Category Archives: Politics

How is Foreign Tax Repatriation Different than Immigration Amnesty?

As politicians in DC lurch toward some sort of bipartisan approach to immigration, conservatives remain adamant that immigrants currently in the country illegally be given no path to citizenship. These conservatives see no reason to reward lawbreakers with citizenship, and worry about the message that will send to future immigrants: if you come here illegally and stay long enough, you will get away with it. I understand this perspective; amnesty reeks of moral hazard. I think that realistically, we need to find a path anyway – we can’t just deport 11million people, many of them employed and embedded in society. But I do very much appreciate the concerns of conservatives on this issue.

However, at the same time, the same conservatives are calling for a tax holiday that will let US companies repatriate their offshore cash at reduced tax rates. Under current law, companies can keep their overseas profits in low tax countries, but if they try to bring that cash back home, they have to pay higher US taxes. In 2004 companies were granted a one-time holiday, with tax rates reduced to 5 percent, and they took advantage by bringing a ton of dough back into the US. But of course, all this tax amnesty did was encourage companies to keep driving their revenue through offshore tax havens, and then use their lobbyists to push for another tax holiday.

If amnesty creates moral hazard, by encouraging people to do the wrong thing and then be forgiven, why would multinational companies be different than illegal immigrants? Storing your cash offshore is not illegal, while immigrating illegally obviously is, but the motivation component is the exact same: if you believe that amnesty encourages behavior, then you need to apply that theory equally across your policies.

By the way, among the leading rationales advanced for the tax holiday is that companies will invest the repatriated cash in jobs and growth. However, studies of the last holiday showed that companies mostly returned the cash to shareholders. Even the Wall Street Journal says so! Here is a story about how companies play the cash repatriation game, and here is one about how hard corporate lobbyists are pushing for a holiday.

Kids Say Hey: The Casualization of America

Here is something interesting I’ve noticed over the last year or so. The generations younger than mine – let’s say everyone under the age of 25 or so – use the word “hey” the same way my generation used “hello” and “dear” and “to whom it may concern.” When I get a cold email from a recent college grad who wants an informational interview, she starts it “Hey Thoughtbasket.” When I was in her shoes, I started such letters “Dear Thoughtbasket.” When my nephew sends me an email, he uses ‘hey” instead of “hi” or “hello” or just “Thoughtbasket.” When there are notes in the common areas of my building, they begin with “hey fellow tenants.”

I don’t love “hey” as a word; it’s too vague for me; I prefer more precision in my language. However, the real point of this post is to use “hey” as an example of the casualization of our society. Rather than a formal structure, in which the younger generation uses respectful language toward their elders, our society has eased into a more casual stance, in which we’re all pals who can say “hey” and then high-five each other. I’m not saying this is a bad thing….I am generally in favor of breaking down barriers, whether they are class-based or age-based. But it does seem kind of coarse. Like when there was that controversy a few years ago because a women’s athletic team wore flip-flops to the White House. There are situations where a little respect can go a long way, and respect is not conveyed by the word “hey.”

And of course, regular Thoughtbasket readers know how I feel about flip-flops; they were the topic of my first blog posting ever.

Go casual! Flip flops at the White House.

Go casual! Flip-flops at the White House.

Is Gun Culture Just As Bad As Hollywood?

When Wayne LaPierre of the NRA held his famous press conference after the Sandy Hook massacre, he criticized and cast blame on Hollywood and the videogame industry and their violent products. This is a common trope of the NRA and certain elements of the gun crowd: that our society’s media products glorify violence and create a culture where massacres are bound to happen.  According to LaPierre, the videogame industry is “a callous, corrupt and corrupting shadow industry that sells and stows violence against its own people” and thus we have “killers, robbers, rapists, gang members who have spread like cancer in every community across our nation.”

And here’s the thing: I don’t totally disagree. The data from studies of this are inconclusive, including a new study that just came out: see more here and here. But to me it seems hard to believe that a person, especially a malleable teenager, can keep watching grotesquely violent movies like the Saw series, or playing shoot ‘em up games like Doom or Killzone, and not become slightly inured to violence. Maybe more violent, maybe not, but certainly with a greater tolerance for violence.

But if you buy into the concept that violent memes in culture could play a role, then the NRA itself, and those same certain elements of the gun crowd, are just as culpable as Hollywood and videogame makers.  I mean, look at the NRA’s favorite saying: “I’ll give you my gun when you pry it from my cold, dead hands.” Kind of violent, right? Or another quote from LaPierre at his press conference: “The only thing that stops a bad guy with a gun is a good guy with a gun.” How is that statement less glorifying of violence than Killzone? Or remember Sharron Angle and her call for “2nd amendment remedies” to government decisions she didn’t like? That sounds like a glorification of violence to me. How about the claim of gun rights activists that the 2nd amendment is all about fighting tyranny by enabling armed revolt against the government; that too sounds like promoting violence against laws you don’t like. [Note: I am not versed in the history of the 2nd amendment, so I have no idea if this claim is right or not; I only point out that it tends to be expressed in a way that glorifies violence.]

