a minimum would be posted to the performance fund. The ‘profession’ would have rules including standards of disclosure, intent, and so on, and the performance fund would be forfeit in the event of breaches of these rules as determined by the licensing body. Unethical tax structuring would also result in the loss of license and a lifetime ban.

The licensing body would have a governing council which included ordinary tax payers as well as professionals and politicians. It would be subject to parliamentary scrutiny. That would be a good start.

Ozzie good sense November 27, 2012 at 6:38 am

From a speech by David Bradbury, Australian Assistant Treasurer:

I believe there is a strong public interest in drawing attention to practices that have the potential to undermine the future sustainability of Australia’s corporate tax base… Governments are discovering the lack of effectiveness in the digital age of international tax concepts created for the industrial age… Many in business reject the notion that paying a fair share of tax forms part of a broader social compact, instead believing that it is just another cost of doing business. On this point, I vehemently disagree. These businesses benefit from operating in an economy built on social and economic institutions- our markets and regulators, the rule of law and our judicial system- not to mention physical infrastructure and human capital that is funded or supported by the taxes paid by others. Where some multinational businesses enjoy the benefits of these public goods but refuse to pay their fair share, they are free riding on efforts of others…

There is an increasing recognition that rules designed to prevent double taxation have in some cases resulted in double non-taxation instead – where income is not taxed in any jurisdiction. This situation is unsustainable – it not only weakens the tax base of individual countries but also weakens the international tax system.

This must surely be right. At a time when austerity seems to be stretching into the indefinite future – 2018 at least – we cannot afford to let multinationals and multimillionaires pay little tax while smaller companies and ordinary working people pay more than their fare share. We need to align the law with the ethical position, so that google and the like can no longer behave in a way that is legal but, to use Margaret Hodge’s term, considered `immoral’ by many.

Reich is right November 12, 2012 at 10:45 pm

Robert Reich has a prescription for closing the $4T US budget deficit:

go back sixty years when Americans earning over $1 million in today’s dollars paid 55.2 percent of it in income taxes, after taking all deductions and credits… go back sixty years when Americans earning over $1 million in today’s dollars paid 55.2 percent of it in income taxes, after taking all deductions and credits… Raise the capital gains rate to match the rate on ordinary income and cap the mortgage interest deduction at $12,000 a year, and that’s another $1 trillion over ten years… Eliminate special tax preferences for oil and gas, price supports for big agriculture, tax breaks and research subsidies for Big Pharma, unnecessary weapons systems for military contractors, and indirect subsidies to the biggest banks on Wall Street, and we’re nearly there.

End the Bush tax cuts on incomes between $250,000 and $1 million, and — bingo — we made it: $4 trillion over 10 years.

He’s close, that’s for sure. I would add reform of the tax code to make aggressive avoidance and off-shore earning sheltering much harder (and I’d probably be less aggressive on research subsidies). Still the point is not the details: it is that the US can easily close the deficit by asking those who have benefited most from the last twenty years to pay the most.

European dividend arbitrage estimated to be worth $500B – and falling September 20, 2012 at 6:51 am

Index Universe reports:

The imminent closure of a tax loophole driving the so-called “dividend arbitrage” business in European equities will cut off a major source of ancillary revenues for the region’s ETF issuers, says Josh Galper, managing principal of Finadium LLC, a consulting firm.

Dividend tax arbitrage—moving equity holdings between different jurisdictions, often via securities lending or derivatives transactions, to capitalise on the different tax treatment of dividends in different countries—is a business worth up to €500 billion a year, estimates Finadium. This sum is earned by institutions involved in the tax arbitrage business and is effectively lost to national treasuries.

Dividend arbitrage also constitutes around 40-45% of the securities lending revenues of large equity portfolios, including UCITS funds and ETFs, estimates Finadium.

