Category Archives: Economy

Bankers Bank On Economic Amnesia

Occupy Wall Street bankers Zillow reports that the current median home value in Nevada is $189,700, up some 16.4% over the past year, and another increase of 6.2% is predicted. The median listed price of a home in Nevada is now $215,000, and the median selling price is now $198,475.  [Zillow] This is good news for Nevadans in Clark County because the median list price as of July 2011 was $118,500. [Movoto]  Bankrate posts mortgage interest rates ranging from 4.1% to $.4% in the Reno area, and a range of 4.05% to 4.4% in the Las Vegas metropolitan region.  [Bankrate]  There’s another factor to consider, especially in southern Nevada, home resale inventories have stabilized, and there’s been no major increases in distress sales (foreclosures and short sales) as a percentage of the total housing market in September. [Movoto]

Mortgage interest rate trends are also interesting because there’s been a decline since January 2005.  The interest rate for a 30 year fixed rate mortgage was about 5.71% in January 2005, 6.15% in January 2006, and 6.22% in January 2007 as the Housing Bubble was about to burst all over everyone.  As the Bubble started to splatter in January 2008 the interest rate was 5.76%, dropping to 5.05% in January 2009. Fast forward to January 2012 and the interest rate had dropped to 3.92%, going down to 3.41% in 2013, and then increasing again in January 2014 back up to 4.43%. [FredMac]

Why are these numbers of any interest?

(1) When homebuyers can get credit they are able to pay prices closer to the original asking price. (2) It’s no longer a buyers’ market when sellers are getting better prices. (3) Someone must be doing a bit better because there seems to be more competition for mortgage money, given that in a free market commodities (in this instance mortgage money) are slightly more costly the higher the demand.  (4) These numbers also highlight the Big Lie that the Wall Street casino operators are trying to sell across the country.

David Dayen, writing for Salon caught the Big Fib and described it as follows:

This is part of a larger myth, blaming government’s efforts to clean up the mortgage market for the slow housing recovery and sluggish economy. This idea that banks are so petrified about burdensome regulations that they’ve decided to scale back their business model of lending to people seems far-fetched.

That’s because it is far fetched.  We can see the whole picture simply by sitting here in one of the states most hard hit by the collapse of Wall Street’s Housing Bubble, and looking at our own numbers.

First, if bankers were so insecure about lending then why have interest rates rebounded since the Bubble burst?  When no one is buying homes rates go down because there simply aren’t enough customers clamoring for loans.  However, in this ‘sand state’ the interest rates have gone up by about 1%.

Secondly, it’s obvious someone is buying something because  the Las Vegas housing market, almost obliterated when the Bubble Burst, has seen an increase in the median price of homes, up by an impressive 16.4%.

It’s a bit difficult to make the case that bankers aren’t lending (because of the icky government financial regulation reform) when median list prices and median selling prices have both increased.  If banks weren’t lending then we’d expect housing prices to flatten out because there weren’t enough bidders for the homes.  Again, Dayen sums up the bankers’ game: “The real motivation here is to roll back regulations and return to the go-go era where anyone who can fog a mirror can get a loan. We know how that turned out the last time.”

Just in case anyone catches the overt fibbing, spinning, and general mendacity of the bankers’ latest pronouncements, they’ve left themselves a bit of wiggle room.  The economic revival is “sluggish.” Translation: If you’d just let us get back to deregulated free for all casino operations we’d be richer. And, “the housing recovery has been slow.”  Translation: Want to get more, and more, and more, mortgages from ‘anyone who can fog a mirror’ to slice, dice, and tranche, into mortgage based securities – upon which we will get richer.

There’s a better reason to explain a sluggish economy and a slowly reviving housing market.  Ordinary people have to have incomes which support major purchases – like homes – and what has happened to the median income in Nevada since the Bubble Burst in 2007-2008 isn’t pretty.

The median HI for Nevadans in 2013 was $51,230, down 9.1% since the Housing Bubble burst in 2008.  The Mean HHI for the top 5% of Nevada income earners was $294,939, which dropped by 2% after the washout of 2007-2008. [Pew]

Given the precipitous drop in median earnings, the question might not be about how “sluggish” the recovery has been, but how we’d experienced any recovery at all.  We might dare to ask the same question about home sales.  Again, given the decrease in median household income it’s a wonder home sales have rebounded – especially if we consider that home values are now up 16.4% with more increases projected.

