Relevant and even prescient commentary on news, politics and the economy.

Apple state aid decision expected soon

$19 billion? $8 billion? A few hundred million? Estimates are all over the map regarding the European Commission’s imminent decision on whether Apple received illegal, unnotified state aid (subsidies) from Ireland. As I mentioned two years ago, two factors go into the Commission’s claim: Ireland’s creation of a corporate entity that is taxable nowhere, and the possibility that the company negotiated a tax rate far below the country’s already-low 12.5% corporate income tax rate.

As you may remember from earlier posts, if the Commission rules against Apple, the sanction it will impose will be the repayment of the illegal subsidies, with interest. Some estimates of Apple’s tax savings are astronomical (the New York Times reported an estimate Apple saved $7.7 billion in 2011 alone), which creates the possibility of an extremely high repayment order. On the other hand, recent cases have seen relatively low repayments, such as the mere €30 million the Commission ordered Starbucks to repay the Netherlands last year. Still, it is perfectly possible that the Commission used smaller cases as a way to establish the legal precedent regarding fiscal aid before dropping the bomb on Apple.

It’s worth noting, as reported by Bloomberg, that the largest state aid repayment order ever made was approximately €1.4 billion charged to Électricité de France, followed by two orders in the €1 billion range. When this decision is announced, we may see a new record by a large margin. Or maybe we won’t. Either way, the Commission will be giving us a clear sign regarding how seriously it intends to treat fiscal aid abuses.

Update: For a little perspective on fines, Chillin’ Competition (via email) points out that the European Commission has just imposed an anti-trust fine on four truck manufacturers of over €2.9 billion , a new record.

Cross-posted from Middle Class Political Economist.

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Subsidy Tracker Reaches Major Milestones

Subsidy Tracker, the free subsidy database created in 2010 by Good Jobs First, has reached major milestones in its coverage of state, local, and federal subsidies.

This month’s enhancements to the database bring it to a once-unimaginable 500,000 individual incentive awards with a cumulative nominal subsidy value of $250 billion! That’s starting to add up to real money!

I explained two years ago how to use the data from Megadeals or Subsidy Tracker to compare a proposed economic development incentive package with past subsidies given in the same industry to get some idea whether the proposal represented a gross overpayment for a given investment. This method relies on finding good matches by industry, location, unemployment rate, and so on. The more deals available to search means your chances for finding good comparables improves proportionately. This can only enhance the ability of citizens’ groups, labor organizations, etc., to independently analyze proposed costly incentive packages.

As Philip Mattera, Good Jobs First Research Director, says, the steady expansion of Subsidy Tracker “reflects the improvement in government transparency over the past decade.” I can personally remember when the first statewide transparency law was passed in Minnesota in 1995; transparency has improved exponentially since then, although there is much progress that still needs to be made.

One notable recent innovation in Subsidy Tracker is a matching system to determine the ultimate corporate parent of subsidy recipients. According to Mattera, it now includes 2,606 parent companies, a threefold increase since 2014. This is critical information, given that so many companies hide their corporate connections through misleading names.

Although transparency remains an elusive goal, it’s worth celebrating successes when they occur. Cheers!

Cross-posted from Middle Class Political Economist.

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It’s official – Icelandic bankers have been jailed

If you’ve been following my posts over the last few years, you know that Iceland took the dramatic step of prosecuting top officers at the country’s big 3 banks, all of which were allowed to go bankrupt in the wake of the 2008 financial collapse. Unlike Ireland, it did not turn bank debt into government debt, which increased Ireland’s debt by close to 100% of gross national product (GNP) overnight. Though hit hard by the 50% drop of the krona, Iceland has managed a remarkable, though still incomplete, recovery marked by its renewed ability to borrow in foreign currency with less than a 1% risk premium and by achieving unemployment rates that Eurozone countries can only envy.

What you wouldn’t know, if you just been looking at the headlines (Google “Iceland jails bankers” and you’ll see what I mean), is that Iceland had not actually been jailing bankers. Here’s a typical one from the BBC, “Iceland jails former Kaupthing bank bosses” (12 December 2013). In fact, nobody went to jail at that time: They were convicted, but all four Kaupthing officials appealed their sentences. If you search similarly titled stories, you will see that headline “jailings” were either convictions, or an affirmation of these lower court decisions by the Icelandic Supreme Court, neither of which actually led to immediate jailings. Indeed, one of the “Kaupthing Four,” as they are now called, was living in Luxembourg (he had headed Kaupthing’s Luxembourg branch), and I wondered to myself if could even be compelled to return to Iceland to serve his sentence.