Most of that $500B is not passed on to fund or ETF holders, so the impact on end investors should be small. The impact on the profitability of asset managers is another matter…

Three links August 8, 2012 at 9:21 am

I’m a little busy trying to finish something, so here are three terse items from my ‘read, and want to blog about’ list for the week so far:

  • A truly shocking article on The Big Picture about the effective tax rates of the most profitable US companies. I really don’t think this state of affairs can continue: people will not tolerate it.
  • An insightful letter by John Hutton in the FT about the EU proposal to extend Solvency II type regulation to pensions schemes. The key point:

    The immediate impact … would be a significant but arbitrary increase in pension scheme liabilities. If these proposals go ahead, funded pension schemes will undoubtedly have to adopt higher funding levels and shorter periods over which they have to make up any deficits… If schemes are forced to adopt ultra-cautious funding models, they will need to disinvest from equities, which would be highly damaging for European financial markets… None of this will offer meaningful protection to fund members – on the contrary, it will undermine the very existence of the remaining defined benefit schemes.

  • A typically over-stated Felix Salmon column that nevertheless makes one good point. He discusses the rise of collateralized funding arrangements such as repo and the decline of the interbank market. This is a bad thing:

    If we’re talking about the banking system, here, we’re talking about a world in which banks simply cease to trust each other at all, and the answer to all interbank credit [extension] questions is “no”. The only way for banks to lend to each other is to either go through some central counterparty, hub-and-spoke style, or else to retreat to the world of repo, where banking prowess counts for nothing and all that matters is collateral quality.

    Clearly a fundamental job of banks is to lend, including to each other: to make credit judgements and to put money on the line based on those. We need to find a way to restore bank confidence in each other (not least because smaller amounts of unsecured debt in a bank’s capital structure gives less of a cushion protecting depositors in resolution).

The shining tax manifesto May 2, 2012 at 12:19 pm

Go Stephen King. From the Daily Beast:

I’ve known rich people, and why not, since I’m one of them? The majority would rather douse their dicks with lighter fluid, strike a match, and dance around singing “Disco Inferno” than pay one more cent in taxes to Uncle Sugar…

Mitt Romney has said, in effect, “I’m rich and I don’t apologize for it.” Nobody wants you to, Mitt. What some of us want—those who aren’t blinded by a lot of bullshit persiflage thrown up to mask the idea that rich folks want to keep their damn money—is for you to acknowledge that you couldn’t have made it in America without America. That you were fortunate enough to be born in a country where upward mobility is possible (a subject upon which Barack Obama can speak with the authority of experience), but where the channels making such upward mobility possible are being increasingly clogged. That it’s not fair to ask the middle class to assume a disproportionate amount of the tax burden. Not fair? It’s un-fucking-American is what it is. I don’t want you to apologize for being rich; I want you to acknowledge that in America, we all should have to pay our fair share.

Tax structuring and reputational damage February 27, 2012 at 6:25 pm

Back in March 2009 I wrote:

The Guardian had another set of articles on Barclays’ tax structuring group yesterday. The point is not whether the practices of this group are legal. Some may be; some are borderline; some may not be. The point is the continuing reputational damage being done to the Bank …

And now, behold, that damage continues. From the BBC:

Barclays Bank has been ordered by the Treasury to pay half-a-billion pounds in tax which it had tried to avoid…

Announcing the crackdown, Exchequer Secretary to the Treasury, David Gauke, said the bank should never have devised the schemes in the first place…

Mr Gauke told BBC Radio 4’s Today programme that the experience of Barclays showed that the system of compulsory disclosure for legal tax avoidance schemes was working.

“They have got caught, they disclosed this information, the HMRC has acted very quickly, there will be no benefit to the bank, they are clearly taking a substantial reputational hit and we have demonstrated that banks are simply not going to be able to get away with it,” he said.

The culture has clearly changed from the Blair/Brown years where, sadly, tax avoidance was all too acceptable. If the banks have any sense, they will be doing very significant due diligence before enacting any substantial tax ‘optimization’ transactions in future.

Will France’s new financial transaction tax reduce high frequency trading on French equities? February 3, 2012 at 7:15 am

I have no idea. But I would have thought an FTT, like Sarkozy’s new one, would make HFT markedly less attractive, at least. Has anyone seen any analysis of this?

Quote of the day December 5, 2011 at 7:31 am

From Nick Hanauer writing in Bloomberg view:

When businesspeople take credit for creating jobs, it is like squirrels taking credit for creating evolution…

So let’s give a break to the true job creators. Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.