Once more, Wall Street has demonstrated very clearly it’s profound dependence on debt and volatility, while Main Street remains dependent on consumer spending and stability.   In this instance, as in so many others, it’s important not to conflate what’s good for Wall Street with what’s good for business in general.

It’s great for Wall Street to have bundles and bundles of unregulated mortgages, car loans, and lines of consumer credit to shovel into its deregulated  casino operations and Bubble Factories – it’s not so great for Main Street to have abandoned homes, foreclosures on every street, and too many unemployed construction workers in the community.

Caveat Emptor – the latest Big Lie would have us believe the investment bankers want the very best for all of us – after their last debacle the only way they’ll sell this notion is if the American public gets a bad case of economic amnesia.

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Filed under consumers, Economy, financial regulation, Nevada economy, Nevada politics

The Price Tag Plus $32: The economic cost of guns in America

Guns $32.00 – according to the author of a NIJ study on gun fire casualties that’s the direct societal cost per gun in the United States.   When the costs for drunk driving and gun related injuries were compared in 1994 the drunk driving costs were characterized as substantially higher.  Now that has reversed.  In 1992 medical care for a fatal shooting averaged $14,500. By 2010 the number was $28,700. [USAT]  More recent figures put the annual cost to American society at $214 billion, or $693 per person. [LeadersEdge] Where does this number come from?

“…societal cost figure includes medical costs incurred from firearms violence and the lost earnings of the victims—either the survivors of a firearms injury or costs to loved ones left behind in case of a fatal shooting. And it includes an estimated $11.9 billion in costs to government for such things as Medicare and Medicaid payments to victims. It also includes $1.5 billion in medical and mental health treatment, public services, adjudication, sanctioning and productivity losses for the perpetrator.”  [LEdge]

On the other side of the ledger, the firearms industry supports about 120,310 jobs in “supplier and ancillary industries,” and the manufacture and sale of firearms generates $33.3 billion to the economy.  This would include $10.4 billion in wages, $4.6 billion in federal and state business taxes, $460 million in excise taxes, and about $2.1 billion in federal and state taxes paid by the firearms industry and its employees.  [LE NSSF]  In short, we’re losing about $180.7 billion on this deal?

Other elements not under discussion are the secondary effects of gun violence, such as the loss of real estate value in neighborhoods which experience high levels of gun fatalities and injuries.  Nor are we taking into economic consideration the unwillingness of commercial and manufacturing firms to expand or site operations in neighborhoods which have high gun violence numbers.

Every instance of a gun related accident or homicide adds to the economic costs of relatively unregulated firearms in American society.  The logic is fairly simple:

“We have supported research for more than 20 years to better understand the problems of gun violence, the risk factors of gun violence and the policies that can prevent it,” says Nina Vinik, the gun violence prevention program director for the Joyce Foundation in Chicago. “One thing consistent in the research over the decades is the finding that where guns are more available, more readily accessible, there is a corresponding increase in levels of gun violence and injuries, in homicides, in suicides and in accidents.” [LEdge]

Arguments about the United States being a “violent society” stray from the essential point – it’s not that we’re necessarily more criminally inclined, but that the easy availability of firearms tends to make our adventures with guns more lethal – and more expensive. [HarvardMag]

Another point, about which we probably ought to be having more conversation is that the proliferation of firearms in this country is costing us more than their economic value in the total economy.  Capitalism works – but only if the market decisions made are rational.

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Welfare Royalty and Nevada Taxpayers

There’s good economic news for northern Nevada – Tesla’s coming to town.  What might not be so delightful is the $1.25 billion tax deal Nevada gave to the corporation to get the factory. There’s a 20 year sales tax abatement ($725 million), a 10 year property tax abatement ($332 million),  another $120 million in transferable tax credits, $75 million in transferrable job tax credits, $27 million in modified business tax abatement for 10 years, and $8 million in discounted electricity for 8 years.   [RGJ]  A bit of quick calculation shows that if the plant generates 6,500 jobs and the tax abatements and credits cost, say, $1.2 billion, then the price tag for each job was about $184,615.  Granting that these costs are spread over a 10-20 year period, it’s up to the view of the beholder as to whether this is a bargain. What’s not a bargain are the other corporate subsidies Nevada is handing out every day to the New Welfare Queens.