Now I am happy to report that the Kaupthing Four are finally in jail in a minimum-security prison with only one road connecting it to the outside world, including the former CEO of Kaupthing’s Luxembourg unit who was outside Iceland when his conviction was upheld. There have been an additional 22 convictions now at various stages in the appeals processes, and special prosecutor for the banking crimes, Olafur Hauksson, indicted five more bank officials for fraud and manipulating stock prices just last month.

As Kaupthing was Iceland’s largest bank before the crash, jailing its top officials sends a reassuring sign that the rest of those convicted will eventually follow suit. Iceland thereby establishes a precedent we should continue to urge in the United States, United Kingdom, and elsewhere that bankers are not too big to jail.

A note to readers: Bloomberg reporter Edward Robinson had not replied to a request for some clarifications at the time this story was published. If any of you know when the Kaupthing Four reported to prison, whether there are other bankers already in jail, or other useful news, please send along the information and I’ll be happy to credit you. Thanks!

Cross-posted from Middle Class Political Economist.

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New OECD tax agreement improves transparency — but the US doesn’t sign and the US press won’t tell you UPDATED

Last week 31 countries signed a new Organization for Economic Cooperation and Development (OECD) agreement providing for country-by-country corporate information reporting and the automatic exchange of tax info between countries under the Multilateral Competent Authority Agreement (MCAA).

Country-by-country reporting, the brainchild of noted tax reformer Richard Murphy,* is a principle that makes it possible to detect tax avoidance by requiring companies to list their activities in each country (nature of business, number of employees, assets, sales, profit, etc.) and how much tax they pay in each country. A company with few employees yet large profits is probably using abusive transfer pricing to make the profits show up in that country rather than another one, to give one obvious example of how the idea works. In the OECD agreement, the procedure is that beginning in 2016 each company will file a report to every country where it does business, then all the countries receiving such reports will automatically exchange them with each other, meaning each of these countries will then have a full view of how much business Google, for example, does in every jurisdiction. The shortcoming to this is that while governments will have this data, the public will not have it (a fact criticized by the Tax Justice Network) due to alleged concerns about confidentiality. However, the European Commission, including its Luxembourgian president Jean-Claude Juncker, is now talking about requiring publication of the country-by-country data for each EU Member State.

Which highlights an important aspect of this agreement: Many major tax havens, including Luxembourg, Ireland, Liechtenstein, Switzerland, the United Kingdom, the Netherlands, Belgium, and Austria have all signed on. But the United States did not sign it. Surprisingly, you can’t find this out in any U.S. publication, as far as I can tell. I’m a subscriber to the New York Times, and a search for “OECD tax deal” or “OECD tax” for the past week (it was signed six days ago) yields no results. “OECD” yields one result unrelated to the MCAA. Ditto for the Wall Street Journal. Ditto for my premium Nexis subscription: No U.S. stories on the agreement. You’d almost think they’re trying to keep us from finding out. But no, not exactly: The Financial Times was able to get Treasury Secretary Jack Lew himself to comment in its story on the MCAA. He said, “From a US perspective, there are elements of this that don’t require legislation and we’re looking to getting to work right away.”

That’s certainly a clue: Some of the changes do require legislation, and getting that from the Republican Congress is not going to happen. In fact, Republicans have always been willing to step up to keep the United States a tax haven for foreigners, and the Bush Administration went out of its way to undermine previous OECD attacks on tax havens offshore, as Australian political scientist Jason Sharman masterfully showed in his book Havens in a Storm.

Republicans have done such a good job at helping out domestic tax havens that the United States is now “The World’s Favorite New Tax Haven,” according to Bloomberg Businessweek which, in an ironic coincidence, published the story at 12:01AM the day the MCAA was signed (so it didn’t report on the signing either). According to the article, foreigners’ money is pouring out of Swiss banks into the United States, and Rothschild has set up shop in Reno, Nevada.

A little too ironic…

* As regular readers know, Murphy is someone I frequently cite in these pages.

 

UPDATE: @AlexParkerDC from Bloomberg BNA was kind enough to send me to a couple of his posts on the OECD’s Base Erosion and Profit Shifting (BEPS) negotiations. These suggest that the Obama Administration believes it can implement country-by-country reporting through regulation alone, and had already committed to it in the BEPS process. However, the IRS has proposed not to implement country-by-country until 2017, while the new OECD agreement begins with this year’s tax information, as noted above.

Cross-posted from Middle Class Political Economist.

