January 14, 2013, 7:46 p.m. ET
The Debt Ceiling Is Scarier Than the Fiscal Cliff
If the borrowing limit isn't raised, then spending would contract by 6% of GDP, followed by a swift recession.

                       David Gothard
Despite its dismal approval rating, Congress deserves thanks for at least not driving the economy over the fiscal cliff. Let me state unequivocally that the New Year's Day deal was a lot better than the alternative, no doubt.

That said, a treacherous fiscal obstacle course still looms ahead of us. To get through it, compromise must cease being a dirty word.

Jumping off the full fiscal cliff would have amounted to a fiscal contraction of about 4.5% of gross domestic product. Horrible. But the next big budget impasse—over the federal debt ceiling—is even more dangerous. And that impasse is fast approaching.

The debt ceiling is one of the worst examples of American exceptionalism. Other countries routinely pass budgets that estimate total receipts and expenditures for the year to comejust as we do. Those budgets imply, by simple arithmetic, how much the government must borrow and, therefore, where the national debt should be by year-end.

Only in America is there another law that might, and sometimes does, contradict the budget law: a limit on how much the government may borrow. If the debt limit exceeds the number implied by the budget, all is well. If it doesn't, Congress has passed two conflicting laws. In such cases, the minority party always has a little political fun before letting the debt limit rise. If not, we have a Walt Whitman Congress. ("Do I contradict myself? Very well, then, I contradict myself. I am large, I contain multitudes.")

Did I say Congress always raises the limit? In August 2011, we almost crashed headlong into the debt ceiling because Republicans refused to raise it. That, you may recall, is when Standard & Poor's downgraded the government's credit rating. Now the GOP is threatening a repeat performance—or perhaps many.

In fact, the government has already breached the legal ceiling, and Treasury Secretary Tim Geithner is using a variety of gimmicks to avoid chaos. The widely respected Bipartisan Policy Center recently estimated that those gimmicks will take us only into the second half of February.

Since the federal government has never crashed into the debt ceiling before, nobody knows exactly what will happen if it does. But whatever does happen, it won't be pretty.

At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays—which includes everything from Social Security benefits to soldiers' pay to interest on the national debt—will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided.

How in the world could the government cut so much spending so quickly? No one really knows. That is why you hear about dark scenarios wherein the U.S. defaults on the national debt, stops paying tax refunds, delays Social Security checks, leaves soldiers unpaid, and so on. Bad things will surely happen, one of which will be a swift descent into recession. Another will almost certainly be a second ratings downgrade and higher borrowing costs for years, maybe decades, to come.

Who knows what else? Use your imagination. Suppose we pay the bills for Social Security, Medicare, Medicaid, defense, and interest on the national debt in full. Then all other federal spending would have to fall by about three-quarters. Think about that.

Or think about another financial crisis. Today's low Treasury borrowing rates imply essentially a zero probability that the U.S. government will default. Markets would be caught flat-footed if the threat of default suddenly materialized. Remember how financial markets froze in response to the Lehman Brothers surprise bankruptcy in 2008? If threatening default comes to be seen as a standard weapon of political combat in the world's greatest democracy, U.S. government debt will lose its exalted status as the world's safest asset. Treasury borrowing rates will soar while the dollar and the stock market sink. Very ugly.

In short, the consequences of hitting the debt ceiling are too awful to contemplateworse even than going over the fiscal cliff. A sane Congress wouldn't even think about it.

So let's assume that Congress is sane and raises the debt limit in time. Is the country then home free? Not quite, for there's more trouble to come when the federal government's current continuing resolution expires.

The what? You may have noticed that the hyperpartisan Congress has been unable to pass a budget for several years. Instead, it keeps funding government operations temporarily with a series of continuing resolutions that, essentially, maintain spending at current levels for a time. The continuing resolution now in force expires on March 27. After that, unless Congress passes another, the country faces a government shutdown of the sort it experienced in 1995-96. (Remember when the Grand Canyon closed?)

What happens then? By dint of his authority to protect life and property, the president would declare some government services (like air traffic control) essential and others (like the national parks) inessential. The latter would be closed down while the former would continue. No one knows precisely how much of the federal government would shut down. But when this happened in 1995-96, relatively few federal workers were deemed essential.

Suppose military spending and entitlements absorb no cuts at all while appropriated funds for nondefense programs are reduced 60%. (That's a pure guess.) Then the resulting fiscal contraction would be about half as large as the just-avoided fiscal cliff, or about one-third of the hit from crashing into the debt ceiling. Plus, a government shutdown is far less likely to precipitate a financial crisis.

