Senate Finance Committee Chairman Ron Wyden Proposes Corporate Tax Reform

WASHINGTON – In a clear and totally non-partisan WSJ op-ed piece, (We Must Stop Driving Businesses Out of the Country, May 9, 2014), Senator Ron Wyden, a Democrat from Oregon, and Chairman of the Senate Finance Committee, makes a case for comprehensive corporate tax reform.

Tax avoidance drives business decisions

In his piece he points out that many large US corporations make significant foreign acquisitions mostly for tax avoidance (better to say tax evasion?) purposes. The latest headline is about the US pharmaceutical giant Pfizer buying UK-based AstraZeneca, so that it can “relocate” to the United Kingdom for tax purposes.

Indeed, if a US corporation can legitimately claim that 20% or more of its stock “is owned by their new, foreign partner” the same corporation can shift its tax domicile to the country where the new subsidiary is located, usually a country with a lower corporate tax rate. This way, in a totally legal way, a large US corporation can cut its tax bill.

Of course, this should not happen. And Wyden pledges his intention to introduce legislation that would close this loophole.

US corporate tax rates are too high

However, at the same time, Wyden recognizes that US corporations are exploiting every possible “legal” avenue to escape from a very heavy US tax burden.

Yes, America, the cradle of capitalism, has one of the highest corporate tax rates in the world: 35%. We know that in many cases this is largely theoretical. Many companies pay much less, or (in some instances) very little, or nothing at all. And this “magic” of a low tax bill despite a high tax rate is due to a jungle of special provisions, tax credits, dispensations and loopholes, incomprehensible to most, that allow many corporations, depending on the sectors they operate in, to pay less.

Lower rates, no loopholes

Without getting into the impossible details of the monstrosity of the US tax code, Wyden proposes a simple, common sensical, approach. Let’s lower the US corporate tax rate, while at the same time eliminating all the loopholes and special treatments for this or that sector.

This way US corporate taxation will be more in line with prevailing rates applied by other developed countries, (about 25%). And this would mean that US corporations would not be incentivized to  pursue business strategies that are in fact mostly, in certain cases entirely, tax avoidance strategies.

Indeed, in an ideal world, the allocation of scarce capital should be driven by business factors and not by calculations of tax advantages. I fully agree.

“Debt Commission” had a similar approach

Going back just a few years, (2010), the “Debt Commission” co-chaired by Republican Alan Simpson and Democrat Erskine Bowles had the political courage to come up with a decent federal spending reduction program matched by a comprehensive tax reform plan. It all made perfect sense. It was a good starting point, that had at least some measure of bipartisan support.

But nothing, absolutely nothing happened, in large part because President Obama essentially distanced himself from the findings and recommendations of the Simpson-Bowles Commission.

What Senate Finance Committee Chairman Wyden suggests now is more limited in scope but essentially in line with the approach that inspired Simpson-Bowles: lower the tax rates, broaden the tax base and eliminate all tax favors to this or that sector. This would be good for the economy, good for the US Treasury and good for individual businesses, especially small and medium-sized companies that would no longer have to spend inordinate amounts of time and resources on tax issues. Everybody would pay, but not too much.

Good idea, (whose time has not come)

All this makes perfect sense. Wyden is not in the pocket of this or that interest group, nor is he trying to mount a populist anti-business crusade that may resonate with the ideological left.

He is proposing common sense. Well, you would think that the traditionally pro-business Republicans would respond enthusiastically. But I doubt it.

Special interests dominate US politics

And sadly this is because behind the “We-are-the-fearless-defenders-of-free-market-capitalism” label, many Republicans (and Democrats too) are subservient to the wishes of the armies of lobbyists permanently encamped in Washington DC.

The lobbies and the powerful economic interests they represent are largely responsible for the grotesque US tax code, with all its ultra-complex and in fact impenetrable layers of special provisions. They are experts at pushing this or that “provision” (often worth hundreds of millions of dollars) at critical times, in sometimes obscure pieces of legislation nobody really understands.

