Archive for March, 2014
Corporate profits as a share of GDP are way up. This is supposed to be good for all of us—higher profits, we are told, means greater investment and job creation.
Unfortunately, this is not what is happening. Investment as a share of GDP is down. Job creation is anemic.
The reality is that corporations no longer appear interested in channeling their earnings into productive activities. As the charts below highlight, they are increasingly content to use their profits to purchase stock, including their own stock.
The charts were republished by Yves Smith in her blog Naked Capitalism from the Financial Times. The first shows the growth of stock purchases by non-financial corporations.
As Smith explains:
Notice that US corporations have been buyers in aggregate since 1985. Now admittedly, that does not mean they stopped investing, since the primary source of investment capital is retained earnings, and companies also typically prefer to borrow rather than issue stock. But as of the 1980s, they were already preferring buying stocks (then mainly of other companies rather than their own, as in acquisitions) to the harder work of expanding their business de novo. Deals are much sexier than building factories or sweating new product launches.
But by the mid 2000, companies had indeed shifted to being net savers rather than net borrowers, which was an unheard of behavior in an expansion. That is tantamount to disinvesting.
The second chart reveals the new corporate orientation even more clearly, with corporate profits increasingly channeled into stock purchases rather than productive investment.
This corporate behavior is highly beneficial for both managers whose salaries are tied to the stock prices of their respective firms and those few at the top of the income scale who own a commanding share of the country’s capital assets. As for the rest of us . . . well, it’s a bad deal.
America stands out for the high share of its labor force that is employed in what economists Samuel Bowles and Arjun Jayadev call “guard labor.”
There are now more people working as private security guards than high school teachers.
The following graph highlights the number of “protective service workers” employed per 10,000 workers and the degree of income inequality in the year 2000 for 16 countries. The United States is tops on both counts.
Two things stand out from this graph beyond U.S. “leadership.” The first is the relationship between the share of protective service workers and inequality. As Bowles and Jayadev comment:
In America, growing inequality has been accompanied by a boom in gated communities and armies of doormen controlling access to upscale apartment buildings. We did not count the doormen, or those producing the gates, locks and security equipment. One could quibble about the numbers; we have elsewhere adopted a broader definition, including prisoners, work supervisors with disciplinary functions, and others.
But however one totes up guard labor in the United States, there is a lot of it, and it seems to go along with economic inequality. States with high levels of income inequality — New York and Louisiana — employ twice as many security workers (as a fraction of their labor force) as less unequal states like Idaho and New Hampshire.
When we look across advanced industrialized countries, we see the same pattern: the more inequality, the more guard labor. As the graph shows, the United States leads in both.
The second is the rapid rise in the U.S. share of guard labor and inequality from 1979 to 2000.
For those who like definitions: The category protective service workers includes those employed as Private Security Guards, Supervisors of Correctional Officers, Supervisors of Police and Detectives, Supervisors of all other Protective Service Workers, Bailiffs, Correctional Officers and Jailers, Detectives and Criminal Investigators, Fish and Game Wardens, Parking Enforcement Workers, Police and Patrol Officers, Transit and Railroad Police, Private Detectives and Investigators, Gaming Surveillance Officers, and Transportation Security Screeners. Inequality is measured by the gini coefficient; the higher the number the greater the degree of inequality.
As noted above Bowles and Jayadev have explored broader measures of guard labor. One such measure adds members of the armed forces, civilian employees of the military, and those that produce weapons to those employed as protective service workers. The total was 5.2 million workers in 2011.
One can only wonder in what ways and for whom this large and growing dependence on guard labor represents a rational use of social resources.
Thomas Piketty is an expert on income inequality. He and Emmanuel Saez have produced some of the best work measuring its explosive growth.
Piketty has just published a massive new book on the subject called “Capital in the Twenty-First Century.” A New York Times review of it by Eduardo Porter begins as follows:
What if inequality were to continue growing years or decades into the future? Say the richest 1 percent of the population amassed a quarter of the nation’s income, up from about a fifth today. What about half?
To believe Thomas Piketty of the Paris School of Economics, this future is not just possible. It is likely. . . .
His most startling news is that the belief that inequality will eventually stabilize and subside on its own, a long-held tenet of free market capitalism, is wrong. Rather, the economic forces concentrating more and more wealth into the hands of the fortunate few are almost sure to prevail for a very long time.
Piketty’s pessimistic view is based on his argument that income generated from capital normally grows faster than the economy or income from wages. This means that the private owners of capital benefit disproportionately from growth, which makes it easier for them to increase their asset holdings and by extension future income. And, since wealth and income translate into political power, we face a self-reinforcing dynamic leading to ever growing inequality.
Porter provides some charts taken from Piketty’s work illustrating the rise in private wealth as a share of national income and the growth in inequality in several countries.
Eric Toussaint, a Belgian political economist and president of the Committee for the Abolition of Third World Debt, has a longer more substantial review of the book, in which he shares the following table from Piketty.
The unequal ownership of capital in Europe and the United States
|Share of different groups in the total amount of wealth||Europe 2010||United States 2010|
|(richest 1% alone)||25%||35%|
|The poorest 50%||5%||5%|
One thing that jumps out of this work is that a serious wealth tax is capable of generating substantial funds that could be used to support public services.