So, if Congress insists on a "surge" in its unending budget war, let us, at least, duke it out on the brink of a government shutdown rather than on the brink of hitting the debt limit. Some choice! Like Sen. Joe Manchin (D., W.Va.), I long for the day when the biggest threat to the American economy is no longer the American Congress.

Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve and author of the soon to be published "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead" (Penguin).

13, 2013 7:22 pm

Taxation: Unsafe offshore

Governments want to close tax loopholes but risk scaring off big foreign investors
ship in the distance©Alamy
Reading the barometer: governments are responding to a changing political climate and are looking to stop companies logging their profits in offshore tax havens

In April 1961, a newly elected President John F. Kennedy launched an offensive against a phenomenon that he feared could undermine America’s future: aggressive tax avoidance.

In a message to Congress, he railed against the “unjustifiableuse of tax havens by growing numbers of businesses to slash their tax liabilities at home and abroad.


More than 50 years on, the political rhetoric seems to be identical, echoing Kennedy’s broadside against “artificial arrangements”. Once again, businesses are under fire for using corporate structures that shift profits to low-tax jurisdictions. Political anger is mounting over the low taxes paid by multinationals such as Apple, Google and Amazon during an age of brutal cuts in public spending.

In the US, the powerful Senate investigations panel has attacked the “loopholes” and “gimmicksused to move earnings offshore; in Australia, a Treasury minister slammed multinationals’ tax practices as “not fair game”. In Britain, David Cameron, the prime minister, sent a blunt message to business: “We’re playing fair by you; you’ve got to play fair by us.” Pascal Saint-Amans, the OECD’s top tax official, says this political pressure has now moved beyond rhetoric and represents a turning of the tide against avoidance by big business.

“The aggressive tax planning of the last 20 years was achieved with the complicity of governments themselves to cope with tax competition,” he says. “This mindset is seriously changing.”
Galvanising co-ordinated action, Britain, Germany and France have thrown their weight behind an urgent review of the international tax standards, which they say, facesdifficulty keeping up with changes in global business practices, such as the development of ecommerce in commercial activities”.

The potential reforms will start to take shape next month at a Group of 20 meeting in Russia, where the Paris-based OECD will release an interim report on tax. Governments are already locking horns with businesses over how far the measures will go.

In November, they met to discuss proposals to tighten the rules on the artificial shifting of profits to tax havens. While these meetings are normally dry, sedate affairs, the session in Paris was marked by a more palpable sense of tension.

James Phillips, a tax executive at CGGVeritas Group, a French oil services company – but speaking at the meeting in a personal capacitystressed what he saw as the dangers of pushing business too far. “The current financial crisis will, eventually, pass – it is far from historically unique. If, however, its legacy is to retrench international trade via reducing opportunities for profitable gain by institutionalising double taxation its legacy will be much further reaching,” he said.

Despite the protestations from business, finance ministries must respond to an increasingly irate public that feels global tax rules have been rigged in favour of multinationals.

All of this is taking place against the backdrop of anti-globalisation and protectionism. Politicians are starting to pick up the vibe,” says Jeffrey Owens, professor at the Vienna University of Economics and Business.

Multinationals, stung by the damage to their reputations, accuse governments of blaming companies for a system that the states themselves designed to attract investors. When Google, which shifted billions of dollars from Ireland to Bermuda to achieve an overseas tax rate of just 3.2 per cent in 2011, drew fire from politicians, Eric Schmidt, its executive chairman, insisted the tax structure was “based on the incentives that the governments offered us to operate”.

Ireland, where Google employs 3,000 people from 65 countries in Dublin’s former docklands, taxes a sliver of profit from the billions of the Google’s overseas sales which are booked in the country. This is achieved by Google’s use of a double Irishstructure, that exploits different definitions of tax residence in the Irish and US tax codes. The Irish unit pays royalties to Google in the tax haven of Bermuda for using the company’s own intellectual property.

. . .

But Google’s arrangements are, above all, a symptom of flaws in the US tax system. Scott Hodge, president of the Tax Foundation, a non-partisan research group in Washington, says these kinds of “tax planning gymnastics” are the “the response you would expect when businesses are subject to an arcane, outmoded tax system”.

As well as having the highest tax rate in the industrialised world, the US is increasingly unusual in taxing companies’ worldwide profits. To mitigate these disadvantages for its companies competing abroad, it allows them to defer US taxes on foreign earnings until they are repatriated.

Since 1997, Washington has tilted the tax system further in the companies’ favour by passing the check-the-box regulations that opened up new opportunities to put income in tax havens, without having to invest in real operations there. Companies had a new incentive to strip taxable profits out of high-tax countries through payments of interest or royalties, pushing down the average overseas tax rates of US businesses.