For example, there are 4,281 Wal-Mart stores in the United States,  and the retail giant operates 30 stores, 2 discount stores, 11 neighborhood markets, and 7 Sam’s Club stores in Nevada. Its associates are paid an average of $13.59/hr.  for full time workers.  [WM]  That wage figure yields annual wages of approximately $27,180 per year.  The federal poverty line for a family of four is $23,850.  133% of that number is $31,720, the percentage is important because that’s the eligibility line for adults qualifying for Medicaid. [NVM]  Thus, the average worker with an average sized family is qualified for Medicaid coverage, and Nevada Check Up coverage, in this state.  Our average worker ($13.59) would receive about $2,174 per month, the SNAP gross income eligibility line is $2,498 per month. [NDW]

This doesn’t make Wal-Mart in Nevada unique, in fact as of last November it was reported that Wal-Mart employees made up the single largest block of Medicaid recipients.  [Bloomberg]

This state of affairs doesn’t make Wal-Mart unique among low wage paying employers.  The fast food joints, currently in the news for being the target of employee picketing, aren’t any better.  The median annual wage for a counter attendant at your local burger establishment is $18,930. [DETR] If the Wal-Mart employees are eligible for Medicaid, Check Up, and SNAP benefits, those counter attendants are truly in the eligibility category.  Additionally, let’s get rid of some silly myths about minimum wage jobs in the fast food industry.

The most common myth is that there’s no reason to worry about wages for fast food employees because most of them are teens earning their first paychecks, and working for pocket money.  No.  Half of all fast food workers are over the age of 23, and about 30% of all fast food establishment personnel are between the ages of 16-19. 36.4% are between the ages of 25 and 54.   [CEPR pdf]

The second bit of malarkey coming from the corporate lobbyists is that the picketing for higher wages is just a screen for union organizing.  Indeed, there are some labor union organization efforts going on – and why not? If workers are being paid minimal wages and aren’t seeing any prospects of advancement (only about 2.2% of fast food workers hold managerial positions) then organizing is an obvious option.   It’s an especially appealing option when the corporate financial statements are taken into account.

Your local McDonald’s franchise is part of a corporation with a $91.31 billion market cap, with an enterprise value of $103.09 billion.   It has a 19.48% profit margin, and a 30.12% operating margin.  To date it has reported revenue of $28.30 billion.  The corporation boasts a 35.19% return on equity. [YahFin]  Its top institutional shareholders are Vanguard, State Street, BlackRock ITC, Bank of America, Massachusetts Financial Services, Bank of NY Mellon, FMR LLC, Northern Trust, BlackRock Fund Advisors, and Wellington Management LLP. [YahFin

The point of serving all those burgers – composed of whatever they might be – is to enhance shareholder value.  What would better enhance ‘shareholder value’ than keeping costs as low as possible, including the cost of preparing and serving the Happy Meal?  If the taxpayers are willing to pick up the tab for the  employees’ health care and basic needs for food and shelter, then so much the better for those institutional shareholders who retain some 64.6% of the corporation.

It’s important to differentiate between welfare recipients – people who are trying to clothe, feed, and shelter their families – from the Welfare Queens who are trying to enhance the incomes of their institutional investors and keep those shareholders satisfied, while the taxpayers of the state have to subsidize their employees, provide their streets, roads, communication infrastructure, and their police and fire protection.  Nice deal, if you can get it?

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Filed under Economy, Nevada economy

Wedding Bells and Slot Ca-Ching

Las Vegas Wedding Chapel

Marriage for everyone will happen sooner or a little bit later in Nevada, either the Federal courts will strike down Nevada’s restrictive marriage provisions or the efforts to pass Joint Resolution 13 will be ultimately successful. [more at LVRJ]   Aside from the tenuous arguments offered by the right wing Coalition for the Protection of Marriage, there aren’t many reasons to oppose Marriages, Lots and Lots and Lots of Marriages in Nevada.

Let’s start with the 100 or so marriage chapels in the Las Vegas area, in addition to the ones in the Reno/Sparks area.  And, we are not discussing nickels and dimes here:

“According to economist M.V. Lee Badgett, research director of the Williams Institute for Sexual Orientation Law and Public Policy at UCLA, legalizing gay marriage would generate $23 million to $52 million in business revenue and $1.8 million to $4.2 million in tax revenue over the next three years in Nevada.”  [LVSun]

Ca-Ching! Additionally, there’s a hint in the Las Vegas Sun article about the nature of tourism in Nevada when one person interviewed said, “Las Vegas is an event town.”   It’s time to consider a Tale of Two Cities?

