Archive for February, 2014
There is serious research and then there is obfuscation that poses as serious research.
I am spending time in Dublin, Ireland, learning about developments here. One thing that is obvious is that the Irish government remains committed to a growth strategy based on using low taxes and low wages to attract foreign investment.
Other European governments are not pleased with Ireland’s low tax strategy. They accuse the Irish government of promoting a tax race to the bottom. Interestingly, no one seems to object to the low wage part of the country’s policy.
During a recent visit to Paris, the Irish prime minister, in the words of the Irish Times:
faced repeated questions over the decision of US internet giant Yahoo to transfer its finance operations from France to Ireland.
Mr Kenny [the Irish Prime Minister] quoted a report by consultants PwC [PricewaterhouseCoopers] and the World Bank Group which found Ireland’s effective corporate tax rate was about 11.9 per cent, higher than France’s effective rate of 8.2 per cent.
This is all well and good, except it appears that the report is based on some strange assumptions. As the Irish Times article goes on to note:
A research paper by Prof James Stewart, professor in finance at Trinity College Dublin, . . . challenges Government claims that effective corporate tax rates in Ireland are just below the headline rate of 12.5 percent.
Instead, [Stewart’s] study suggests Ireland’s effective tax rate for American firms is similar to jurisdictions regarded as tax havens such as Bermuda, based on latest US Bureau of Economic Analysis statistics.
Stewart found that the PwC/World Bank study based its analysis of Irish tax policy on a “hypothetical Irish company that sells ceramic flower pots and has no imports or exports.” Such a company is hardly the best starting point for an investigation of Ireland’s tax treatment of multinational corporations.
Another Irish Times article discusses Stewart’s research results in more detail:
“It is surprising that this [PwC/World Bank] study is frequently cited by Irish Government sources to the effect that effective tax rates in Ireland are not that different or even higher than in other EU countries,” Prof Stewart’s research paper states.
Publicly available data which shows corporate tax payments and profits on a consistent basis across countries is not widely available, according to the paper. However, one such data source is the US Bureau of Economic Analysis which, Prof Stewart maintains, provides a more accurate estimate of effective tax rates for US subsidiaries.
This indicates that effective tax rates for US subsidiaries in Ireland fell from 5.5 per cent in 2006 to 2.2 per cent in 2011.
This reduction is likely to be linked to wider use of tax write-offs – such as tax credits for research and development activity – and profit-shifting measures such as the “double Irish”.
Google is one of the most high-profile beneficiaries. Latest figures indicate that its Irish operation had revenues of €15.5 billion during 2012. However, it ended up paying Irish corporation taxes of just €17 million.
That’s because it charged “administrative expenses” of almost €11 billion to other Google entities abroad, some of which are ultimately controlled from tax havens such as Bermuda. . . .
By contrast, effective rates were many times higher for US firms in the UK (18.5 per cent), Germany (20 per cent) and France (35.9 per cent).
I guess one cannot blame the Irish government for trying to have it both ways—offer low rates while denying it. But what is one to make of the research done by PwC/World Bank? The study’s core deceptive assumption brings to mind all the World Bank and U.S. government studies of free trade agreements which find that free trade benefits all. They obtain this result in large part because their researchers begin their work assuming full employment, balanced trade, and no capital mobility both before and after the agreements.
Capitalism is a dynamic system, driven above all by the private pursuit of profit. Contemporary business decisions, supported by government polices, have been very successful in generating high rates of profit. They have also led to slow and unstable growth. One consequence is the now widely recognized problem of income inequality.
Significantly, this income inequality is reshaping our economy in ways likely to be self-reinforcing. This is highlighted by the concentration of consumer spending in ever fewer hands and the business response.
According to a study discussed in a recent New York Times article,
The top 5 percent of earners accounted for almost 40 percent of personal consumption expenditures in 2012, up from 27 percent in 1992. Largely driven by this increase, consumption among the top 20 percent grew to more than 60 percent over the same period.
Thus, by 2012 the top 5 percent of earners were responsible for approximately the same share of personal consumption expenditure as the bottom 80 percent.
If we focus on the post-recession period, the spending dominance of those at the top is even more striking. As the article notes, “Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.” More broadly, the top 20% of households accounted for approximately 90% of the total increase in real consumption spending over the years 2009 to 2012.
Not surprisingly, this trend has triggered major changes in the economy. In particular, businesses that cater to “middle-income” earners are in decline while those selling to high and low income earners are rapidly expanding:
In Manhattan, the upscale clothing retailer Barneys will replace the bankrupt discounter Loehmann’s, whose Chelsea store closes in a few weeks. Across the country, Olive Garden and Red Lobster restaurants are struggling, while fine-dining chains like Capital Grille are thriving. And at General Electric, the increase in demand for high-end dishwashers and refrigerators dwarfs sales growth of mass-market models. . . .
In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.
“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Mr. Maxwell [head of the global retail and consumer practice at PricewaterhouseCoopers] said. “You don’t want to be stuck in the middle.” . . .
The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.
As for the self-reinforcing nature of this development: luxury spending tends to have the highest profit mark-up, thereby boosting the incomes of those at the top. And low-end businesses prosper only because they underpin their low prices with ever lower wages. In sum, structural changes are well underway that, if not opposed, are likely to lock-in this growing income inequality to the detriment of most working people.