There is a ton to be said about gun rights and gun safety, and I’m not saying any of it, although I did recently point out that stupidity + guns = badness. But I am saying that if you want to talk about how culture breeds violence, you better be careful about your own words, because they too might breed violence. In my opinion, the gun crowd isn’t careful, and their cultural contributions are as violence-tinged as anything out of Hollywood.

By the way, has anyone ever noticed that LaPierre sort of looks like the villain in Raiders of the Lost Ark, right before the Ark of the Covenant melts his face away?

Wayne LaPierre

Wayne LaPierre

Villain With Face Melting

Villain With Face Melting

Why is Health Care So Expensive?

According to Steven Brill, whose 26,000 word article in Time is getting all kinds of attention, one big factor is price negotiation. An uninsured patient can’t negotiate at all, so they get charged $1.50 for a single Tylenol in a hospital. Insurance companies negotiate on their customers’ behalf, so they get charged less. And Medicare, which is the biggest player of all, negotiates hard — volume discounts and all, just like any big customer anywhere in the world — and thus pays the least for the same products and procedures.

Interestingly, Brill steps away from one obvious solution — have Medicare cover everyone — because he says it will leave doctors underpaid. Felix Salmon takes him to task for this, pointing out that Brill never states what “underpaid” is. Since my greedy doctor post remains my most read and commented of all time, I feel a certain obligation to chime in here. I have never seen any analysis that tries to show what doctors might get paid in an all-Medicare system. Maybe it would be pretty low; if GPs maxed out at $50,000 per year, they probably wouldn’t spend all that money and time at medical school. But maybe doctors would still get paid what they do now, and it would be hospital administrators (whose multi-million dollar salaries are the true villains in Brill’s piece) getting a pay cut. Or maybe it will be CEOs of drug companies getting paid less; who would complain about fewer $78 million severance packages being paid to CEOs?

You can read more commentary regarding Brill’s article here and here.

One Reason to Limit Access to Guns

With a renewed national dialog about gun safety (I am adopting James Fallow’s nomenclature; let’s focus not on controlling guns, but on improving gun safety), I want to point out that stupidity and aggression are not constitutionally protected, and when you combine them with guns, bad things can happen. Things like:

  • A 6th grader bringing a gun to school for “protection,” and then pointing that gun at other children
  • A man forcing another man to do the moonwalk at rifle point
  • A man shooting and killing his roommate in an argument over how to cook pork chops
  • A man pulling a gun on a furniture delivery man in an argument over paying a delivery fee
  • A man going to his apartment and bringing out a rifle after having his penis size insulted in his apartment building pool

No 2nd Amendment exegesis here. Just noting that people can do a lot of awful things, and when you put killing devices in their hands, those awful things can get even worse.

Of course, 60% of my examples took place in Florida, so maybe the answer is to have tougher gun laws in that state, but leave the rest of the country alone.

Overseas Cash and Justin Bieber

As tax reform is discussed in preparation for our upcoming leap off the fiscal cliff, among the topics has been corporate tax reform, in particular how American companies are taxed on their overseas income. As the system currently works, as long as US companies keep their cash offshore, they don’t have to pay US taxes. Once they bring that money back, it’s a flat 35% tax rate. So, not surprisingly, US companies with multinational operations have a lot of cash stashed overseas. Read all about it here, here, here and here.

The thing is, some of these companies have so much cash overseas, and so little here in the US, that they’re borrowing money to fund their operations here, or to fund dividends and stock buybacks. But they (the companies and the reporters covering this topic) are making it seem like the companies CAN’T bring the money back to America. Let’s be very clear: they CAN bring the money back, it will just cost them 35%.

For example, here is how the WSJ described it:

Each of these companies is grappling with a growing problem that comes from keeping Uncle Sam away from their foreign income: How to round up enough cash in the U.S. to cover items like dividends, share repurchases, debt repayments and pension contributions.

And here is how a CFO described it in the WSJ:

“You end up with the really peculiar result where you are borrowing money in the U.S. while you show cash on the balance sheet that is trapped overseas,” said Bruce Nolop, former chief financial officer of Pitney Bowes and E-Trade Financial and now a director at Marsh & McLennan. “It is a totally inefficient capital structure.”

Now I understand why companies are keeping their cash overseas: it’s their job to minimize taxes. And I can certainly see why they would rather borrow at historically low interest rates (like 5%) than pay a 35%. No complaints from me on either front. But for the companies to act like it’s just impossible for them to bring the cash home annoys me. They choose not to bring the cash home, for good reasons, but if they really wanted to they could. It’s like saying that you can’t get Justin Bieber to play at your daughter’s bat mitzvah. You can, but it’s going to cost you a boatload.