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Champion tax avoider GE gets subsidized relocation to Boston

On Wednesday, General Electric announced that it was going to relocate its headquarters from Fairfield, Connecticut, to Boston beginning in 2016. Even without the headline, you probably already guessed that the relocation was subsidized — in this case, by both the state of Massachusetts ($120 million) and the city of Boston ($25 million). 800 jobs will move as a result of the deal, but no new jobs will be created.

Massachusetts has been historically a low-subsidy state, helped in large part by its highly trained workforce along with the Boston area’s 55 universities and colleges, the latter factor noted prominently in GE’s announcement of the move. Yet this is the largest subsidy package ever assembled in the state according to the Good Jobs First Megadeals database (download the December 2015 spreadsheet version here). In fact, the database shows that it is only the fourth package over $50 million in Massachusetts, and the very first above $100 million.

I asked Greg LeRoy, the founder and Executive Director of Good Jobs First, for his thoughts on the deal. His response:

GE’s press release is almost worth bronzing and mounting: the company clearly chose Boston because of its executive talent pool and research assets. Why on earth the state and city felt they had to throw $181,000 per job at the company is beyond me; that’s unconstrained federalism at its worst.

This dynamic is one I have discussed often: a company threatens to move to another state and suddenly you have an auction with numerous other states trying to pay a relocation subsidy, while the home is doomed to pay a retention subsidy as a best-case scenario. Frequently, as with GE, the company moves. Either way, collectively the states receive less tax revenue from the company which threatened to flee. Thus, the common question, “Was this a good deal for Massachusetts?” completely misses the point, which is that the country as a whole is worse off, due to the decreased tax revenue for no new jobs.

In this case, as I reported last summer, GE threatened to leave Connecticut over tax increases in the state budget. This is ironic/hypocritical/outrageous (take your pick) because, as the Hartford Courant (h/t Richard Florida) reported, General Electric pays only the minimum Connecticut corporate earnings tax of $250 per year. The Boston Globe (see first link in this post) reports that GE pays essentially no state corporate income tax in any state!

It’s tiresome to report yet another egregious example of this kind of corporate blackmail. It is depressing to see Massachusetts, with only 4.7% unemployment in November 2015, give its largest subsidy package ever under such circumstances. It’s past time for Congress to solve the job piracy problem once and for all.

Cross-posted from Middle Class Political Economist.

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Ireland still isn’t back

Ireland remains, in some circles, a poster child for austerity’s success: It paid off its bailout loan early! It regained its 2007 Gross Nation Income per capita in 2014! Unemployment is only 8.9%! Don’t believe the hype.

Paul Krugman recently pointed out that Ireland’s employment performance continues to be dismal, especially in comparison with currency-devaluing, banker-prosecuting Iceland. Iceland’s employment now exceeds its pre-crisis peak by about 2.5% whereas Ireland is still, 8 years later, 8% below its peak. More specifically, Irish employment peaked in Q1 2008 at 2,160,681; in Q3 of 2015, the figure was still only 1,983,000.

Not only that, but in 2014-2015 (May-April), Ireland continued with net emigration, as 11,600 more people left than came to Ireland. This was a substantial improvement of 9800 over the April 2014 figure, but still the trend is that Ireland is exporting unemployment literally.

Things are obviously getting better in Ireland for those who remain behind. Jobs are being created, and the number of unemployed has fallen. The April 2016 immigration report (the data are only reported once a year) may finally see an end to net emigration. But Ireland is 80% of the way to a lost decade, and isn’t out of the woods yet.

Cross-posted from Middle Class Political Economist.

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New study finds state subsidies go overwhelmingly to large companies

Good Jobs First has just issued a new report analyzing state investment incentive programs open to small and large businesses alike. With the financial support of the Surdna Foundation and the Ewing Marion Kauffman Foundation, Shortchanging Small Business: How Big Businesses Dominate State Economic Development Incentives finds that 70% of the awards and 90% of the money goes to large companies. This is a big deal: The justification for many major incentive programs is that they benefit small business. This study is the first in a planned series of reports which show that this claim does not stand up.

If subsidy programs disproportionately benefit large businesses, they reduce market competition and thereby make the economy less efficient. As I discussed in Competing for Capital, subsidies to capital exacerbate income inequality (post-tax, post-subsidy). This effect will be magnified if the incentives are flowing primarily to large firms rather than smaller ones, as this new study suggests to be the case. The report’s findings are relevant to the European Commission’s ruling last week on Starbucks and Fiat, that subsidies created by tax havens harm the ability of small- and medium-sized enterprises (SMEs) to compete.

