Starbucks has faced scrutiny for what UK lawmakers call “outrageous” and “immoral” tax dodging, along with Amazon and Google. Starbucks’ average tax rate on overseas income is just 13 percent, and it has paid the UK just $13.8 million in the last 14 years.
On Thursday, Starbucks promised to pay $16 million more to the UK over the next two years, after coming under fire for its complicated use of tax deductions and inter-company payments:
“Today, I am announcing changes which will result in Starbucks paying higher corporation tax in the UK — above what is currently required by law,” [Managing Director Of Starbucks UK Kris] Engskov said in the speech to the London Chamber of Commerce [...]
“In addition, we are making a commitment that we will propose to pay a significant amount of corporation tax during 2013 and 2014 regardless of whether our company is profitable during these years,” Engskov said.
Legal tax dodging is a common affliction worldwide, as major companies avoid taxes everywhere by shifting profits to tax havens. Starbucks’ overseas tax rate of 13 percent, “one of the lowest in the consumers goods sector,” is approximately what the average corporation paid in federal U.S. income tax between 2000-2005. The effective federal rate fell to a 40-year low last year.
Continuing efforts to cut spending and reduce deficits have driven the Eurozone into its second recession in just four years, as its economy shrank for the second consecutive quarter. Struggling countries like Spain, Greece, Portugal, and Ireland are still pursuing deficit reduction to rein in their debt, cutting spending to the bone to do so. The spending cuts have driven unemployment to record levels and threatened the continent with a recession that became official during the last quarter, Bloomberg reports:
The euro-area economy was pushed into a recession for the second time in four years as trade slowed and government spending declined.
Gross domestic product in the 17-nation currency bloc slipped 0.1 percent in the third quarter from the previous three months, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today, confirming an initial estimate published on Nov. 15.
Eurozone unemployment reached 26 percent in September. The youth unemployment rate has topped 50 percent and resulted in a “lost generation” for the continent’s young adults. Still, the pursuit of austerity continues.
Lawmakers around the world have ignored the European lesson, though. Australia’s growth slowed last quarter as its government pursued deficit reduction, and in the United States, the so-called “fiscal cliff” brought on by Republican-demanded spending cuts is threatening the country with a bigger austerity package than those that have been implemented in Europe, even with ample proof that the U.S.’s original preference toward stimulus was more effective than the austere European approach.
Online retailer Amazon has been a recent target of lawmakers who want to force it and other retailers to stop taking advantage of a tax loophole that exempts them from the collection of state sales taxes in states where they do not have headquarters or distribution facilities. While Amazon has fought those efforts, the online sales tax loophole isn’t the only one it has taken advantage of to lessen its tax burden.
Amazon has paid a high tax rate — an average of 44 percent over the last five years — on its American earnings, but by setting up subsidiaries in Luxembourg, it has taken advantage of a loophole in American tax law and saved more than $700 million in taxes on overseas profits, Reuters reports:
Amazon’s Luxembourg arrangements have helped it pay an average tax rate of 5.3 percent on overseas income over the past five years, less than a quarter of the average rate across its major foreign markets.
Company accounts show that since 2005, Amazon Europe Holding Technologies started to make payments to Amazon Technologies Inc in Nevada of up to 230 million euros ($300 million) each year. At the same time it received up to 583 million euros each year from its European affiliates. [...]
Had Amazon remitted all that to the United States and then paid the headline U.S. corporate income tax rate on it, the firm would have incurred taxes of more than $700 million. But it has not and the deal has allowed Amazon’s Luxembourg unit to accrue tax-free cash worth more than $2 billion.
Until 1997, Amazon would have still owed that $700 million in taxes to the United States. But that year, a new tax provision known as “check-the-box” allowed certain overseas profits to be exempt from dividend taxes, allowing companies like Amazon to utilize low-tax havens to avoid paying millions — and sometimes billions — of dollars in taxes.
Apple, for instance, used foreign tax havens that have become popular among tech companies to avoid paying $2.4 billion in taxes last year, according to a New York Times analysis. Microsoft used subsidiaries in Puerto Rico, Ireland, Singapore, and Bermuda to avoid more than $6.5 billion in taxes, according to a report from Sen. Carl Levin (D-MI), who has advocated for closing corporate loopholes and reforming the tax code in a way that eliminates such avoidance.
Before the Great Recession, the financial sector had consistently been eating up a greater and greater share of the economy. In 2007, it accounted for a whopping 40 percent of corporate profits. Before 1950, the financial sector made up less than 3 percent of GDP; now it makes up more than 8 percent.