The Boardwalk or walking the plank?

Atlantic City, NJ is about to witness the closing of more casinos and the opening of a massive unemployment filing “event” in the Atlantic City Convention Center. [StarLedger]  There were 12 casinos in the city and now there will be 8, with about 8,000 people looking for work.  The reason might be said to be in gaming revenues, $5 billion in 2006, down to $2.6 billion today. [BusIns]  This is true, in part, and true, but other factors need to be included in the discussion.

Regional Competition:  Bally’s opened in Atlantic City in 1979.  Foxwood didn’t exist, the Mohegan Sun Casino Resort didn’t either.  The casino business hadn’t expanded to Pennsylvania, Connecticut, and Maine.  Even New York is getting into the act at the Aqueduct . Atlantic City was going to be the Las Vegas of the East? Gaming was going to be recession proof, and Atlantic City’s casinos were going to give Vegas a run for its money?  However, the loss of jobs,  the stagnation of wages, the increasing number of people employed in part-time jobs with lower incomes dispelled the recession-proof myth amidst a wave of regional competition.

Atlantic City may want to blame its problems on regional competition, but it may be missing another crucial point – one illustrated by the simple declaration that Las Vegas is an Event Town.

Las Vegas also faces regional competition.  California has 68  Native American casinos, and another 90 poker casinos.  [500Nations] Since Nevada’s proximity to a well populated state is often given as a reason for the success of its gaming industry why didn’t the opening of regional competition create the same financial havoc for Las Vegas and environs?

The Fine Art of Reinvention

Yes, once upon a time the casinos in Las Vegas only needed to be… casinos. Busloads of $60 bettors could keep the slots jingling and the tables occupied.  However, since Nevada could never rely on its own population to keep those slots ringing and tables filled, there’s a history (and plenty of practice) of selling ourselves as an entertainment option.

Remember the old Sands? The Alladin? The Jackpot? The original Hacienda? The Stardust?  The Desert Inn and the Dunes?  There’s nothing like a lovely implosion, demolition, and re-construction to illustrate how Las Vegas kept the travelers coming.  If some venue is getting out of style, away from the trends, behind in the  running for entertainment dollars – then it’s time for the implosion, and the demolition, and the re-construction.  Where else but Las Vegas might one expect guided tours of a Sign Cemetery (otherwise known as the Neon Museum?) However, there’s more to the process than just a periodic facelift to keep the dowagers functioning.

Nevada understood, and still seems to understand, that we are competing for people’s entertainment dollars.   If we consider eating as a form of entertainment, then the city with the most variety can be predicted to land in the winners side of the ledger.  Pity Atlantic City, with the world class restaurants and neighborhood bistros of Manhattan next door, trying to compete with the gourmet and specialty fare in New York City. 

On the other side of the country,  there’s Joel Robuchon’s  on the Strip, complete with a celebrity chef, and a menu which will take a couple of Benjamins out of the billfold, next door to ….. ?  For every Zagat rated restaurant there are others, renovated to appeal to the Three Star budget, a trend across the country as the competition for that entertainment dollar becomes hotter. [CEM]

And, that’s the point – those entertainment dollars – Do people want an iPad gaming lounge? – then renovate and build one.  Do people want a more varied assortment of entertainment? – then book it.   Frank Fahrenkopf, Jr. summed it up:

“Today, F&B and entertainment options within casinos have become the great differentiators in our market.  Today’s typical casino customer does not come to Las Vegas merely to gamble.  In fact, many do not gamble at all.  Instead, celebrity chefs, star entertainers, innovative menus, luxurious rooms and level of service – both on and off the casino floor – distinguish each property.”

And, might we add – Weddings?  If Nevada can re-invent and re-construct its casinos, renovate and transform its restaurants, even figure out how to make a tourist destination out of a lot-load of old neon signs – then it can surely consider adding another reason for people to spend those entertainment dollars in Las Vegas and elsewhere – more weddings!  Where else could the happy couple – of any and all gender orientations – experience an Elvis Wedding, A Hot August Nights Wedding, A Doo Wop Reception, or a really creative Halloween Wedding?   Make your wedding a real event –  after all, Las Vegas is an “event town.” * Please remember to bring your checkbook, cash, and credit cards.

