Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

07 October 2016

Keeping Good Jobs at Home I: Tax Concessions and Subsidies

[For analysis of the second presidential debate, click here. For analysis of the debate between vice-presidential candidates, click here.]

The Best Video on Donald Yet
Sometimes I post political humor for comic relief, after a long, serious essay. But I just ran across a video-commentary-cartoon that is worth a link in its own right. In 2:38, it encapsulates The Donald and strongly suggests the utter devastation of our nation, and perhaps the world, that will ensue if we are dumb enough to elect him.

This is the first time that Carly Simon has ever released her award-winning popular song, “You’re so Vain,” for political purposes. Thank you Carly. You’ve done good.

[MAIN ESSAY] Never have so many missed the point by so wide a mark. Working Yanks are upset by the steady drain of good jobs abroad. They appear ready to elect a demagogue and Hitler clone named Donald Trump. Working Brits rejected membership in the EU for similar reasons.

Yet both workers and elite hand-wringers just can’t seem to get the point. Reducing the job drain doesn’t require giving up free trade in goods or services. Nor does it mean abandoning the rules of trade that have kept the peace and promoted prosperity ever since our species’ most horrible war.

The essence of the problem is not free trade in goods or services, but massive drains of good jobs. These things are apples and oranges.

More to the point, displaced workers don’t really want to kill the goose that has laid the golden egg by bringing back tariffs and other forms of trade protectionism. Trump may have said he wants that, but he’s not the brightest bulb in the marquee, is he? What displaced workers want is to stop, or at least to slow, the export of whole factories, some 60,000 of which have left the US alone.

But the 0.1% and the right wing are a bit hard of hearing. They don’t want to hear that the system that has enriched them (and many poor people globally) beyond measure has had unfortunate unintended consequences. They don’t want to know that many innocent, middle-class people are hurting. They see the global system they have created as perfection itself, because it has been very good to them.

So what do they do? Like aristocrats in pre-revolutionary France, they pretend their current scheme of globalization is the best of all possible economic worlds. They pretend that middle-class complaints are assaults on free trade—which they are most definitely not. In false response, they exhume the bodies of Smoot and Hawley just to riddle them with bullets and rebury them. Here The Economist, which recently spent a whole issue doing just that, is the global cheerleader.

What these worthies don’t do—because they personally are doing just fine, thank you—is acknowledge that there is a flaw in their paradise: millions of people are hurting, insecure and facing a dim future for themselves and their families. Not even acknowledging the problem, the elite naturally refuse to search for causes and a cure.

In so doing, they resemble our Yankee insurance executives, who benefit mightily from the world’s most expensive and inefficient system of health-care financing. Those worthies pretend that the single-payer systems in effect in every other developed nation would be, in a Yankee form of Medicare for all, “socialized medicine” and a threat to capitalism. So they inveigh against “socialism,” which the United States has never had and never will, and they exhume the long-dead bodies of Marx and Engels to flog them mercilessly and rebury them.

Unfortunately for them and for our globalized world, their approach resembles the head-in-the-sand attitude of French aristocrats before the French Revolution, and of Trump and Inhofe today toward global warming. In addition to being dangerous, it’s un-American.

At our best, we Yanks have always tried to look at problems face on, to find what caused them, and to fix them. In this instance, doing so requires understanding precisely why so many factories have moved from the US and other developed countries to developing ones, and what we might do to slow the flow.

There are at least four reasons why whole factories go abroad. In rough order of importance, they are: (1) cheaper labor, (2) tax relief and subsidies, (3) transportation and logistics issues, and (4) variant requirements for working conditions, worker safety, and environmental protection.

To some extent, items (1) and (4) are self-limiting, at least in theory. As factories follow cheaper labor abroad, local standards of living rise, bringing wages with them. Better working conditions, worker safety, and environmental protection soon follow.

That happened in Japan, as it morphed from a once low-cost, low-quality producer to today’s third-largest economy. Now good jobs have moved offshore from Japan, just as they have from other developed economies. And now Tokyo and Osaka, where once vending machines sold doses of oxygen against ever-present acrid smog, are as clean as any other developed-nation cities.