According to a new report from Demos, the financial sector siphons off $635 billion annually in funds that otherwise might go to productive uses, rather than flipping financial assets back and forth:
In recent years, the financial sector share of aggregate GDP has been in the range of 8.3%, an increase from the historic level of 4.1%. By inferring that the historical increase in financial sector share of GDP is attributable to the value diverted from capital intermediation, the excessive wealth transfer to the financial sector is in the range of $635 billion per year. In terms of capital investment loss, one would apply a multiplier to the annual wealth transfer figure since recovery of the annual cost to the capital intermediation system would enable greater upfront investment by businesses and governments.
Research has found that a large financial sector can actually impede economic growth. An International Monetary Fund study showed that “at high levels of financial depth, a larger financial sector is associated with less growth. Our findings show that there can be ‘too much’ finance.” Currently, the six biggest banks hold assets equal to 60 percent of America’s GDP.
Indiana workers protest passage of "right-to-work" law in January
After insisting all last year that an anti-labor “right-to-work” law was not on his agenda, Michigan Gov. Rick Snyder (R) has changed his mind. This morning, he called on the state legislature to introduce and pass so-called “right-to-work” legislation and promised to sign it should it reach his desk.
Snyder was among the Midwestern Republican governors who leveled an assault on unions in 2011, but right-to-work, which effectively undermines union activities by allowing non-union workers to free-ride on union-negotiated contracts, is a new front in that fight. Indiana passed right-to-work legislation earlier this year, and by following suit, Michigan can remain competitive with its neighbor while also becoming a better place for workers, Snyder claimed in a video posted by The Detroit News:
SNYDER: There are two main reasons I’m asking the Michigan legislature to move forward on a package of bills on workplace fairness and equity, and I’m going to sign those bills when they come to my desk. First, it’s about being pro-worker. It’s about hard-working Michiganders having the freedom to choose who they associate with. [...]
The second one is about being more healthy in Michigan, in terms of our economy. If you look at the numbers, the last two years we’ve done well. We added 140,000 jobs. We’re forecasted to add 110,000 jobs over the next two years. [...] I want to see that rate go up, to even be bigger and better. And when I looked at Indiana, here’s an opportunity to see that pace increase.
Though Snyder refers to his agenda as “pro-worker,” a quick glance at studies of “right-to-work” legislation paints a different picture. According to the Economic Policy Institute, right-to-work laws have virtually no impact on job growth and have a negative impact on both union and nonunion workers, reducing wages by up to $1,500 a year. A Ball State University study conducted during Indiana’s push to pass right-to-work found that “no impact is likely” for job growth or wages in the manufacturing sector. Another EPI study suggests that right-to-work laws had a negative impact on Oklahoma’s economy and that right-to-work is “is ineffective as a strategy for increasing a state’s employment.”
The right-to-work experiment failed miserably the last time it was tried in the Midwest. Indiana originally passed right-to-work laws in 1957, but orkers hated the new laws so much that they were repealed just eight years later.
At least eight protesters have been arrested outside the Michigan state capitol during protests of the right-to-work legislation, and police have used pepper spray on other protesters who tried to entire the capitol, the Lansing State-Journal reported. The capitol is currently in “exit-only” mode, according to state police.
Michigan Rep. Gary Peters (D) slammed Snyder’s push for right-to-work in a statement on his web site, saying: “Governor Snyder campaigned on a promise of unity, but instead he’s ushering in an era of divisiveness across Michigan by launching an attack against working families. … Just like Scott Walker, Governor Snyder’s flip flop is clearly a calculated decision to put his own political ambitions ahead of the families he’s supposed to be working for. I stand in solidarity with Michigan’s working families, and we will never stop fighting against this unprecedented and reckless action by Governor Snyder.”
“President Obama has long opposed so-called ‘right to work’ laws and he continues to oppose them now,” said White House spokesperson Matt Lehrich. “The President believes our economy is stronger when workers get good wages and good benefits, and he opposes attempts to roll back their rights. Michigan – and its workers’ role in the revival of the US automobile industry – is a prime example of how unions have helped build a strong middle class and a strong American economy.”
Republican Rep. Tom Cole (OK) broke ranks within his party last week, urging GOP members to immediately extend the middle-income Bush tax cuts, those that primarily affect the middle class and give a tax cut to 98 percent of all Americans. “I think we ought to take the 98 percent deal right now,” Cole said.
Since then, at least four other Republican House members have come out in support of such an idea:
Rep. Robert Dold (R-IL): “Tom Cole is talking about passing the ones that are out there so there could be more certainty, and I think that would be a positive step,” Dold told National Journal. “Let’s make sure we aren’t raising the taxes on the vast majority first.”
Rep. Mary Bono Mack (R-CA): “I have to say that if you’re going to sign me up with a camp, I like what Tom Cole has to say,” Bono Mack told CNN. “I know you had him on the show earlier at length. And I think Tom presented a very thoughtful, articulate position.”