Corporations, lobbies and campaign finance

The ugly truth is that, while the US economy as a whole suffers because of this ghastly hodgepodge of dispensations and special credits, many economic sectors benefit from it. And so they will fight tooth and nail to keep things as they are. And, of course, at election time, money talks. Elected representatives need vast and always larger sums of money to finance their re-election campaigns. Directly and indirectly, corporations are a major source of those needed finances.

Dysfunction is now system

So, here we are. In large part because of our dysfunctional politics, we have elevated tax dysfunctionality to system. We say that America is the best place in the world to do business, while in fact we have created a tax and regulatory environment that pushes US corporations to relocate their headquarters and/or key operations abroad.

Sensible ideas will be ignored

Ron Wyden, a fair-minded Democrat, proposes sensible reforms. But I doubt that he will find enough allies –Republicans and Democrats– to make something happen. In order to cut the Gordian knot of the absurd US tax system, we need a new political consensus.

Yes, we need to rediscover the simple truth that the job of people sent to Washington is to pursue the “common good”, as opposed to electing Representatives and Senators who will respond mostly to the demands of special interests.

Sadly, I do not see this “back to basics” (but in essence revolutionary) transformation coming along.




After The Release Of The National Climate Assessment Report, Forget About Approval Of The TransCanada Keystone Pipeline

WASHINGTON – The US Government just released the congressionally mandated National Climate Assessment. As you can imagine, the emphasis is on mostly negative, man-made changes to the climate and therefore to the environment. Things are not looking good, according to the report. That said, the good news is that, by limiting certain human activities, especially concerning the use of fossil fuels, we can improve our outlook. 

Is regulation the best tool?

Assuming that the report is correct, it is not entirely clear to me that regulatory actions aimed at restricting the use of fossil fuels will be able to reverse whatever damage has already been inflicted on the environment.

I know that this is a difficult and divisive subject. Still, many scientists who do not deny the reality of man-made climate change believe that it is a lot more cost-effective to invest scarce resources in actions aimed at mitigating the impact of climate change rather than trying to reverse it by curbing the use of this or that.  Anyway, this is a truly complicated subject that cannot be addressed in just a few words.

Forget about the Keystone pipeline

Still, on a more practical level, one of the most immediate (politically motivated) policy consequences of this report is that we may as well forget about any decision on the already controversial Keystone pipeline that could carry almost 800,000 barrels of Canadian oil a day from Alberta down to Texas refineries.

This project has already been demonized by all the US environmentalists as something that would trigger a real catastrophe. It has been said that buying and then refining this Canadian heavy oil is basically a criminal act, as this is oil is a super pollutant that will damage the air, the atmosphere and everybody coming in contact with it.

It all about politics

Well, let’s say that this is at least an exaggeration. But this belief is firmly held by lots of Democrats. And Obama does not want to offend them (there is a national election coming up in November) by authorizing the project.

Sure enough, if we were thinking strategically, if we were thinking US energy security, it would make a lot of sense to increase US oil imports from Canada, a stable and dependable ally, as opposed to buying the same oil from OPEC countries. This is obvious.

But Obama cannot talk energy security with the environmentalists in his own party. And so he has tried to be clever by creating an endless project review process that allows him to delay a decision without openly offending anybody.

Some Democrats may suffer

True enough, there are some Democrats, mostly Senators running for re-election, who may suffer politically because of this, since their centrist constituents are actually in favor of the Keystone pipeline. But the White House is not inclined to approve such a controversial project just a few months before the November mid-term elections.

Still, for anybody who might have harbored any residual hope regarding approval of the Keystone pipeline, the just released National Climate Assessment report should put the issue to rest.

The report says that carbon is bad

Now we have heard it from higher authority: carbon based energy is bad. We should use less, not more. Never mind that the issue at stake here is not consuming more oil but decreasing our dependence on OPEC oil. As we have to import almost half the oil we consume anyway, it would be wiser to buy it from a friend close by, rather than from the Persian Gulf.

Regarding the pipeline, the real issue is energy security  

And yes, Canadian heavy oil may indeed pollute more, but I do not believe that using more of it will make such a big difference, if we take into account global emissions of greenhouse gases dominated by thousands of super dirty Chinese and Indian coal-fired power plants that the US environmentalists cannot close down.