In Europe, the problems are exacerbated by the anti-discrimination rules enshrined in the 1957 Treaty of Rome which have hindered the policing of national tax boundaries. Existing single-market rules allow businesses to “structure arrangements with such jurisdictions via the member state with the weakest response ... this does not only erode member states’ tax bases but also endangers fair competitive conditions for business”, according to a new report on aggressive tax planning by the European Commission.

Emerging economies, particularly the powerhouses of Brazil, China and India, are also feeling the pinch. The existing rules on international taxation “only take care of the interest of developed countries”, the Indian government told the UN in March 2012, a sign of frustration over multinationals’ ability to siphon off profits through royalties and management fees and deposit them in tax-friendlier locales. “The Brics are saying: you are raiding our markets,” says one multinational executive.

Beijing is increasingly resisting efforts to cast its companies as low-margincontractmanufacturers, arguing that its own technical expertise, infrastructure and huge population mean substantial value is created in China and should be taxable there. Brazil has rejected conventional approaches to determine multinationals’ tax bills in favour of a simpler, more rigid approach that assumes fixed industry-wide profit margins.

Facing competing demands, the fragile consensus over the international allocation of multinationals’ profits risks a breakdown. Highlighting the dangers of a failure by governments to collaborate on reforms, the OECD warns: “The consequences could be damaging in terms of increased possibilities for mismatches, additional disputes, increased uncertainty for business, a battle to be the first to grab taxable income through purported anti-avoidance measures, or a race to the bottom with respect to corporate income taxes.”

There is “no magic recipe” to address profit shifting, the OECD warns. But it is increasingly confident about the technical changes that would make the system more robust.

The new guidelines on “intangibleassets it is pushing through would stop companies shifting profits to shell companies in tax havens, although they would not stop the transfer of intellectual property and other intangibles to a low-tax country if companies had genuine business operations there.

It is also likely to propose a crackdown on arbitrage – the exploitation of differences between countries’ tax codes – by recommending governments refuse tax deductions on income that will be untaxed in another jurisdiction. Reforms of the rules affecting ecommerce companies are also under consideration.

Similar proposals are being pushed by the European Commission. Calling for a “strong and cohesive EU stance”, Algirdas Semeta, the tax commissioner, said: “In a single market, within a globalised economy, national mismatches and loopholes become the playthings of those that seek to escape taxation.”

Some factors are already working in governments’ favour: demands from the public and investors for greater transparency, a growing and renewed awareness of the risks of extreme tax planning to companies’ reputations and the recently acquired ability to prise open the details of companies held in tax havens.

. . .

Attempts at reform will, however, face powerful headwinds. The forces of tax competition – including the temptation to grab the most mobile profits, such as those arising from intellectual property – remain significant. In spite of the soaring rhetoric, governments must proceed with some caution, fearing any cooling of investment because of a crackdown on tax avoidance.

Member states are defensive,” says a Brussels-based official contemplating efforts to co-ordinate a tougher code.

Countries are using their tax system to compete.” In the UK, for example, at the same time as spearheading international efforts to collaborate on reforms, George Osborne, the chancellor, is this year launching a “patent boxoffering a cut-price tax rate for certain types of intellectual property and an offshore finance company regime to enhance the UK’s ability to attract headquarters.

Rooting out avoidance might, paradoxically, intensify competition on tax rates. James Hines of the University of Michigan says tax havensplay the important role of pressure valves”, allowing big countries to impose higher taxes on domestic businesses without deterring international investors or triggeringbeggar thy neighbourtax competition.

Rates in industrialised countries have already been driven down from almost 50 per cent to less than 30 per cent since the 1980s in a trend that shows no sign of ending. Pressure is likely to intensify if the US joins the fray. The International Monetary Fund reports: “Any sizeable US corporate income tax reform can therefore be expected to elicit a tax competition reaction by other countries.”

But as cash-strapped governments around the world attempt to repair their deficits, they will battle to defend corporate tax revenues that – while failing to keep up with the growth of companies’ profitability – have held broadly steady at 8-10 per cent of the total for the past 50 years.

One likely alternative would be a far greater reliance on consumption taxes, which would only add to increasingly unequal income distribution.

Given this need to preserve the integrity of the tax system, businesses would be well advised to brace for higher tax bills.

Governments have made the business tax system more friendly since the mid 1980s,” says Mr Owens. “Now it is payback time”.

Copyright The Financial Times Limited 2013.

One Nation (Under China) – China's Long March toward World Domination.