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Filed under Economy, gay issues, Nevada economy, nevada taxation

Who’s Happy Now?

DBeacon128E As of Friday, August 29, 2014 the S&P 500 stood at a healthy 2,003.37, increased by 6.63 from the day before.  This figure is good news since the S&P was a pathetic 676.53 on March 9, 2009. [WSJ]  S&P uses a weighted average market capitalization to calculate its index, so this must be the most accurate measure of the state of the economy?  Maybe.   Feeling all comfy right now?  Maybe not.  Not to be too much of a bear dancing through the bullishness of the stock market reports, but there’s something troubling about the numbers.  Perhaps we should begin at the beginning.

The Truism of Yesterday Transformed into A Corporate Facade Today

In those days of yesteryear, before the late 1970s, corporations retained most of their earnings and invested them in new technologies, expanded facilities, more employees, or even – pay increases. [WP]  Indeed, in those ancient times the argument worked: If corporations could hold on to more of their earnings then plants would expand, and more workers would be hired.  What our numbers keep telling us now is that this old line is being applied to a new and quite different reality.

Not to put too fine a point to it, but it is as though the Captains of Corporate America are asking us to cling to the old reality while they saw the props out from under average Americans, creating a more profitable system for themselves.   And they have been sawing away vigorously, fueled by the new corporate reality since 1980  which  holds that the primary purpose of a corporation is to maximize shareholder value.

It is one thing to seek to enhance corporate profitability if the  old line is true, and quite another when the goals have changed, and the new line is “Corporate profits are important because they make shareholders richer.”   The pre-1980 truism is now a corporate facade covering a structure which places the demands of shareholders above customers, workers, and almost everyone else.

In some instances the facade is a very real false front inadequately covering the hollowing out of American industry.  Remember  Endicott, NY, the home of IBM?  Some 10,000 employees of IBM worked there in the 1980s, by 2013 employment at IBM was down to 700, and the vacant storefronts in the community bore witness to the diminishment of the real American economy.  [WP]

Since, Ferguson, MO has been in the news of late it’s appropriate to look at the moves made by Emerson Electric  to enhance shareholder value by offshoring  its operations – with its $44.68 billion market cap, and return on equity of 24.38% [YahFin]  Emerson was praised in at least one financial journal for its long term strategy of “transferring costs to a basket of low-cost countries,” yielding the accolade: “Emerson is well known among its peers to have benefited considerably from being earlier and bolder in its pursuit of cost mitigation.”  

That cost mitigation came with a price, but not for Emerson’s shareholders.   On January 18, 2002 Emerson announced it was closing 50 of its plants and offices in the United States and moving the jobs to China, India, and the Philippines. No sooner was the announcement made than Emerson’s stock price increased by 3.4%.  [SunSent]  The Emerson plant in Kennett, MO closed in 2005.  [DDD]  Another plant, in Columbus, NE, closed in 2009. [WOWT]  If it seems counter-intuitive to have share prices increase as people (consumers) are laid off that’s because most people have missed the point: It’s not how many people a corporation employs or how much their wages bring to our economy – it’s how costs can be “mitigated” so that shareholders get an increased portion of the pie being served.

Keeping the Shareholder Satisfied

If a decreasing number of people are enjoying an increasing share of the American economic pie, then why wouldn’t current stock market reports be indicating weakness in the economy?

Same answer.   Shareholders are happy.  One of the reasons for their happiness is that corporations are “mitigating costs” and propping up stock values.  One way to prop up the old shareholder value is to engage in stock buybacks.  Does Corporation X have lots of cash on hand?  The best way to keep those shareholders happy is to use it in a stock buyback which results in a decrease in the number of outstanding shares and drives up the price of the ones which are on offer.   [Forbes]  Yes, that cash could have gone into research and development? Or, plant expansion? Or, even increased wages?  However, those don’t make the shareholders happy, and since 1980 it’s been the primary job of corporations to make the shareholders happy, happier, and happiest.