America Shall Not “Pay Any Price” To Protect Ukraine’s Territorial Integrity

WASHINGTON – The Moscow-inspired and Moscow supported Ukrainian crisis is slowly morphing into something resembling a civil war. Whether this is the actual direction or not, it is obvious that the Kiev government will be unable to achieve its goal of recreating law and order within Eastern Ukraine.

Illegitimate government in Kiev

The Kiev provisional government is described by Moscow, and now by many if not most ethnic Russians in Ukraine, as illegitimate, (it came into power via the violent overthrow of the properly elected government), and bent on destroying the large Russian minority living in the East. As we all know, it is a government led by neo-Nazis and Russophobes, and so on.

This being the case, the Russians in the East have every right to resist the police and military forces sent by Kiev to kill them. And Moscow has every right to intervene in order to protect its brethren on the other side of the border.

This being the official Russian interpretation of events, add to the mix overwhelming Russian military force now deployed close to the border with Ukraine and compare these well armed Russians with a small and ill-equipped Ukrainian army.

Hopeless situation

Once you have done this, you can only come up with one conclusion: the situation is hopeless. Kiev cannot and will not prevail in this crisis. Further escalation will simply give Putin a pretext for intervening directly.

It would make sense for Kiev to resist this well-orchestrated, indirect Russian aggression only if the provisional government could have the comfort of a solid, US-led, Western commitment to its security and territorial integrity.

In another era, America would have helped

Yes, there was a time in which the US pledged its unconditional support to all those who were seeking freedom against tyranny.

Yes, there was a time in which America was the defender of freedom:

“….Let the word go forth from this time and place, to friend and foe alike, that the torch has been passed to a new generation of Americans–born in this century, tempered by war, disciplined by a hard and bitter peace, proud of our ancient heritage–and unwilling to witness or permit the slow undoing of those human rights to which this nation has always been committed, and to which we are committed today at home and around the world.

Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty. [bold added]

This much we pledge–and more.

To those old allies whose cultural and spiritual origins we share, we pledge the loyalty of faithful friends. United there is little we cannot do in a host of cooperative ventures. Divided there is little we can do–for we dare not meet a powerful challenge at odds and split asunder….”

America, the defender of freedom

No, this is not fiction. This was the most memorable part of John Kennedy’s Inaugural Address delivered on January 20, 1961. Yes, a long time ago, but not so long ago. Kennedy delivered it when America was engaged in the Cold War, a global ideological and geo-political struggle against Soviet communism and Soviet-inspired mischief.

Mercifully, today there is no longer a Soviet Union. But we have a Russian Federation led by Vladimir Putin, a tyrant who wants to make his own rules and impose them on weak neighbors, counting on Western timidity. And Putin’s calculation about Washington’s inaction is most probably correct.

Obama’s America may grumble; but it will not do much. JFK’s pledge to “pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty” sadly, does not apply any more.

Moscow knows this, and this is why it is not backing off, whatever Obama says it will do in response to Russia’s open support for the separatists in Eastern Ukraine.

Kiev should realize it cannot win

It is high time that the Kiev provisional government realizes this as well. As America will not intervene, its fight against the Russian separatists in the East is hopeless. Kiev cannot win without the active support of powerful and credible allies –and this means Washington. In fact, prolonging a fight against this manufactured insurrection may make matters far worse.

It is time for Kiev to recognize that Eastern Ukraine is lost. No, America is not ready to “pay any price” for the “success of liberty“.

And if America will not protect and support Ukraine, forget about Europe, whose real concerns are about unhindered  deliveries of precious Russian gas and business deals with Moscow.




America’s Economy: Stagnation and Inequality, A Bad Mix

WASHINGTON – Capitalism is still by far the best economic system we know. But it is not as good as we would like it to be. Here in America we are in the middle of what Tyler Cowen appropriately named “The Great Stagnation”.

No innovation

Indeed, beyond the still vibrant IT sector, we seem to have lost the ability to innovate. There are no ground breaking inventions, no real “game changers” in power generation, civil aviation, biotech, agribusiness, and so on, that open up entire new sectors.