The same thing seems to be happening in China. But the changes in China are happening more slowly than in Japan, because: (1) China is much bigger, (2) real economic growth has barely touched China’s undeveloped western hinterlands, and (3) China is much less democratic than Japan. Nevertheless, the changes are already under way; some multinational corporations that crave lower wages already are moving out of China to less-developed nations, and some even back home.

Waiting for living standards, wages and legal protection of workers and consumers to equalize requires patience. It took about a generation in Japan and may take two in China. But eventually it will happen. In contrast, transportation and logistical issues may persist, and in many cases they ought to. Cars, trucks and heavy equipment, for example, are better made near where they are used, if only because transportation costs are high and likely will rise as fossil fuels begin to run out.

So causes (1) and (4) of job losses likely will fade with time. Cause (3) is real and probably won’t change. But cause (2)—tax concessions and subsidies—is both a real and a potent cause of job losses that wise policy can and should alleviate.

Tax breaks and subsidies are real ways that nations steal jobs from each other. They are economically inefficient. In addition, they deprive national governments of much-needed revenue and resources. They appear unfair, especially to workers who lose jobs because of them.

Fortunately, such inefficient and counterproductive jobs thefts are something that we Yanks could eliminate globally, on our own, at the stroke of a pen.

To see how, consider the well-known case of Apple. It’s the world’s most valuable company, and indeed the most valuable corporation in human history. It’s an American company, founded in America by Americans and having its world headquarters, directors and top management in America. Most, if not all, of its product ideas and intellectual property come from America. So why, pray tell, is its European headquarters located in Ireland?

Two numbers provide an answer. The EU Commission recently accused Ireland of under-taxing Apple’s presence there by $14.5 billion (€ 13 billion) over a ten-year period. It ordered Ireland to recoup that amount from Apple. And records tell us that Apple has accumulated a cash hoard of over $200 billion from its foreign operations, which it refuses to bring home for fear of US taxation.

So it’s clear that taxes give Apple powerful incentives—having nothing to do with the economics of its businesses—to put and keep jobs and money in Ireland and other foreign countries instead of in the United States.

How do these tax incentives work? To understand them in detail, it helps to review the global taxation of Yanks by their government, the United States.

For individuals, the US rules of global taxation are relatively simple. An individual worker is considered a US resident for tax purposes if he spends less than 330 days abroad in any tax year. Then US taxes apply to all his worldwide income, with credits for taxes rightly paid to foreign countries. If he spends more time abroad, he is considered a foreign resident, and only foreign taxes apply to his income (up to specified limits) earned outside the US.

The rules for corporations are different. The reason is that each legal corporation—whether a parent, subsidiary, or brother-sister corporation—is considered a separate and distinct legal “person.” If Apple’s Irish works were an unincorporated division of California-incorporated Apple, and not a separate subsidiary, all their worldwide income would be subject to US tax. But because they are a separate subsidiary, incorporated in Ireland, they are treated as wholly foreign, and all their worldwide income is subject only to Irish tax, unless and until it comes back to the US. That’s the reason for those huge, idle foreign cash hoards.

This rule allowed Ireland to win Apple’s jobs by granting Apple one of the lowest corporate tax rates in Europe and the world. It’s also what keeps the $200-billion-plus that Apple has earned outside the United States in financial limbo, unavailable for building US infrastructure or creating US jobs.

Thus does so much trouble come from the notion that corporations are “people.” Not only does that odd idea give them “rights” of free speech, so that corporate managers can use piles of money gleaned from shareholders and customers to propagandize the public under Citizens United. It also allows foreign states to attract and hold subsidiaries of American companies (and their jobs) by offering them lower tax rates—sometimes ridiculously lower—as foreign “people.”

A simple solution to this problem would be to treat all affiliates of American corporations (parents, subsidiaries, and brother/sister corporations) as American, too. Then Apple’s Irish subsidiary would be considered part of Apple for tax purposes, despite its separate Irish incorporation. The greater Apple would be taxed by the United States on its worldwide income, including that of its Irish operations, with credit for Irish taxes rightly paid, just as in the case of US citizens residing and working abroad. (This point ignores the current numerical limitations on the foreign income of such citizens that is free from US tax.).

