Month: May 2016

Gridlock is a word often used these days to describe Congress, and Republicans are often blamed for refusing to compromise. Senator Harry Reid, the frustrated Majority Leader, said in 2013: “the anarchists have taken over. They’ve taken over the House and now they’ve taken over the Senate. People who don’t believe in government — and that’s what the Tea Party is all about — are winning, and that’s a shame.” US News & World Report wrote this about Republican Senate Majority Leader McConnell: “Unless he can stop the Senate from backsliding into gridlock, the leader may find himself and the Republican Party again relegated to the minority.”

Maybe a better explanation is that Obama is failing to engage with Congress to push his legislative agenda. The President’s relationship with Congress is at best arms-length. Kevin Drum wrote in Mother Jones in 2014:

Obama is an odd duck. It’s not just that he doesn’t schmooze. As near as I can tell, he has a barely concealed contempt for Congress. He doesn’t really enjoy playing the political game, and not just because it’s gotten so rancid in recent years.

Obama and Republicans
Obama’s relationship with Republicans is notoriously poor. Reportedly, the problem is the president’s autocratic style (elections have consequences). He doesn’t like negotiating. As reported in the New York Times:

After some back and forth, Mr. Obama pulled out his trump card. ‘Elections have consequences,’ he said, in Mr. Cantor’s recollection, ‘and Eric, I won.’

Aides said the president was being lighthearted and remembered it differently. ‘We just have a difference here, and I’m president,’ Mr. Obama said in this version.

Either way, the back and forth cemented impressions early. Mr. Obama and his team bristled at what they thought was a lack of deference to the president’s popular mandate. Mr. Cantor deemed it representative of Mr. Obama’s ‘my way or the highway’ attitude.”

Obama and Democrats
However, it’s not just the Republicans. The president doesn’t get along with either party in Congress. Obama’s relationship with then-Majority Leader Senator Harry Reid was described by the New York Times:

After his return to the Capitol that afternoon, Mr. Reid told other senators and his staff members that he was astonished by how disengaged the president seemed … the impression the president left with Mr. Reid was clear: Capitol Hill is not my problem.

To Democrats in Congress who have worked with Mr. Obama, the indifference conveyed to Mr. Reid, one of the president’s most indispensable supporters, was frustratingly familiar. … with his popularity at the lowest of his presidency, Mr. Obama appears remarkably distant from his own party on Capitol Hill

Obama’s relationship with Democrats’ leader in the House, Rep. Nancy Pelosi, was described this way in a story on RealClearPolitics:

By anyone’s definition, putting Obama and Pelosi together under one roof to sing House Democrats’ praises a week after a messy intraparty rift over trade policy should be interesting.…But on Tuesday, it was unclear whether the president and the liberal congresswoman from San Francisco were on speaking terms.

Obama and the Supremes
Well, there’s always the third branch, the courts: but Obama’s relationship with the Supreme Court has also been…frosty, as described in an article from the Washington Post:

More substantively, the two men clashed when Obama, during his 2010 State of the Union address, criticized the court’s …decision…while several justices sat in the front row of the audience…Justice Samuel A. Alito Jr. was seen to murmur “Not true” as he sat in the House chamber that night. Six weeks later, Roberts told an audience at the University of Alabama Law School that he was “very troubled” by the “setting, circumstance and decorum” that now marked the president’s annual address to Congress.

The fact that Obama has a frosty relationship with just about everyone in Washington leaves the finger of blame pointing straight at him. In the relationship with Congress, the President is responsible for providing initiative and direction, as described here in a publication from The Center on Congress:

the President tries to point the direction for the country…as the nation’s chief legislator, giving the Congress its to-do list for the year. …The President is entitled to recommend legislation, but his success at seeing his agenda enacted depends to a considerable degree on his skill at reaching out to members of Congress and persuading them to follow his lead. The President often sees Congress as an obstacle to be overcome, and always has to calculate how his proposals will play out with Congress. He cannot dictate to Congress what he wants… typically, fostering a sense of cooperation and partnership with Congress building coalitions of support — is the path to presidential success.

So, if the President is incapable of, or unwilling to do to the political work needed, are we surprised there is inertia in Congress?

The Bottom Line
The President doesn’t like to schmooze. He doesn’t get along with the Republicans in Congress, he doesn’t get along with the Democrats in Congress, he doesn’t get along with the Supreme Court.
If there’s no agreement on how to move forward in Congress, whose fault is it?

There’s been concern in Europe and the US over the last year or so about tax avoidance. The controversy has involved on the one hand US corporate darlings Starbucks, Google, and Amazon in a flap over tax payments in Europe; and on the other hand the Panama Papers and UK Prime Minister David Cameron.

Let me stipulate at the beginning that paying the taxes we owe is an obligation, both legal and moral. As the famed jurist Oliver Wendell Holmes said: “Taxes are what we pay for civilized society.”