Stagnation also means little or no productivity growth, and that means thin margins for many industries. And technological changes, to the extent that they exist, usually have a negative effect on mundane functions, (and that means jobs), that can be easily replaced by automation.

Little growth, low wages

Yes, the economy grows; but just a little. There are good news on employment. We have just added almost 300,000 jobs in April. But they are mostly low paying jobs. There are millions of Americans who would love to trade their current part-time jobs with full-time employment. The middle class is barely treading water. Millions of Americans are actually doing worse now than 10 or 20 years ago.

Growing inequality

At the same time, whatever new wealth is produced, it ends up in the hands of fewer and fewer people. So, here we have it. Very little economic growth and growing socio-economic disparities.

The US is becoming a bit like Brazil and other Latin American countries. Modest growth, huge inequality and a shrinking middle class.

No good answers

These are really major issues. And nobody has a good answer. How do we reduce inequality without punitive actions against those who do better or very well? How can we help the shrinking middle class without creating a gigantic and ultimately unaffordable welfare state? And –most critical issue– how do we recreate the magic of broad based innovation? As I said, nobody really knows, for sure.

Retreaded political ideas

But politicians are forced by the circumstances to come up with answers. Confronted with this phenomenon of lower incomes for the middle class, while those at the top have become fabulously wealthy, the left simply retrenched to familiar ground. This growing inequality –its leaders say– is unjust and immoral. The state should do more to help those at the bottom. And you finance these needed social safety nets by taxing the rich who are taking more than fair share anyway.

Redistribution

This approach may make some people feel better. But in the long run it is self-defeating. No public policy founded on redistribution ever managed to give any real impulse to growth. The rich will hide their wealth whenever they can and/or move to another country if they have the opportunity. Those who cannot escape will lose their motivation to invest and expand. If things are bad today, you can rest assured that they will be worse tomorrow.

Free-market capitalism will work its magic

That said, the orthodox pro-capitalist have no new insights either. The idea that, if you leave the system alone –that means deregulation, lower taxes– it will take care of itself, looks at best a bit naive, at worst utterly disingenuous. While one should not tinker with innovation by having politicians picking winners and losers and by subsidizing this or that, are there ways in which public policy can stimulate innovation and expand opportunity?

Expanding opportunity

Is there anything that can be done to give a good, if not excellent, public education to millions of poor kids who are stuck in mediocre or failing public schools? These kids are part of our future human capital reservoir. If we let them grow up with no education, they will be able to do little for themselves and even less for society.

These lean times should stimulate new, constructive ideas. But they do not. The left thinks in terms of redistribution financed via higher taxes imposed on the rich. The right still thinks in terms of pure free market capitalism whereby the “invisible hand” will take care of everything.

Immediate handouts seem better 

These stale recipes will not work. Sadly, in this unimaginative political landscape it is likely that those on the left who promise a free lunch to people who are really hungry will get more attention.

The millions of Americans who are not doing well are more inclined to listen to the politicians who offer immediate relief. Paraphrasing the old story, for most people in need receiving a fish now seems more appealing than enrolling in a course that will teach them how to fish.

The point is that we shall soon run out of fish.




Putin Deployed 50,000 Russian Close To Ukraine, Obama Sent 600 US Paratroopers To Poland And The Baltic States

WASHINGTON – With cause, The Economist worries about America’s determination to stand up against the bad guys. (Putin in Ukraine, China with its preposterous territorial claims on islands in the South China Sea, Iran with its nuclear weapons plans).

However, a recent The Economist piece commenting on how Putin’s Crimea aggression has (supposedly) injected more resolve into NATO states that 600 US paratroopers sent to Poland and to the (weak and worried) Baltic States for exercises are an illustration of this new fighting spirit.

While this was only a passing comment in the context of a long article, it should be noted as silly. Who is kidding whom, here? Putin has sent 50,000 Russian troops right next to Ukraine’s eastern border with the obvious goal of intimidating the Kiev provisional government. Putin has sent into Ukraine Russians  special operations troops in disguise to foment an insurrection.

And the mighty United States does what? It responded by  promising Meals Ready to Eat, uniforms and socks, (military issue socks, mind you, not just ordinary stuff), to the Ukrainian army.