Shortchanging Small Business looks at 15 incentive programs in 13 states that are well-documented in Good Jobs First’s Subsidy Tracker database, plus one Missouri program that is highly transparent online (and will soon be included in Subsidy Tracker), for a total of 16 programs in 14 states. Overall, these programs account for 4228 individual awards allocating over $3.2 billion.

Note that these are not one-off deals for a large company: For example, as I showed in my special report on North Carolina incentive packages, the deal Google received from the state in 2007 was worth $140.6 million at present value to the company. This dwarfs the $26.4 million over six years given by the One NC Fund, included in this Good Jobs First report, and is only one of a number of megadeals in North Carolina.

Moreover, neither are they apparently open programs with criteria that in fact rule out small companies through the use of large job creation or investment requirements. No, the 16 programs considered in this report are all genuinely available to large and small firms alike; that is what makes this such an important study. This report excludes programs directed solely to small businesses, but Good Jobs First has promised a separate analysis of those generally poorly funded measures.

What, then, is a small company? For the purposes of this study, it has to have fewer than 100 employees, it has to be an independently owned local firm, and it must have fewer than 10 establishments. If a company does not meet all three criteria, it is classified as a large company. Note that this cutoff is considerably below that of the U.S. Small Business Administration, which for most industries is 500 employees. On the other hand it is larger than the European Union definition of a small enterprise (50 workers) but smaller than the EU definition of a medium-sized enterprise (250 workers).

Despite the fact that small companies are theoretically eligible for the 16 programs analyzed, they receive only 30% of the awards and 10% of the money available through them. As I pointed out earlier, combined with one-off megadeals, programs that only appear to be open to small firms, and tiny programs specifically for small business, this adds up to a large bias in favor of big business, with all the consequences noted above.

What should be done? The report notes that many small businesses cannot benefit from the tax credit or tax abatement involved in the programs analyzed and, in a separate survey, many small business leaders said they would benefit more from public goods like job training, education, and transportation. Therefore, Good Jobs First proposes a reduction in incentive spending going to large companies, to be effected by using hard caps on each program’s spending, on cost per job, and on the total amount any one company can receive under a given subsidy policy. While such caps are unusual in the United States, they are the main basis for the European Union’s successful control over incentive spending there, elaborated further to have higher caps in poorer regions and a cap of 0 in the richest EU regions. In addition, the caps proposed by Good Jobs First could be augmented by using an EU metric known as aid intensity, which is simply the subsidy divided by the investment. While a cost per job cap is useful at resisting excessive capital intensity, an aid intensity cap is a valuable metric when substantial jobs are created but the government is paying for virtually the entire cost of the project (for example, Electrolux in Memphis).

I’m looking forward to further extensions of this research, and you should, too.

Cross-posted from Middle Class Political Economist.

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EU slams Starbucks and Fiat advanced tax rulings as state aid; Is Apple next?

The European Commission decided two of its major tax subsidy cases on Wednesday, October 21, and the rulings could not have been worse for Starbucks and Fiat (h/t Chillin’ Competition). These cases can be seen as a barometer of what is to come in the legally similar but much larger case of Apple, where potentially billions of euros could be at stake.

The gist of the three cases is that tax haven subsidiaries of each company (Starbucks in the Netherlands, Fiat in Luxembourg, and Apple in Ireland) were given advance tax rulings by each country that were so removed from economic reality as to constitute illegal subsidies (“state aid” in Euro-speak) under EU competition law. In the Commission’s decision, it was emphasized that the artificially low tax bills created by the rulings gave them an unfair competitive advantage over competitors, especially small business (“small and medium-sized enterprises” or “SMEs” in Euro-terminology).

Since the alleged subsidies were not notified to the European Commission in advance as required by EU law, the Commission has ruled that Starbucks and Fiat have to repay the illegal aid to the granting countries, with interest. The decision states that each company will owe € 20-30 million in aid repayments.

Of course, both of these cases will be appealed to the European court system, all the way to the Court of Justice of the European Union (CJEU), the highest court in the EU. Tax haven shenanigans are built into the economic structure of both Luxembourg and the Netherlands, and the two countries will do everything they can to maintain the status quo. The Apple case is much bigger, because it goes back all the way to 1991, and some estimates have put its tax savings at billions per year. If Apple loses, and I think it will, we can again be assured that the case will be appealed to the CJEU.

If the Commission makes these decisions stand up on appeal, it will dramatically change the shape of tax havens in Europe (including Switzerland, which the EU holds as being subject to the state aid rules through its free trade agreement). It won’t put them out of business, because the decisions pertain to corporate income tax rather than personal income tax, but the amount of revenue lost on the corporate tax alone is a very big deal.