Piketty’s work also suggests that embracing a system based on maximizing the returns to private owners of capital is a mistake for the great majority of working people.
A recent study by the investment bank Credit Suisse provides more evidence for this conclusion. As Michael Burke explains,
the study . . . shows that long-term growth rates of GDP in selected industrialized economies are negatively correlated with financial returns to shareholders.
That is, the best returns for shareholders are from countries where GDP growth has been slowest, and vice versa. Where growth has been strongest, shareholder returns are weakest. . . .
The negative correlation does not prove negative causality. But it does support the theory which suggests that the interests of shareholders are contrary to the interests of economic growth and the well-being of the population.
Here is a chart taken from the study which highlights the negative correlation found by the Credit Suisse researchers.
All this information is worth keeping in mind the next time business and political leaders tell us that the key to our well-being is boosting business confidence, the market, or private returns on investment.
Globalization offers companies many ways to boost profits at the public expense. A case in point: they can use differences in national tax laws to slash their taxes.
Google, Apple, and Microsoft are among the most skilled at this, although they are far from alone.
For example, a recent report on Google’s tax strategy, which takes advantage of differences between U.S. and Irish tax regimes, highlights what is at stake:
The Financial Times reports that … Google Netherlands Holdings … received €8.6bn in royalties from Google Ireland Ltd and €232.8m in royalties from Google’s Singapore operation. All but €10.4m of this was paid out to Google Ireland Holdings, a company that is incorporated in Ireland but technically controlled in Bermuda, where there is no corporation tax.
The FT says that differences between the Irish and US tax codes mean that this dual-resident company is viewed as Irish for US tax purposes but Bermudan for Irish purposes. It acquired much of Google’s intellectual property in 2003, which it licensed to Google Ireland Ltd, a Dublin-based business that is at the heart of its global operation. The business, which employed 2,199 people last year, paid €17m in Irish corporation tax, having reported pre-tax profits of €153.9 on turnover of €15.5bn. . . .
Google’s provision of €17m in corporate tax in 2012 to Ireland on the foreign net income of $8.1bn it booked in Ireland, gave an effective tax rate of 0.21%.
Google’s foreign-paid tax rate in 2012 was 4.4%.
Pretty complex stuff—but that isn’t surprising. A lot of money is at stake and the companies can afford to hire the best legal and financial help.
What is critical to understand is that governments are well aware of these corporate maneuvers and have done nothing to end them while simultaneously demanding cuts in public services because of a lack of tax revenue.
These maneuvers are so widely employed that the IMF decided to provide the following explanation of one of the most popular–the “Double Irish Dutch Sandwich” tax avoidance strategy–in its October 2013 Fiscal Monitor:
- Here’s how it works (Figure 5.1 above): Multinational Firm X, headquartered in the United States, has an opportunity to make profit in (say) the United Kingdom from a product that it can for the most part deliver remotely. But the tax rate in the United Kingdom is fairly high. So . . .
- It sells the product directly from Ireland through Firm B, with a United Kingdom firm Y providing services to customers and being reimbursed on a cost basis by B. This leaves little taxable profit in the United Kingdom.
Now the multinational’s problem is to get taxable profit out of Ireland and into a still-lower-tax jurisdiction.
- For this, the first step is to transfer the patent from which the value of the service is derived to Firm H in (say) Bermuda, where the tax rate is zero. This transfer of intellectual property is made at an early stage in development, when its value is very low (so that no taxable gain arises in the United States).
- Two problems must be overcome in getting the money from B to H. First, the United States might use its CFC rules to bring H immediately into tax*.
- To avoid this, another company, A, is created in Ireland, managed by H, and headquarters “checks the box” on A and B for U.S. tax purposes. This means that, if properly arranged, the United States will treat A and B as a single Irish company, not subject to CFC (controlled foreign corporation) rules, while Ireland will treat A as resident in Bermuda, so that it will pay no corporation tax. The next problem is to get the money from B to H, while avoiding paying cross-border withholding taxes. This is fixed by setting up a conduit company S in the Netherlands: payments from B to S and from S to A benefit from the absence of withholding on nonportfolio payments between EU companies, and those from A to H benefit from the absence of withholding under domestic Dutch law.
This clever arrangement combines several of the tricks of the trade: direct sales, contract production, treaty shopping, hybrid mismatch, and transfer pricing rules.
*The United States will charge tax when the money is paid as dividends to the parent—but that can be delayed by simply not paying any such dividends. At present, one estimate (cited in Kleinbard, 2013) is that nearly US$2tn is left overseas by US companies.
In considering the financial significance of these types of tax maneuvers, Finfacts Ireland notes:
The IMF says that assessing how much revenue is at stake is hard. For the United States (where the issue has been most closely studied), an upper estimate of the loss from tax planning by multinationals is about US$60 billion each year – – about one-quarter of all revenue from the corporate income tax (Gravelle, 2013). In some cases, the revenue at stake is very substantial: IMF technical assistance has come across cases in developing countries in which revenue lost through such devices is about 20% of all tax revenue.
In short, globalization dynamics tend to boost profits at the public expense. We need to be resisting rather than strengthening them.