Larry Edelson


martes, enero 15, 2013



The Centrists Cannot Hold

Kemal Derviş

Jan. 14, 2013

This illustration is by Paul Lachine and comes from <a href="http://www.newsart.com">NewsArt.com</a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.Illustration by Paul Lachine
WASHINGTONIn most advanced democracies, a large center-right party competes with a large center-left party. Of course, the extent to which an electoral system favors large parties – by having high popular-vote thresholds to enter parliament, or through winner-take-all constituenciesaffects the degree of political fragmentation. But, by and large, the developed democracies are characterized by competition between large parties on the center left and center right. What, then, are true centrists like Mario Monti, Italy’s respected technocratic prime minister, to do.
To be sure, regional and ethnic allegiances play a greater role in some places in Europe – for example, Scotland, Belgium, and Catalonia – but far more so in emerging countries, where political cleavages also reflect specific post-colonial circumstances and often the legacy of single-party rule. Nonetheless, even in “emerging marketdemocracies, such as Chile, Mexico, South Korea, and India, a left-right cleavage plays an important role – while those who claim the political center generally remain weak.
The British Liberal Democrats, for example, have tried for decades to become a strong centrist third party, without success. While the political vocabulary in the United States is different, the Democratic Party, since Franklin Roosevelt’s presidency, is indeed a center-left force, the Republican Party occupies the right, and no other significant party exists.
In France and Germany, there is more fragmentation. Politics is still dominated by a large center-left party and a large center-right party, but smaller groupssome claiming the center and others the right and left extremes challenge them to various degrees. In some countries, the “Greens” have their own identity, close to the left; but, despite remarkable progress in Germany, they remain unable to reach the electoral size of the large center-right and center-left parties.
Variations of this basic structure exist in Spain, Portugal, Greece, Turkey, and the Nordic countries. The situation is particularly interesting in Italy, where Monti, having decided to contest the upcoming general election, has had to position himself on the right (which he signaled by attending a gathering of the leaders of Europe’s center-right parties). He and former Prime Minister Silvio Berlusconi are now fighting for space on the right, with the center-left Democrats leading in the polls.
There are at least four differences between center-right and center-left approaches to social and economic challenges. The right has greater confidence in markets to allocate resources and provide appropriate incentives; favors private consumption over public goods; is minimally concerned with economic inequality; and tends to be more nationalistic and less optimistic about international cooperation.
The left, by contrast, believes that markets, particularly financial markets, need considerable government regulation and supervision to function well; gives greater weight to public goods (for example, parks, a clean environment, and mass-transit systems); seeks to reduce economic inequality, believing that it undermines democracy and the sense of fairness that is important to well-being; and is more willing to pursue international cooperation as a means to secure peace and provide global public goods, such as climate protection.
When looking at actual economic policies as they have evolved over decades, we see that they always combine center-right and center-left elements. Repeated financial crises have tempered even the right’s faith in unregulated markets, while the left has become more realistic and cautious about state planning and bureaucratic processes. Likewise, the choice between privately consumed and publicly consumedgoods” is often blurred, as politicians tend to reinforce citizens’ understandable tendency to demand public goods while rejecting the taxes needed to pay for them.
As income inequality has increaseddramatically in some countries, such as the US – it is moving to the forefront of the debate, reinforcing the traditional political divide. Nonetheless, the center right and the center left are arguing about the degree of redistribution, not about the need for some progressivity in taxes and transfers. Both also agree on the need for international cooperation in an increasingly interdependent world, with differences mainly concerning how much effort to spend on it.
So, given that differences in policies as they are implemented have become largely a matter of degree, why do centrist parties remain weak? Why have they failed to unite moderates on both sides of the ideological divide?
One reason is that only a minority of any population is active politically. Active party members hold more ideologically consistent views – and hold them more strongly – than most of those who are politically less engaged, giving activists disproportionate influence in the political process. After all, more nuanced ideas and policy proposals are relatively difficult to propagate effectively enough to generate broad and enthusiastic popular support.
But there also really are fundamental differences in values and economic philosophies, as well as in economic interests, leading to a fairly consistent positioning of voters on the right or left. Disagreement may lead to compromises, but that does not change the underlying differences in starting positions.
It is probably a good thing that structured competition between large center-right and center-left parties persists. Such parties can help to integrate the extremes into the political mainstream, while facilitating alternation in power, which is essential to any democracy’s dynamism; a system in which a large centrist party remained permanently in power would be far less desirable. Those, like Monti, who want to mount a challenge from the center, however personally impressive they may be, have steep obstacles to overcome, and for good reasons.

Kemal Derviş, a former minister of economy in Turkey, administrator of the United Nations Development Program (UNDP), and vice president of the World Bank, is currently Vice President of the Brookings Institution.