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Webb on SS

If I could put my Vulgat Marxist hat on for a second another major difference between an invested pension fund and Social Security is that the fiormer fattens its balance by maximizing the extraction of value from labor productivity (and so increases ROI on capital) where SS thrives when labor retains as large a share of its own productivity as is consistent with drawing needed capital investment. And while some would argue that any reduction in ROI automatically leads to Capital Going Galt, the real world suggests that some capitalists will stick around even at smaller margins. (Not every pizza maker wants to be Pizz-onaire like Papa John, some just want to run a nice pizzeria)

Back in 2005 Dean Baker put forth his NELB (No Economist Left Behind) Challenge that demanded that privatizers show how they could get historic ROI on equities using the economic numbers assumed for Intermediate Cost {Dean didn’t formulate it this way, blame me and not him}. And some people claim to have met the challenge, but on inspection it SS by drawing much of their return by moving production overseas and so maintaining productivity at the cost of American worker wage. Left unexplained was how this magic was supposed to work when those same workers were being called to fund their private accounts out of now decreased wages so as to share in gains of even more suppressed wages of overseas workers was left unexplained.

That is you don’t have to be a full throated advocate of Labor Theory of Value to understand that ROI on production investment depends crucially on cutting labor costs for any given productivity unit. And conversely Real Wage increases by taking a bigger share of productivity gains.

This to me explains why union pension funds heavily invested in company stock will almost always come a cropper. Managements need to maximize ROI for stockholders as a whole in practice means starving the compensation of workers depending on the pension fund. Most easily by just deferring company contributions over time and then complaining about ‘unsustainable promises’ based on ‘unfunded liability’. Social Security reduces the inclination for labor leaders and more senior vested members in the plan to buy in to “starve the new guy with two tier wages and shaft him by going from DB to DC with corporate ‘match’ (if the match ever comes). Whereas SS benefits wherever actual wage compensation increases, whether that comes at the expense of ROI or not.

SS vs pensions is not just about time shift between contribution and payout, each reacts differently to Real Wage as share of productivity. Not in linear fashion. But still.

 I agree in principle. Which suggests a discussion focused on three points:

One) what level of ultimate productivity does the current Intermediate Cost Alternative projection assume?

Two) is that level of productivity actually justifiable given all we know (or think we know) about future economic trends?

Three) are there ways to address productivity through policy so as to attain results above IC and approaching LC (Low Cost and also fully funded SS) numbers?

But we never have that discussion or indeed anyone actually using the ultimate productivity number in question. Instead we have hand waving that in effect asserts Intermediate Cost outcomes and then proposes solutions that implicitly rely on much better productivity numbers.

This shell game was highlighted in 2005 by Dean Baker with his NELB (No Economist Left Behind) Challenge which in effect asked privatizers to show how they could achieve traditional rates of return on equities given the productivity assumptions of Intermediate Cost.

And I added the request that if it became necessary for privatizers to adjust those productivity numbers up then that they should rescore Social Security outcomes.

The overall response to both challenges was crickets. But I haven’t given up hope that someone would step up to the plate. Either future productivity numbers are sucky enough that all retirement schemes are moot or there is some potential upside in the direction of SS solvency. But crisis mongers can’t have it both ways.

Maybe we are fucked. Fine admit that and we can move on to mitigation. Which won’t include magical returns on equities given IC productivity numbers. Over to you.

Jan 16, 2013, 9:51:00 PM

Table V.B1.—Principal Economic Assumptions
Ultimate Productivity (2020 on) 1.68%
Ultimate Real Wage: 1.1%
Real interest: 2.9%
Nominal interest: 5.7%
Unemployment: 5.5%
Real GDP: 2.1%

Are those really our best estimates of MEDIAN outcomes? Are there exactly no policy proposals that could target ANY of those numbers in ways that would improve solvency?

If so why? And why not? Until we actually have discussions focusing on the actual numbers underlying Social Security ‘crisis’ I have to call bullshit. Note that the corresponding numbers for fully funded Low Cost are 2.8% Real GDP and 1.7% Productivity. Are those really such pie in the sky numbers that even results approaching them are out of the question? And if not how does that translate to solvency scoring?

Until I get some answers to those questions a few sorta lazy claims about productivity aren’t going to cut the mustard. MAKE me look like an uninformed IDIOT. Using NUMBERS.

Jan 16, 2013, 10:03:00 PM

Dell restructuring–all for a tax advantage?

by Linda Beale

Dell restructuring–all for a tax advantage?