Rep. Walter Jones (R-NC): According to the Huffington Post, Jones could be “willing to pass the Senate bill to ensure 98 percent of taxpayers don’t get hit with a hike” if no deal can get done.
Despite these indications of support, none of the five Republicans has signed the discharge petition filed by House Minority Leader Nancy Pelosi (D-CA) that would force the House to vote on the middle-income tax cut extension. Only Jones has indicated that he may sign the petition at a later date. The petition needs 25 Republican signatures to get the majority it would need to mandate a vote, but if these Republicans are serious about extending tax cuts for 98 percent of Americans, instead of holding out for tax cuts for the rich, the petition they haven’t signed gives them that opportunity.
Louisiana Governor Bobby Jindal (R) has been cited as a “new voice” in the GOP and potential presidential candidate for 2016. However, in a recent op-ed, Jindal suggests Congress enact a balanced budget amendment (BBA) to the Constitution.
We call for a Constitutional amendment requiring a super-majority for any tax increase with exceptions for only war and national emergencies, and imposing a cap limiting spending to historical average percentage of GDP so that future Congresses cannot balance the budget by raising taxes.
A balanced budget amendment overwhelmingly favors tax and spending cuts over increased revenues and puts the country “in a fiscal straightjacket.” Though tax increases require a super-majority of all members — not just those present — tax cuts can pass with a simple majority. As former Reagan economic official Bruce Bartlett explained, “the idea of mandating a balanced budget through the Constitution is dreadful.”
Requiring a super-majority to raise taxes is a recipe for fiscal calamity. Just ask California, which passed such a requirement, known as Prop 13, in 1978. Prop 13 resulted in multi-billion dollar drops in both revenue and spending and legislative gridlock. In addition, education funding per-pupil dropped from one of the highest rates in the country to one of the lowest by the 1990s.
The sticking point of the negotiations over the so-called “fiscal cliff” has been the Bush tax cuts for the wealthy, which Republicans insist must be extended and President Obama and the Democrats insist must end. (Both sides agree on maintaining tax cuts for 98 percent of Americans.)
Of course, the reason the fiscal cliff is looming in the first place is because of concerns over deficit spending, and the cliff represents a sudden and massive reduction in the size of the country’s budget hole. Not all the fiscal cliff’s policy changes arrive at once, but should all of them be enacted, the Congressional Budget Office predicts a new recession over the course of 2013.
The GOP’s fiscal cliff offer says nothing about retaining the payroll tax cut or emergency unemployment benefits (EUC), both of which end come January 1. But as the Economic Policy Institute found, extending EUC creates five times as many jobs per dollar of budget deficit as the Bush income tax cuts for the wealthy:
Extending just the upper-income Bush tax cuts would boost GDP growth by 0.1 percentage point, increasing nonfarm payroll employment in 2013 by only 102,000 jobs—far less than one-tenth the impact of continuing the temporary ad hoc stimulus measures. Continuing EUC would do three times as much in terms of GDP growth and support 300,000 to 400,000 jobs. In terms of jobs created per dollar of budget deficit, EUC is more than five times as effective as the Bush income tax cuts for the wealthy. Combine them with the Bush estate tax cuts and they are one-seventh as effective as EUC.
That’s consistent with earlier work from EPI which determined that the expiration of the stimulus measures and the scheduled cuts to government spending were by far the most economically damaging aspects of the fiscal cliff. Meanwhile, the end of the Bush tax cuts for the wealthy was far less severe — in fact, in dollar terms their expiration did more to repair the budget than to hurt job growth. CBO came to a very similar conclusion.
Allowing the payroll tax cut to expire would result in $1,000 less take home pay for the average family.
Welcome to ThinkProgress Economy’s morning link roundup. This is what we’re reading. Have you seen any interesting news? Let us know in the comments section. You can also follow ThinkProgress Economy on Twitter.
Treasury Secretary Tim Geithner said yesterday that the administration is “absolutely” willing to allow the so-called fiscal cliff to occur if tax rates are not raised on the wealthy. [The Hill]
The Eurozone fell into its second recession in four years. [Bloomberg]
The Senate appears likely to approve a bill expanding trade relations with Russia. [Reuters]
Senate supporters of an online sales tax are vowing to push ahead with their attempt to implement the measure. [The Hill]
The British bank Standard Chartered will pay $330 million to settle claims with the U.S. that it laundered money for Iran. [New York Times]
U.S. regulators charged a Wells Fargo banker and nine others for allegedly making $11 million via insider trading. [Reuters]
Victims of Hurricane Sandy say major banks are dismissing their pleas for mortgage help. [Huffington Post]
Education Secretary Arne Duncan has begun to sketch out his agenda for the next four years. [Education Week]