Understand that tax avoidance is not the same thing as tax evasion. Tax evasion is illegal. The IRS provides a helpful web page with a quiz to make the differences clear. The quiz lists six activities. You decide whether it’s tax evasion or tax avoidance, and get graded on your answers. Again, evasion is illegal, avoidance is legal. Scanning the listed activities, the key distinction seems to be whether or not report income is reported:

1) Keeping a log of business expenses (Tax Avoidance )
2) Ignoring earnings from lawn mowing (Tax Evasion)
3) Not reporting interest earned on savings account (Tax Evasion)
4) Keeping a log of contributions to charity (Tax Avoidance)
5) Not reporting tips (Tax Evasion)
6) Claiming your dependents as tax deductions (Tax Avoidance)

Back to Google, Starbucks, Amazon and David Cameron…what they’re guilty of must be tax avoidance, because nobody’s going to jail. At worst, Google was fined $43 million in Turkey. Nobody denies tax avoidance occurred, but is this good or bad? The liberal journal The American Prospect calls out tax avoidance as a bad thing: “You pay more because elites use their influence to pay less.”

The tax avoidance tactic that has drawn most attention overseas is ‘profit-shifting’: corporations exploiting mismatches between various countries’ tax laws, moving their revenues from country to country to find the highest profits.

So what’s the harm? Indeed, if you’re a business and don’t conscientiously practice tax avoidance, you will probably find yourself the loser. Are corporations supposed to voluntarily refrain from profit-shifting and other tax avoidance tactics? Should they volunteer to pay a certain amount in excess of the tax they owe? And what if the business that doesn’t use tax avoidance then loses money, and has to lay off staff to stay afloat?

Let’s imagine how this might work: fictional Alpha Corp forgoes certain legal tax avoidance schemes. When the next quarter’s results come out we see Alpha Corp getting its bell rung. Suddenly its competitors are pulling ahead in revenue, getting improved access to financing. Alpha Corp’s stock price lags behind its competitors. When earning goals are missed, executives and managers lose pay raises and stock options. Costs are cut to maintain profits, requiring staff cuts and facility closures. Then one day, a whistleblower reveals that Alpha Corp’s CEO in a burst of civic charity forbade use of tax avoidance techniques that are standard across the industry. Stockholders revolt. The board insists they were kept in the dark. Within weeks, Alpha Corp has a new CEO who promises to restore their competitive position in the industry, and make full use of standard finance and accounting strategies to help Alpha Corp lower tax costs.

The moral of this story? If a business doesn’t push the law to its limit, it’s playing with one hand tied behind its back and betraying employees and investors.

Do corporations really have a moral obligation to pay extra tax? If so then how should we react to the tax avoidance schemes practiced by some prominent liberals:

• John Kerry, when he was a Senator from Massachusetts, domiciled his new yacht in Rhode Island, rather than his home state. By avoiding Massachusetts taxes Kerry saved himself over $500,000.
• George Lucas sold his film company to Disney in late 2012, avoiding anticipated capital gains tax increases and Obamacare surtaxes on investment income. The capital gains savings alone were $200 million.
• Andre ‘Dr Dre’ Young is a big Obama supporter and was the highest-paid musician in the world in 2012. The Irish Examiner reported that Dr Dre “has based three of his companies in one of the region’s best-known towns to avail of Ireland’s generous corporate tax rate, thereby reducing his tax liability.”
• Jack Lew, Obama’s Treasury Secretary invested personal funds in a Cayman Islands investment fund, and was an executive vice president at NYU when they placed investments in the Cayman Islands.

If there is a particular kind of tax avoidance you don’t like, make it illegal. It is unreasonable to criticize corporations for making every legal effort to succeed in the marketplace; it would be reasonable to criticize if they weren’t. Importantly, there is no obvious harm from corporate tax avoidance. Tax payments from corporations as a share of GDP are rising, not falling. The following chart is copied from cato.org.

If governments are really interested in collecting more revenue, then they should follow pro-growth economic policies – avoid high corporate taxes. An OECD study compared tax structures and found this: “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.”

As for the morality, tax avoidance is just fine. There is no obligation to pay extra tax. For a business, tax avoidance is responsible behavior. For the individual, it’s your money and your choice.

Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more…There is no such thing as public money; there is only taxpayers’ money.

Margaret Thatcher

It’s a good thing that governments are forced to compete in offering investment-friendly or business-friendly tax schemes, and it’s entirely sensible for businesses and individuals to move their money where it gets the best returns. As long as it’s legal.

Bottom Line
Tax avoidance is both moral and sensible. For businesses it’s a competitive requirement. The right thing to do is fulfill your legal responsibilities while delivering more profit than the competition. In order to fulfill responsibilities to investors, employees, and customers, as long as tax avoidance is available as a cost-cutting strategy it must be used.

For individuals, remember that it’s your money. If you choose to not use tax avoidance, then you will pay more tax than required. It would be like donating money to a charity, just know that it’s a very badly run charity.