Desperate times call for rational measures September 30, 2011 at 5:51 am

Praise be. The EU has actually acquired some balls and is proposing a financial transaction tax. Yes, it will be widely evaded. Yes, it will make the EU less competitive. But the only way that these things get globally implemented is if someone tries it and it works well enough that the naysayers can be safely ignored. In this case at least, necessity is the mother of invention.

Two encouraging pieces of news on tax August 25, 2011 at 9:36 am

First, following Buffett, the French rich too say that they should pay more tax. According to the Guardian, 16 prominent French CEOs have called for rich people like themselves to be taxed more.

Second, again from the Guardian:

The Treasury has struck a deal with the Swiss government to repatriate unpaid British taxes from private bank accounts and end the exploitation of the country’s secretive banking system.

Switzerland has agreed to make a one-off deduction from all existing accounts held by people who are liable for British taxes but have not paid them. The tax grab could raise as much as £5bn for the Treasury and will be applied in 2013.

Perhaps the culture of acceptance of tax avoidance is finally changing a little.

Update. I don’t do facebook, but if you do and you think the rich should be taxed more, you might want to consider this.

Spend spend spend August 19, 2011 at 6:25 am

Jeffrey Sachs, writing in the FT (non gated version here), has a far more eloquent recipe to address the issues I discussed in the last post:

Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy…

Macroeconomic policy has not only failed to create jobs, but also to respond to basic social values too. Let me be clear: good social policy does not mean running big deficits. Public debts are already too large in both Europe and the US. But it does mean a completely different balance between cuts to social services and tax increases on the rich…

An improved fiscal policy in the transatlantic economies would therefore be based on three realities. First, it would expand investments in human and infrastructure capital. Second, it would cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen. Third, it would balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens.

(It is scant consolation that he is more eloquent than a similarly themed Guardian editorial too.)

There is one little problem though. Leadership. It is hard to think of a single elected leader in the US or the EU who is up to this task. Depressing, isn’t it?

Who suffers? August 18, 2011 at 8:25 pm

Mostly, it turns out, the young and the poor.

Today the Guardian reports

The Office for National Statistics revealed that unemployment jumped by 38,000 to 2.49 million in the three months to June on the government’s preferred measure…

On the more timely claimant count measure, unemployment was up by 37,100 on a month earlier – the biggest increase since February 2009, when the economy was deep in recession.

Meanwhile of course the wealthy are doing fine, with the BBC reporting that their fortunes increased 18% last year.

Warren Buffett is right. The rich need to pay more tax. For the burden to fall this unequally is not just unfair, it tears at the fabric that binds society together. The riots can’t be excused by this context but they can partly be explained by it.

Update. Zero Hedge has an interesting if frightening quote from David Rosenberg:

“labor[‘s] share of national income has fallen to its lower level in modern history – down to 57.5% in the first quarter from 57.6% in the fourth quarter of last year, 57.8% a year ago, and 59.8% when the recovery began… some recovery it has been – a recovery in which labor’s share of the spoils has declined to unprecedented levels.”

As ZH says, this does not increase socio-political stability.

In praise of Richard Wolff May 29, 2011 at 9:20 am

I shall be away for a few days, so let me leave you with an excellent article by Richard Wolff in the Guardian. There’s a lot in this piece, and I will only quote a few parts of it. Let me pick up with his discussion of the history of tax in the US:

The tax burdens of US corporations and the richest citizens (what they actually pay) are significantly lower than in most other advanced industrial economies. Indeed, they are far lower than they were inside the US a few years ago. In the mid 1940s, the corporate income tax brought Washington 50% more than the individual income tax. Today, the corporate income tax brings the federal government 25% of what is taken from individuals. In the 1950s and 1960s, the top individual income tax rate in the United States (the rate paid by the richest citizens on all their income over about $100,000) was 91%. Today, that rate is 35%, a staggering cut in the taxes on the richest Americans, far larger than the cuts in anyone else’s tax rates. Half or more of today’s federal deficits would be gone if we simply taxed the richest US citizens at the rates in effect in the 1950s and 1960s. If we also taxed corporations in relation to individuals as we did in the 1940s, the entire deficit would vanish.