David Cay Johnston writes for Tax Analysts, in Dell’s Multiple Restructurings Aid It in Tax Avoidance (2013), about a global reorganization disclosed by Dell in its January 2007 Form 8-K filed with the SEC:  “just before the end of 2006, [Dell] issued more than 475 million shares worth $12 billion to invest in a subsidiary.”  In the Form 8-k, Dell notes that “Dell has modified the corporate structure of certain of its subsidiaries to achieve more integrated global operations and to provide various financial, operational and tax efficiencies”  (as quoted in the Johnston article).

What Dell did was remake itself in a way that lets it escape taxes on profits earned in the United States by running them through a Netherlands entity and newly formed subsidiaries in Singapore and the Cayman Islands.

Dell later quietly dropped the Singapore and Cayman Islands entities in what appears to be a pattern of remaking its corporate structure every few years. This nuanced timing pattern may have great significance as a tool for tax avoidance because IRS corporate audit practices were established on the assumption that companies tend to have stable structures. The IRS rarely audits newly formed entities.

The documents suggest that Dell created companies with no apparent purpose except to funnel profits into jurisdictions where they would be untaxed. In some cases, subsidiary names existed for a day or so and then were changed to the names of existing entities. The company shuffled its subsidiaries like a deck of cards — a deck stacked against shareholders and the IRS.

Sometimes the deals used companies with identical addresses, suggesting circular flows in which what would be taxable profits in the United States were run through offshore entities with no discernible purpose except escaping tax.  Id.

Describing the work of a couple who sleuthed through Dell’s state filings and court papers to examine its tax compliance, Johnston reports:

Before one restructuring, Dell Inc. sold products to domestic customers through Dell Catalog Sales Corp., which shared the same address in Texas.
The couple distilled from annual corporate ownership and sales tax filings with state governments, as well as stipulations in various civil lawsuits, that Dell then replaced this simple organizational structure with a hierarchy of tax haven holding companies.

In all, Dell inserted four new companies between the parent and operating entities, which use the same Texas street address.

The result was that a Texas company reported to a Netherlands company that reported to a Singapore company that reported to a Caymans company that reported to what appears to be another Netherlands company that then reported back to the Texas headquarters.

This makes business sense? I cannot fathom how — except to escape taxes.

And because Dell publicly discloses its untaxed offshore profits and the expected tax rate upon repatriation of those profits, those numbers support the suggestion that the elaborate creation (and killing) of subsidiaries has one primary purpose–the reduction of taxes owed to the US.

Citizens for Tax Justice, in a report last year (Doc 2012-21457 , 2012 TNT 202-22), noted that Dell is one of the few multinationals that discloses how much untaxed profits it holds offshore and the expected tax rate if it brought the money back to the United States.

Dell said it had $15.9 billion of untaxed profits offshore on which it would owe a tax of $5.2 billion, or 33 percent. Since that is almost equal to the 35 percent corporate tax rate, it suggests Dell paid virtually no tax anywhere in the world on those profits, because Congress gives a dollar-for-dollar tax credit on corporate income taxes imposed by other countries.

So what, Johnston asks, is the public benefit of allowing this kind of corporate shell game?  He suggests that for shareholders, the question is whether they are being told enough to evaluate the risks and rewards of holding Dell securities.  And he concludes probably not.  For the IRS, it is whether regular audit techniques will miss what they should catch. And again, he wonders if the IRS policy of letting companies know what will be audited, sticking to those points, and completing audits in fixed time periods isn’t just a giveway to those who are manipulating their tax rates.  Dell’s tax counsel, he notes, would undoubtedly advise that they have reviewed each reorganization step and that they are perfectly legal. 

But Johnston wants an audit, and one that looks at the whay sophisticated companies are adept at working around audit policies.  Dell’s reorganizations, he says, are apparently timed at two-year intervals, injecting considerable complexity into the work of any IRS auditor trying to track their impact. And “the business purpose for this management structure is elusive”, he notes, on one set of slides showing a shuffle of entities that ultimately lands a company still located in Texas under a foreign sandwich of companies and ultimately avoiding US tax on the operating company income. He surmises that Dell owes a billion or more in US corporate income taxes that have escaped capture because of this endless restructuring.

cross posted with  ataxingmatter

1 Comment
  • J.Goodwin says:

    Not a big surprise. When I was auditing for DoD, we found the same stuff in the major defense contractors. Paper reorganizations, entities that didn’t really exist, all designed to affect the flow of overhead allocations and time reporting and evade scrutiny.

    Companies do this, and the big accounting firms are in the business of enabling them to do this, and the government goes to both of them for advice on how to tax them.