And who else loves making shareholders happy? Bain Capital Management, which extolled the virtues of corporations which do the hard work of making shareholders, like Bain Capital, happy:

“In studying the offshoring practices of major industrial companies, we’ve found that Continental’s highly modular approach is shared by other supply-chain leaders like General Electric, Honeywell, Siemens International, and Emerson Electric. Rather than think in terms of entire factories when they make offshoring decisions, these companies focus on individual functions and products. They optimize, in a coordinated fashion, the location of every module of their supply chain, capitalizing on regional differences not only in costs but also in skills. As a result, they’ve been able to move quickly and with great agility, shifting activities among a wide array of regions and countries in a way that optimizes the cost and effectiveness of their entire operating system.”  [BainInsights 2005]

It’s worth noting that when Bain speaks of “optimizing costs” it means reducing production and service costs, as in closing factories and offshoring jobs.   Hence, the formula continues: Shareholder Happiness = Cost Mitigation + Propping Up the Stock Price.

The danger in not heeding this formula is the dreaded Takeover.  Should some shareholders find their yields too low, the vultures begin swarming over the still warm victim.

There is a reminder of the perils of the dreaded  takeover in north St. Louis.   The old Rexall Drug Company plant stands at the corner of San Francisco St. and Kingshighway, now the site of an automobile auction company.   The quick part of the  demise began in 1977:

By 1977, Dart Industries had sold all of its Rexall business, including franchised drug stores. A group of investors, including Howard K. Vander Linden, president of Rexall at the time, formed the Rosshall Corporation and bought the manufacturing laboratories in St. Louis and other facilities. [NYT]

As part of the process the Rexall Drug Store franchises were spun off, a familiar drug story could retain the name but now had no affiliation with the parent company.  It didn’t take long for the scheme to fall apart.  The retailers were under pressure from chains like Eckerd, the manufacturing under pressure from various manufacturers, and the grand experiment failed. The St. Louis factory closed, and the Arlington neighborhood lost another industry. Rexall wasn’t the first, nor the last takeover victim, brands like Sunbeam and Singer also changed dramatically in the face of both friendly and hostile takeovers.  The brand most closely associated with recent takeovers which have decimated a corporation remains Hostess, which was destroyed, not by its employees, but by the vulture capitalists who plucked it. [Salon]

True, there are unresponsive companies which fail because of a lack of vision, firms that falter because of poor management, and corporations which are takeover targets because there are some few valuable assets among a conglomeration of acquired flotsam and jetsam.   However, the end game should be the improvement of a company such that it can be profitable, not merely the M&A gamesmanship which too often plays strip and run, leaving little but debris in its wake.   However, those games will continue as long as there is a profit to be made by the investors – how much greater the danger to U.S. corporations in the prospect of upsetting those private investors than of disappointing the shareholders? 

This isn’t our parents (or grandparents) economy.  The days of cash allocation into research and development, plant expansion, higher wages, better facilities is as out of date as a Pontiac Firebird.   These are the days of the F-150, and the maxim: “If the shareholders ain’t happy, ain’t nobody happy” – unless you’re a taxpayer, consumer, salaried or wage worker? 

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Stripping Doesn’t Have To Happen In a Bawdy House

Stripping is associated in most people’s minds with one of two things, either dancing while steadily removing garments accompanied by music by David Rose, or taking layers of paint and varnish off some surface.  In the financial world it means roughly the same thing, only better – for the bottom line. And since we’re not talking our our bottoms, but those of U.S. corporations with overseas affiliates, or those which want to shape themselves that way, let’s try to understand the language they are speaking.

The financial definition of Earnings Stripping is:

“A method of avoiding taxes by paying excessive amounts of interest to another party. For example, an American subsidiary of a foreign company might reduce its taxable income by paying an excessive amount of interest to its parent. The IRS has developed regulations that are intended to limit earnings stripping.”

Yes. the Internal Revenue Service is trying to do something about this highly dubious practice, in Section 163(j) of the law.  Implementing Section 163(j) means the IRS would require adherence to the “arms length” standard in intercompany indebtedness.  In one example, if 60% of an affiliated  firm’s assets are financed by debt, then the deduction for interest is limited to 50% of the firm’s operating profits. [TaxTR]

In order to carry out the law, the IRS has to be able to do two things. First, it has to evaluate whether or not there’s an arms length interest rate.  The key to arms length transactions is that neither side has any incentive to act against his or her own interest.  If I’m the banker I’m going to try to charge the highest interest rate for a loan I can, and if you are the borrower you are going to smile nicely, threaten to go to another bank, and work to get me to reduce the interest rate for the loan.  But, how to evaluate the arms length status of a loan made from the parent company to an affiliate?