Why has the US got itself into the lamentable situation of being easily able to solve its deficit problem but politically unable to admit that?

The largest corporations and richest citizens long ago learned that if you want to sustain an extremely unequal distribution of wealth and income, you need an equally unequal distribution of political power. Those corporations use their profits to pay huge salaries and bonuses to their executives, to pay big dividends to their major shareholders, and to “contribute” to politics. The corporations, their top executives and the major shareholders whom they enrich all regularly finance the political campaigns and politicians that perform that sustaining function. An increasingly unequal capitalist economy pays for the increasingly undemocratic politics it needs.

Any serious effort to change the basic situation, functions and direction of government policy must change the answer our society now gives to this basic question: who gets and disposes of the profits of producing goods and services in the US economy? So long as the answer remains corporations’ boards of directors and major shareholders (the status quo), current trends will continue until bigger economic collapses bring the system to self-destruction. Then we will have graduated from a crisis with banks “too big to fail” to a crisis that is itself “too big to overcome.”

What Kelley taught them March 6, 2011 at 6:06 am

Kelley McDaniel, a teacher from Portland, testified in front the State of Maine Appropriations Committee about the right wing Governor’s proposed budget. The Portland Press Herald picks up the story and, while it’s not exactly the New York Times, what this story has to say is really worth reading:

She told the committee that she recently won a national “I Love My Librarian” Award from the Carnegie Corp. and The New York Times — an honor that included a check, made out to McDaniel, for $5,000.

“I plan to report that money on my income tax and I expect to pay taxes on it,” she told the lawmakers. “Even though I donated the money in its entirety to the public middle school where I work.”

You heard that right.

She gave the whole five grand, after taxes, to her school. If you live in Portland, that’s your school, too.

It was only the beginning.

McDaniel said she’s “happy to pay those taxes” because the way she sees it, taxes are “like membership dues” for being a citizen of this great state.

She said that while she gets lots of things (education, health and safety, arts and recreation) in exchange for those “dues,” she realizes “I may not personally benefit from everything that tax money is used for.”

She has no problem with that. As McDaniel put it, “I try to trust that elected officials will spend money to the best benefit of society and not just to a handful of individuals.”

Then, without missing a beat, she turned her attention to the budget.

She talked about how, over there, the budget contains $200 million in tax cuts — including an expansion of the estate-tax exemption from $1 million to $2 million — that largely would benefit Mainers who aren’t exactly scraping to get by.

And how, over here, that loss of state revenue is more than offset by $413 million in various curtailments on benefits earned by retired state workers — many of whom, like McDaniel has at King Middle for the past 11 years, served long and nobly in Maine’s public schools.

Observed McDaniel, “I don’t understand the rationale for this proposal.”

She said she doesn’t buy the idea that the tax cuts, putting significantly more money back into the pockets (or portfolios) of Maine’s wealthy, will stimulate the economy.

Citing reports from the Congressional Budget Office, McDaniel said “the best way to stimulate the economy is to give modest increases to the poor. Wealthy people tend to hold on to their money, while poor people tend to spend it as they get it.”

Then McDaniel, as those experts might say, “re-framed the issue.”

“I don’t think it’s a moral decision, because taking money from people who don’t have much money and giving it to people who have more money than the people you took it from seems, well, greedy,” she said. “Greed is frowned upon in every major world religion — and I don’t think agnostics and atheists look too kindly upon it, either.”

She wondered aloud, “Is this about a quid pro quo? A gift from elected officials to wealthy people who have donated, or will donate, to election and re-election campaigns?”

Finally, as the clock wound down, McDaniel dropped the hammer.

“It’s not economically sound. It’s not morally sound. And I think you know that,” she said. “I would be embarrassed to support something so ludicrous — taking from the poor to give to the rich.

“Maybe you’re testing us, checking to see if we, your constituents, are really paying attention, really listening,” she continued. “I hope that’s what’s going on, because the alternative involves me losing faith in representative government, in democracy and in you, the elected officials.”

She said it better than I could. This passage deserves to be really widely known. Go on, print it out and send it to your MP or your representative, your congressman or your senator.