Then Ireland could tax Apple’s Irish works as low or as high as it liked. In the US, Apple would have to pay the difference between Ireland’s present low taxes and the US’ higher rates on all the subsidiary’s income. As a result, Apple’s total tax bill for its Irish subsidiary, including both Irish and US taxes, would be the same as if the subsidiary were located in the US. Therefore tax rates would provide no incentive to move jobs abroad or to prefer a subsidiary to a division; only real business advantages would.

Just as important for foreign nations, Ireland would have no reason to lower its tax rates and deprive itself of revenue just to attract Apple’s jobs. It could tax local operations as much as it liked (up to the US rate), secure in the knowledge that doing so would not increase Apple’s total taxes, because Apple would pay US taxes on its Irish operations only at the differential rate.

The same change in rules would eliminate the abomination of so-called tax “inversions,” by which a US corporation can avoid US taxes and pay only lower foreign taxes by having a foreign corporation acquire it and moving its headquarters abroad.

In order to make these rules work, US tax law would have to distinguish between American and foreign corporations with a bit more realism and subtlety than it does today. Today, lawyers can make any foreign operation of an American corporation “foreign” for tax purposes simply by incorporating it as a foreign subsidiary and locating it in a foreign country.

But doesn’t that ploy belie common sense? Apple and all its worldwide operations are as American as apple pie. Bayer’s are German. Mitsubishi’s and Toyota’s are Japanese. The legal form of their foreign operations does nothing to change these basic facts.

To adopt this bit of common-sense, our tax law would have to use a so-called “multifactor test” to determine the tax “nationality” of a US corporation’s operations in a foreign country. Among the factors to be considered would be management and control, the nationality of top management, officers and directors, stock ownership in the subsidiary, and the national origin of product ideas and intellectual property. These rules would be no more complex in operation that the rules for so-called “transfer pricing” that now apply when a foreign subsidiary deals with its American parent. (The prices actually charged for goods and services may not apply if one tax authority or another thinks that prices are “unrealistic” and have been misstated or manipulated to avoid taxes.)

The current efforts by the EU to force Ireland to tax Apple more heavily on past income have become a cause celebre among American corporate elite. But those efforts might have done and be doing other EU nations and workers everywhere a favor.

Ireland has tried to buy jobs from Apple by low-balling the taxes it charges Apple. So far, it has had considerable success. But the success has come at a big price. Not only has Ireland forfeited enormous potential revenue and increased its national debt to the danger point. It has also deprived other European nations, and perhaps the US itself, of jobs and tax revenue that otherwise they might have had.

Nothing in the hard-fought rules of “free trade” in goods and services requires that Ireland be allowed to steal jobs this way. Its doing so distorts the global economy. It also creates a race to the bottom in tax revenue for Ireland and its EU partners, at a time when all of them are mired in debt and need to maintain reasonable streams of tax income. At the same time, the Irish ploy gives Apple and other American multinationals reasons to exacerbate our Yankee job drain. We Yanks could eliminate all these bad effects at the stroke a pen, simply by changing our own tax laws.

State subsidies to attract business operations from abroad have a similar effect. By artificially influencing business-location decisions, they distort plans based on real economic effects, such as logistical and transportation costs, language barriers, and the need to train local workers and keep control of quality despite cultural differences. At the same time, subsidies deprive the offering state of revenue that could be used for other purposes.

The WTO already prohibits similar subsidies among competing private firms from different nations. For example, governments acting on behalf of Airbus and Boeing have brought cases in the WTO accusing each other of benefitting its respective aircraft competitor with governmental subsidies.

The case of Apple is more difficult in two respects. First, Apple is not about to complain of subsidies that it receives itself. Second, since Apple has few, if any, direct competitors in Europe, complaints from that sector are unlikely. Therefore, it might be beneficial, if not necessary, to expand anti-subsidy rules to allow adversely affected workers, their unions, or their governments to complain.