Secondly, there has to be a way to determine if the operating profits truly reflect the “income attributable to the functions, assets, and risks incurred by the affiliate.” [TaxTR]  The affiliates credit rating helps determine if the interest rate is at least close to “arms length,” and the operating profits have to be such that the IRS can see that the intercompany interest rate at least has the appearance of propriety.*

And now the fun begins.  The current flap over corporate inversions plays is related to good old fashioned earnings stripping, the Wall Street Journal explains:

“When a U.S. company acquires a foreign firm, and decides to domicile overseas in a low-tax country like Ireland, it will often load the U.S. subsidiary up with debt that is “owed” to the foreign headquarters. Interest payments on this debt can often be deducted from taxable income. If the debt is considered “excessive,” the practice is known as “earnings stripping.”

The Bush Administration took a look at these dubious practices back in 2007.  The report (pdf) analyzed several proposals offered at the time to restrict the ability of foreign controlled domestic corporations to practice earnings stripping.  The report concluded that corporate inversions were associated with earnings stripping, and that the government needed to (1) look carefully at the arms length part of the problem, (2) update the regulations from those issued in 1968, and (3) new rules should be made to help determine the amount of income from a multi-national company is subject to U.S. taxation.

By August, 2014 not much movement had been made on restricting the global corporations from engaging in earnings stripping.  In what has become a familiar refrain,  the WSJ explains:

“The Obama White House has already proposed that Congress pass a law that would effectively end such earnings stripping arrangements, but Congress hasn’t acted. The Treasury Department could instead decide to act unilaterally to prohibit the practice, effectively by amending 163(j) in the tax code.”  (emphasis added)

The White House proposal is summarized by the analysts at CTJ:

“President Obama included two proposals in his most recent budget plan that would address the problem. The first would treat the entity resulting from a U.S.-foreign merger as an American corporation for tax purposes if it is majority-owned by shareholders of the original American corporation. The proposal would also treat the resulting entity as an American corporation if it has substantial business in the United States and is managed and controlled in this country.

The president’s second proposal would address earnings-stripping by barring American companies from taking deductions for interest payments that are disproportionate to their revenue compared to their affiliated companies in other countries.”

The issue was beginning to get some traction by August 14, 2014 when Senator Charles Schumer (D-NY), a member of the Senate Finance Committee, proposed a four part bill to end the earnings stripping game. Republicans were unwilling to move, saying it might make U.S. companies more attractive for foreign takeovers. [WSJ]

Opponents of restricting the stripping also cite the “high” U.S. corporate tax rate of 35%, however, large corporations – as in Fortune 500 – on average paid only 19.4% of their profits in federal income taxes from 2008 to 2012, and 26 companies in the Fortune 500 paid nothing at all during the five year period.  In other words, no matter how low the U.S. corporate income tax is set there will always be some entity lower, say at an inviting 0% – or Tax Havens. It doesn’t seem at all practical to allow U.S. corporations to pretend their profits are earned in Cyprus, Luxembourg, Bermuda, the Cayman Islands, Switzerland, or Singapore, [TW] when it’s perfectly clear for all to see their major business operations are in the United States.

Another argument for doing nothing, or even doing something worse, is that taxing overseas profits gives corporations an incentive to become foreign.  Fact checks are necessary at this point. U.S. taxes on foreign profits are minimal and American companies get “a tax credit equal to any taxes they pay to foreign governments, and are allowed to defer U.S. taxes until they officially bring their offshore profits to the U.S.” [CTJ]

If anything is done at all by the Do Less Than Nothing 113th Congress we might count it as miraculous.  One peek at the official calendar for the House of Representatives demonstrates the point. The House Majority Leader’s calendar illustrates the point that there are only five days on which votes are scheduled for the entire month of September. (pdf) No voting will take place in the House during the month of October, except for October 2nd, thereafter all days are labeled “district work week” – the district work being getting re-elected.    The Senate calendar isn’t much more full.

While Congress fiddles, or the band continues to play “The Stripper,” the list of U.S. corporations which have availed themselves of tax havens and possibly earnings stripping continues to grow. And the band plays on.  The longer the music continues the more average American income earners will be expected to shoulder the burden of generating revenue, and the less will be expected from corporations – those other kinds of “people,” my friend.