And now, just to make sure that everybody knows that President Obama means business, the US sent 600 US paratroopers to NATO countries that have plenty of reasons for feeling uneasy about their security.

Here you go: 600 Americans on this side, versus 50,000 Russians on the other side. And Putin is supposed to be scared? Of this? And do keep in mind that President Obama has already stated in clear terms that the US has no intention to use or even threaten to use force in order to bring the Ukrainian crisis, caused by Moscow, to an end.

And this display of timidity, plus a token 600 paratroopers is supposed to reassure allies and force Putin to change course?




The Kiev Provisional Government Cannot Win, All By Itself, Against Putin

WASHINGTON – The difference between the failed separatist fight that Chechnya started and lost several years ago and the current semi-insurrection now underway in Eastern Ukraine is that the Chechens could not rely on any help from anybody. And so they were literally decimated by the Russian army sent there by the same Vladimir Putin who has now reinvented himself as the protector of minorities. Putin saw to it that there would be no Chechen secession. Grozny, the capital of Chechnya, was destroyed.

Putin fomenting secession

In Eastern Ukraine it is the opposite. The very same Putin who acted ruthlessly to protect Russia’s integrity is now openly undermining another country’s sovereignty by fomenting rebellion in Eastern Ukraine. Unlike the Chechen rebels, the ethnic Russians in Ukraine, now protesting more and more violently against Kiev, know that they are not alone in this fight. Moscow pays for and enables the “rebellion”.

Kiev is too weak

Unlike the Russian government that acted with complete freedom in confronting isolated Chechen rebels, the poor and weak provisional government in Kiev knows that on the other side of Ukraine’s Eastern border there are 50,000 Russian troops ready to jump into Ukraine, if and when Putin decides that the moment has come to come to the aid of the persecuted Russians trying to fight the neo-Nazis from Kiev. (This is, as we know, the official Russian narrative).

The Ukrainian government of course would like to regain control over its Eastern cities, many of them now under Russian militias’ control. But it will not launch a real military operation for fear of giving Putin the excuse to invade.

In Chechnya Putin had a free hand

In other words, in Chechnya Putin had a free hand. He could send a large force and defeat the insurgents, even if at a very high price, because the Chechens really fought back, for many years. Still, in the end the Chechens, with no allies, were outnumbered and defeated. By 2009 Chechnya had been “pacified”.

In Eastern Ukraine it is exactly the opposite. The ethnic Russians demanding independence or whatever are very confident, because they are aided by Moscow, and because they know that the Russian army right across the border will attack the Ukrainians if they seriously try to regain control over the East. And Kiev, with no real military support from anybody, cannot prevail all alone against Russia.

Europe and the US will do nothing to stop Putin

Of course, Europe and the US are making all the right noises. They condemned Moscow, they sanctioned a few Russian policy-makers and business people close to Putin and they threaten to do more.

But it is more than obvious that there is zero appetite for a real confrontation with Putin. Putin knows this and so he keeps up his game. And this very favorable scenario emboldened the ethnic Russians in the East who see “victory”, (whatever that is in the end), near. And the Kiev provisional government at this point must have realized that this is the end game. They lost. They lost because they are much weaker than the Russians, and because they are all alone in this fight.

Kiev authorities should end all this by letting the East go

This is a dreadful situation. Still, these are the facts. Because of all this, the Kiev authorities by now should have realized that they will never, never win this battle for control over Eastern Ukraine. Therefore, they should accept defeat. And defeat means letting Eastern Ukraine go.

Even though until yesterday the vast majority of the ethnic Russians living in the East were calm and totally comfortable about being Ukrainians instead of citizens of Russia, today this is no longer possible. There is no going back.

And forget about working with Moscow on “honorable compromises” via “diplomatic solutions”. Putin wants to win. Having missed the opportunity of regaining control over the entire Ukraine when his deal with then president Viktor Yanukovych fell apart, now he wants at least a piece of it.

He started by grabbing  Crimea, the low hanging fruit. And now he sees with satisfaction that nobody is willing to stop his mischief in the East. And so he quickly added it to his list.