Tax concessions and governmental subsidies are not yet the primary reasons for moving jobs abroad. Wage differentials still are. But taxes and subsidies are important today, as the huge numbers in Apple’s case attest. The mere fact that tax laws keep over $200 billion of Apple’s money abroad, doing nothing, is a sign of a breakdown in international policy. Nations, including our own, seeking resources for infrastructure building and debt reduction could use that money in circulation in their economies. Right now, it benefits no one but Apple’s foreign banks.

As wage levels and worker protections equalize around the globe, tax concessions and governmental subsidies will become increasingly important means by which one nation tries to steal good jobs from another. The United States government and its foreign counterparts would do well to try to nip this counterproductive sort of job theft in the bud.

Besides encouraging job theft, tax-concession subsidies create a race to the bottom in international tax policy. They pit government against government in a race to reduce taxes to attract good jobs from multinational corporations. They thus demean and impoverish government in general, as distinguished from business, thereby hastening the onrushing day when we, the people, will have our daily lives governed primarily by business corporations, not nation-states.

The Apple case shows how the US, merely by changing its tax laws, could help save the very idea of government from obsolescence. It could level the playing field as between US and foreign jobs, give foreign governments an incentive to raise the taxes they need to subsist, and perhaps motivate the repatriation of a foreign cash hoard of US multinationals now estimated as aggregating $ 1.6 trillion.

At first glance, the EU Commission’s push to raise Irish taxes on Apple’s Irish subsidiary might seem a mere money grab. But it’s not. It’s a first serious attempt to remedy global imbalances in tax policy that have several anti-competitive consequences. First, low Irish taxes on Apple in Europe disadvantage Apple’s European competitors. Second, low Irish taxes disadvantage American workers, who, with the aid of cheap global transportation and communication, might do many of the Irish subsidiary’s jobs here at home in America. Third, by reducing Ireland’s revenue, low taxes disadvantage Ireland’s government in competition with other European governments and competing governments worldwide.

Finally, as part of a global race to the bottom in national tax revenue to attract good jobs, low Irish taxes disadvantage governments generally, in competition with multinational corporations, in efforts to remain economically effective and relevant. They hasten the day when we, as human beings, will look to multinational corporate boards of directors, rather than governments, constitutions, laws and courts, to protect our rights as workers, consumers and human beings. All these anti-competitive effects are reasons why the EU Commission’s Irish tax push properly arose out of its competition branch.

Endnote: This essay is the first in an occasional series on how to keep good jobs at home without impairing globalization or free trade. Future essays will consider start-up subsidies for new technology and new industries and time-limited prohibitions on exporting new intellectual property.

Footnote: Trump has said he wants to impose, or at least threaten, 35% tariffs on Chinese exports, bringing Smoot and Hawley back to life again. In contrast, Bernie just identified the problem of losing good jobs but offered no specific solution, let alone an obviously counterproductive one. Perhaps that’s why he lost to Hillary in the primaries, while Trump won his. We Yanks like plans, even if they self-evidently won’t work.

The Second Presidential Debate

In three ways, the second presidential debate was both depressing and disappointing. First, what was supposed to be a “town-hall” meeting focusing on undecided voters’ genuine concerns ended up a knock-down, drag-out slug fest focused mostly on trivia and gossip. Any idea that real people would control this debate went out the window in the first half-hour.

Second, those who hoped that Hillary would put Donald away came up disappointed. Donald took the fight to Hillary and stopped his free fall. He may have even consolidated his position with his odd constituency: uneducated white folk who are not well informed on relevant facts. Thus Donald “won” the debate, if anyone can be deemed to have “won” a mud wrestle in which hitting below the belt and being slimy enough to squirm out of holds were the chief means of winning.

Third, the debate was depressing because it proved beyond doubt how much we will miss Barack Obama. Neither candidate had anywhere near his cool judgment or political skill, let alone his scandal-free record. Once again, Donald showed himself too scatterbrained, inconsistent and unreliable, and too willing to make up facts out of whole cloth. Hillary showed herself too cautious, tentative and triangulating, and sometimes unable to see key trees for the forest.