*For a more technical look at some of the controversy around Section 163(j) see Morrison, “Section 163(j) and Disregarded Entities,” Bloomberg BNA.  April 6, 2011.

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Filed under Economy, Politics, Taxation

Swiping Away Toward the Next Debacle?

banker 2 The Las Vegas Sun reports that residents of the Las Vegas metropolitan area have run up $3.88 billion – yes, that’s billion with a B – in credit card debt as of June 2014.  The residents are not alone. There’s more credit card indebtedness piling up in Texas.  The Dallas Morning News lists the increases in credit card debt for Houston is up 5.45%, for Dallas-Fort Worth up 4.70%, and just for good measure there are other increases around the country.  Orlando’s credit card debt is up 4.89%, Atlanta up 4.21%, Tampa-St. Petersburg up 3.75%.   There’s good and bad news here.

Remember the mantra in this blog? One man’s debt is another man’s asset?

Somewhere, somehow, in the maw of the Wall Street financial institutions, those accounts receivable are being sliced, and diced, and traded.  They are being securitized.  They are becoming Asset Based Securities.  Read bonds. They are being priced and sold.  And, of course, someone is making a tidy profit. Synchrony, the largest issuer of private label credit cards for large retailers in the United States,  recently earned a Morningstar rating of BBB for its new issue.  Profits are good news, if the products being transferred are valued properly.  If not, then we have the 2007-2008 Mortgage Meltdown Debacle Redux.

The replication of that debacle will be a bit more difficult if the Security and Exchange Commission succeeds in enforcing rules under the 2010 Dodd Frank Act. The rules now call for firms issuing the securities to file reports with the SEC on the underlying loan data, including credit scores and debt levels.  The SEC plans on providing potential investors with debt to income ratio information and metrics which would help with the assessment of loan/credit quality.  [WSJ]

We should possibly recall at this point that both the Heritage Foundation and the American Enterprise Institute have called for the repeal of most, if not all, the provisions of the Dodd Frank Act.  The ultra-conservative think tanks have already declared the Act an imposition of unreasonable regulatory burdens on financial institutions.  [AEI]  It should also be remembered that Nevada Senator Dean Heller has called for the repeal of the Dodd Frank Act and its attendant regulations. [NVProg]

It’s also within recent memory that then-Representative Heller voted against the House version of the Dodd Frank bill on December 10 and  11, 2009 when Representatives Berkley and Titus voted in favor of it.  [govtrack]  Then on the final vote, December 11, 2009 Heller voted against the measure as one of 176 Republicans to do so. [govtrack]

When the conference report came back with the changes made to the bill from the Senate, once again Heller voted against it, on June 30, 2010. [govtrack] Heller also voted against H.R. 4173 (111th) on the conference report. [govtrack]  Four “nay” votes certainly should indicate that Heller was not in favor of financial regulatory reform.

Once in the Senate, Senator Heller teamed with Senator Jim DeMint (R-SC) to fully repeal the Dodd Frank Act in 2011. [DB]  And, lest he be considered inconsistent —  Senator Heller has now signed on as a cosponsor of Senator Bob Corker’s (R-TN) bill (S. 1217) which would make the FMIC (Federal Mortgage Insurance Corp) an independent agency of the federal government – read: Out from under the provisions of Dodd Frank.

For the record, there are eight bills in the House and Senate which provide for the repeal or diminishment of the financial regulation reforms included in the Dodd Frank Act. [govtrack]  Among these bills are those  sponsored by (H.R. 5016) Rep. Ander Crenshaw (R-FL), (H.R. 4564) Rep. Patrick McHenry (R-NC), (H.R. 4304) Rep. Steve Scalise (R-LA), (H.R> 3193) Rep. Sean Duffy (R-WI), and in the Senate, S. 1861, sponsored by Senator John Cornyn (R-TX). [govtrack]

The efforts by the Securities and Exchange Commission and the Consumer Financial Protection Bureau to implement and enforce financial regulatory reform measures remain under a steady assault of lobbying interests, banking associations, wealth managers, and their allies in the U.S. Congress.  Senator Heller is certainly among this legion.

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Filed under Economy, financial regulation, Heller, Nevada economy