California & SF Voter Guide

Thoughtbasket readers, if you live in San Francisco, or in other parts of California, and haven’t had time to read up on all the initiatives and propositions on next month’s ballot, a friend of mine took the time to prepare a voter guide. I can’t vouch for his recommendations — I don’t agree with all of them — but his summaries are concise and amusing, which is a pretty good combo. Make up your own minds, of course, but this might be a useful tool.

Check out the quick voter guide at www.quickvoterguide.org

 

Aside

First of all, how come nobody told me that Richard Posner and Gary Becker had their own blog? I have never referenced Becker in this blog, but he is a big hitter economist of the Chicago school. But I have … Continue reading

Private Equity Parallels the Mortgage Business

I’ve been trying to ignore all the discussion in the presidential campaign about Bain Capital and leveraged buyouts and private equity, but pull is too strong and I can no longer resist. Must….write…blog…entry.

First off, let me say that buyouts* are neither inherently good nor bad. People who are completely bashing buyouts as inevitably bad, as rapacious tools for the 1%, are simply wrong. People who are utterly defending buyouts as inevitably good, as the perfect form of free market capitalism, are also wrong. I mean, duh. Nothing as complicated as a buyout is going to just be good or just be bad.

Good: having a buyer focus a complacent or bloated company on its core products is often very productive. Bad: having a buyer stop investing in R&D and shut down pensions while continuing to pay itself fees and dividends is often very troubling.**

Rather than delve more into the good or the bad, I do want to point out one thing that isn’t often mentioned: how similar the buyout business is to the mortgage business as practiced on Wall Street. Both businesses are leveraged gambles with the government picking up at least some of the tab if you lose. We all know how Wall Street borrowed massively to bet on mortgage-backed securities. And they made jillions, paying out huge bonuses, until it went wrong, and the government bailed all of Wall Street out. Heads they win, tails we lose.

Buyout barons have a similar deal. Not quite as good, but similar. They borrow heavily to amplify the returns on their deals. If it goes well, they make tons; that is why Mitt Romney is so rich. But if it goes poorly, the Bains and KKRs of the world get to walk away, using the government bankruptcy code, and leaving the workers’ pension plan in the hands of the Pension Benefit Guaranty Program, a government agency. I don’t want to overstate the case: sometimes private equity firms lose money on bad deals. They don’t fully socialize their losses. But their losses are limited to that deal; the structure is such that they can walk away from bad deals.

In the meantime, they are borrowing against the assets of the company and paying themselves dividends with the money. You might say “they can’t be applying too much leverage, or banks wouldn’t lend them the money.” Sure, just like banks would never give mortgages to pool cleaners who made $25,000 per year. Oh wait, they did, repeatedly. To quote Mike Konczal, who is quoting Josh Mason, “It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country’s productive enterprises.”

Finally, I should also note that buyouts are structured as giant tax dodges. Again, this is not inherently bad; we expect companies and investors to legally minimize their taxes. But the fact is that a big part of the value of buyouts is their tax efficiency. That is why buyout firms continually sell companies to each other in a round robin of tax avoidance; they aren’t all adding “operational value.” There is only so much a bunch of ex-investment bankers can do to change the operations of a company, but each time a company is sold there is a new set of tax avoidance strategies.

How does this work? First of all, because interest payments are tax deductible, the leverage applied in a buyout is essentially subsidized. Much like homeowners are encouraged to take out larger home loans by the tax deductibility of mortgage interest, buyout firms are encouraged to leverage up as much as possible. This enables the company’s operating income be used on debt payments, amplifying returns, rather than going into taxable income. In addition, at the time of acquisitions, assets of the company can be written up to fair market value and then depreciated, with the non-cash depreciation expense also tax-deductible. That step-up in asset value at acquisition is precisely why buyout firms keep flipping companies to each other. In a perfect deal, the post-acquisition company will have taxable income below zero, but positive cash flow. In other words, regardless of whatever operational improvements a buyout firm might implement, a huge part of the value that accrues to that buyout firm is due to financial engineering, specifically financial structuring to avoid taxes.

* I will use the term “buyouts” here, which are usually leveraged but don’t need to be. Since “private equity” also refers to venture capital, I will avoid using that term.

** From a recent Vanity Fair article:
“According to Kosman, “Bain and Goldman—after putting down only $85 million … made out like bandits—a $280 million profit.” Dade’s debt rose to more than $870 million. Romney had left operational management of Bain that year, though his disclosures show that he owned 16.5 percent of the Bain partnership responsible for the Dade investment until at least 2001.
Quite soon, however, a fragile Dade faced adverse conditions in the currency markets, and it had to start in effect cannibalizing itself, cutting into the core of its business. It filed for bankruptcy in August 2002 and Bain Capital departed. When Dade emerged from bankruptcy, its new owners invested in long-term R&D, and it flourished again.”

The Fakery of Paul Ryan

Like most (all?) Washington politicians, Paul Ryan is a liar and a hypocrite. Read about it here. Skip to page 6 for the ultimate example of Ryan’s nearly pathological fakery.