Donald claimed the “presidential” mantle in addressing the first topic. That was his famous sexist video, recently gone viral, in which he bragged how his celebrity and wealth let him molest women at will. He made a full apology, in a voice and tone of sincerity, and dismissed the whole thing as “locker-room banter.” Hillary countered that multiple similar incidents prove Donald’s real character to the contrary. But she failed to point out that what may be standard locker-room banter for boys of 16 to 25 is pathological for a grown man of 59, let alone one with presidential aspirations.

Donald also won the second round, about e-mail-gate, albeit with a lie. He claimed—repeatedly—that Hillary had deliberately erased 33,000 e-mails after receiving a subpoena requiring them to be kept as evidence. In fact, she and her staff had ordered the emails’ destruction before the subpoena issued, but a negligent subordinate did not carry out the order until afterward. A PBS fact-checker had to point this out after the debate; Hillary had not mentioned it, apparently wanting to keep things simple. As a result, she left viewers with the notion that she didn’t care much about protecting classified information, with only her abstract assertion of caring to the contrary.

Hillary won the third round, on health care. Donald castigated Obamacare as terrible, without citing a single specific fact. Hillary pointed out the 20 million new insured and the four benefits, including coverage of preexisting conditions, that Obamacare assures all the other 170 million insured. Her reasoning no doubt appealed to educated voters who can reason, but Donald probably kept his base.

On foreign policy, Donald continued the GOP tradition of blaming everything bad that happens in the world on the Dems. Remember how Nixon once accused Dems of “losing China” to Communism, as if an omnipotent America could fix the fate of a country four times its size, halfway around the world, while dealing with the global wreckage of World War II? Donald did much the same thing with Iraq, Syria, and Libya. Things have not gone well there, and he blamed them all on Hillary and the President.

You would have had to be both educated and well-informed to refute those arguments. So Donald kept and may have strengthened his base on foreign policy. But foreign policy is a minor issue for most voters. What matters is jobs, the economy and policy here at home.

The only two fields in which Hillary stood out were tolerance and children. She made her case for wanting to be everybody’s president by comparing Donald’s gaffes and insults re Mexicans, Muslims, African-Americans, and the disabled with her own “caring” about children and women, citing her accomplishments in passing S-Chip and her efforts to promote gender equality at home and abroad.

Donald’s most damaging argument was that, despite her thirty years in and around government, Hillary hasn’t accomplished much. He repeated it several times during the debate, calling her “all talk and no action.” Indeed, besides S-Chip, getting help for 9-11 first responders, augmenting the consensus to get bin Laden, and getting UN authorization to topple Qaddafi, there aren’t to many big accomplishments to which she can point. Her insistence that 400 acts of Congress bear he name as sponsor or so-sponsor will convince no-one from Donald’s coterie or fellow travelers.

So the second presidential debate left us with the same sad conundrum of this whole election. Who would make a better president? a boy-man who thinks he knows it all, has terribly intolerant tendencies, shoots from the hip in all directions, and can’t keep his mind on anything but himself for more than five minutes? or an earnest and much smarter woman with deep flaws and a long history of urgent caring and trying but little real accomplishment, with a few serious errors in judgment (Iraq and e-mailgate)?

There is a reason why this election has little to do with policy. Both candidates are flawed, but in very different ways. There is no question that Hillary has the greater competence. In the end, the election may turn on which of the two the electorate can less stand to see in its living rooms for four years. If we Yanks have become a nation of hustlers as much as Donald thinks and our history suggests, we may all be in serious trouble.

Endnote: The debate’s depressing quality probably had little to do with the work of the two moderators: Anderson Cooper and Martha Raddatz. Both did a credible job of keeping the candidates to their allotted times, holding them to answering the questions asked, and pressing them with follow-ups. If they made any error, it was the plan of the whole debate. Had it started out as a “town hall meeting,” with real citizens asking real questions about substantive policy, not gossip, it might have turned out differently. But with the news media and the Internet scintillating with gossip, and our media bosses chasing it as a road to profits, that depressing outcome was probabaly pre-ordained.



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