The only way for Western Ukraine to survive and begin to focus on the serious business of rebuilding its society and economy is to stop the bleeding by letting the East go. There is absolutely nothing to be gained by prolonging a hopeless fight that Kiev by now should know that it will never win.




Benghazi Tragedy: Incompetence and Callousness

WASHINGTON – It has hard to get the general public to focus on the attack on the US Consulate in Benghazi on September 11, 2012 and fully appreciate what it means.

Benghazi is far away

Benghazi is far away, in Libya, a country most Americans know nothing about. And yes, 4 Americans, including the US Ambassador, were killed. But, hey, these things happen in far away, messy countries.

Well, it is a lot worse than that. The loss of life as a result of the premeditated attack on the US Consulate in Benghazi and the way this (avoidable) tragedy was handled at the time and even today, show a sad –and in fact ugly– combination of incompetence and callousness.

Incompetence

Let’s look at incompetence. It is clear that this diplomatic outpost in fragile, post-conflict Libya was not adequately protected. A mix of bureaucratic inertia and sheer stupidity allowed the US Consulate to be essentially defenseless and therefore vulnerable in case of attack.

This vulnerability was repeatedly pointed out by people on the ground, but it was not corrected. Who was ultimately in charge of the Department of State? Secretary of State Hillary Clinton, universally praised for the “great job” she has done while in office. Well, while this one instance does not impeach her entire tenure as Secretary of State, this is an instance of gross incompetence, bordering on willful negligence.

Callousness

Let’s look at callousness. Sure enough, we know that in the real world of politics there is an irrepressible urge to put a spin on current events so that policy makers may take credit, even when credit is not due; and may distance themselves from failures for which they are responsible.

That said, please do remember that the Obama administration came into office in 2009 with a totally new spirit of openness and transparence. They wanted to create a new climate of dialogue and trust.

Well, the way the White House handled the Benghazi tragedy proves that the opposite is true. The Obama administration deliberately obfuscated what the Benghazi tragedy was really about, because they feared negative political repercussions of a US policy failure that had occurred just weeks before the critical 2012 elections.

Terror networks destroyed?

Let’s remember that Obama was running for re-election in 2012 on the basis (among of other things) of his successes in fighting al Qaeda that culminated with the killing of Osama bin Laden in Pakistan. A successful terror attack against a US diplomatic facility in an Arab country –on September 11, mind you– did not fit the official, optimistic narrative of a decimated and powerless terror network.

Run for cover

And so what did the Obama people do? They run for cover. They literally “invented” a convenient story. They told the media and the world that the attack on the US Consulate in Benghazi had been caused by a spontaneous protest arising from an anti-Muslim video produced in the USA. Their story was that the airing of this video resulted in (justifiable) outrage in several Muslim countries.

Tragically in Benghazi the protest became very violent and it caused the attack on the US Consulate that ended with the death of four Americans, including the US Ambassador.

Manipulation

In other words, this was a tragedy caused by a spontaneous protest caused by a video. Well, we know that this is not true. This was a deliberate attack orchestrated by well armed terror groups. And we know that the attack succeeded because the Consulate was unprotected.

Worse yet, we now know that everybody in the Obama administration knew that their version of the events was not true.

Indeed, a couple of days ago, long time after that sad incident, via a court order, White House e-mails that specifically instructed UN Ambassador Susan Rice to give the untrue “video story” as the cause of the attack have been made public. She said on TV what she was instructed to say, in order to minimize the political consequences of this tragedy.

Avoid political fall out

So, it is now clear beyond any doubt that this tragedy was treated only as a political embarrassment that needed to be obfuscated through the deliberate injection of extraneous material. The point was not to tell the truth about what had happened, but to limit any political damage resulting from a tragedy originating in the decision to leave a key US Diplomatic post in a dangerous country virtually unprotected.

The White House orchestrated the fictitious narrative

What is even worse is that even now, after the role of the White House in directing how the tragedy should be explained has ben exposed, the White House spokesman keeps saying that what was said at the time was in line with what was known, and so on. So, even today they deny any wrongdoing or any attempt at manipulation.

As I said, this is callousness.