Cross-posted from Middle Class Political Economist.

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Obamacare hasn’t killed full-time jobs, either

When we last looked at Obamacare as an alleged “job-killer,” Matt Yglesias had just pointed out that 2014, the first full year of insurance on the exchanges, was also the best year for job creation since 1999. But recently a non-blogging friend reminded me of a related anti-Obamacare meme, the idea that employers have been cutting their workers below 32 hours per week so they would not have to provide them with health insurance. His argument was, logically enough, that this would mean a loss of full-time jobs.

As with so many other anecdotal Obamacare horror stories, this one does not stand up to even simple inspection. Just like total job creation, it turns out that full-time (BLS uses 35 hours/week, not 32, by the way) job creation has quickly increased since December 2013, just before exchange insurance went into effect. Not only that, part-time employment has fallen slightly. The Bureau of Labor Statistics’ monthly “Employment Situation” (Table A-9 in both cases) tells the tale.

Date            Full or Part Time     Not Seasonally Adjusted Jobs          Seasonally Adjusted Jobs

December 2013   Full-time          116,661,000                                      117,278,000

July 2015             Full-time           123,142,000                                     121,589,000

Change                                                 + 6,481,000                                      + 4,311,000

 

December 2013   Part-time           27,762,000                                        27,372,000

July 2015             Part-time            26,850,000                                        27,265,000

Change                                                     – 912,000                                          – 107,000

I included both seasonally adjusted and not seasonally adjusted data for completeness sake, but when we are comparing a summer month to a winter month, surely the seasonally adjusted figures are the correct ones to use. For those of you keeping score at home, then, full-time jobs have increased by 4.3 million since Obamacare exchange insurance went into effect, whereas part-time jobs have fallen by 107,000. Neither of these fits the anecdotes of workers being shunted from full-time to part-time work to avoid providing insurance. This increase in full-time work has been accomplished in the span of just 19 months, or an average of over 226,000 new full-time jobs per month.

Of course, it’s theoretically possible that using sophisticated statistical controls might uncover a hidden negative relationship; that we’d have even more full-time jobs than we do if the exchanges hadn’t gone into effect. Even if that were true, it’s obvious that everything else going on in the Obama economy is having a much bigger effect on full-time employment, so there’s no justification for using the epithet “job-killing” on the off chance that it’s true.

Cross-posted from Middle Class Political Economist.

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The basics of tax increment financing subsidies

Last week I made a presentation to the Colorado Assessors Association on tax increment financing (TIF) subsidies. With the organization’s permission, I am sharing the PowerPoint presentation for my talk, as well as adding this introduction.

The talk begins by putting TIF in the context of subsidies generally. As a subsidy, TIF is subject to the three main potential drawbacks of their use: Inefficiency, inequality, and environmental harm. These differing harms often call forth coalitions that prove the adage that “Politics makes strange bedfellows.” One example was a joint appearance by Ralph Nader, Rep. John Kasich, and Grover Norquist in 1997. I was in a similar coalition in 2003 fighting a TIF that would have leveled downtown O’Fallon, Missouri, then the fastest-growing city in the state. Our leadership included people from liberal Democrats to future Tea Party members. Similarly, the mayor and TIF-supporting council members were bipartisan. It’s easy to find single-party governments that abuse subsidies, too, whether it’s now-Governor Kasich offering $400 million to move Sears from Illinois, or Democratic stronghold Kansas City, MO, offering multiple multi-hundred million dollar TIFs.

I then go on to discuss the legal particularities of TIF, which gives it another level of controversy. Tax increment financing typically allows governments to capture the property tax revenue of other districts (something especially hard on school districts), and these revenue fights are matched by the intense hatred the use of eminent domain usually brings forth.

The very first state to adopt TIF (in 1952), California axed TIF in 2011 due to its budget crisis, caused in part because the state reimbursed property tax revenue that school districts lost to TIF. Last year, a new version of TIF was passed, but it completely removes the option to take money from school districts, and lets other taxing jurisdictions opt out as well (see below).

 

Also of note in TIF history is the constant pressure to expand the locations able to use it (i.e., progressively less economically deprived areas want it in their subsidy arsenal) and the gross overuse of TIF for retail projects. As I mention in the link, St. Louis-area municipalities gave $2 billion in retail TIF from 1990 to 2007, creating all of 5400 jobs, no more than we’d expect on the basis of the area’s income growth. That’s why the relevant slide says $2 billion = 0 jobs.

Thanks to Karen Miller of the CAA for inviting me and agreeing to let me post the PowerPoint.

Cross-posted from Middle Class Political Economist.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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