Thursday's Top 10 with NZ Mint: Ireland gives America the finger(s) over Apple's Irish tax 'minimisation' strategy; Where's America's creatively destructive jobs growth?; The drive for a 'living wage'; Dilbert

Here's my Top 10 links from around the Internet at midday today in association with NZ Mint.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read is #9 from John Cassidy on Europe's austerian madness.

1. Why corporates should pay more tax - The US Senate's exposure of Apple's serial tax avoidance globally is a sensation.

It's indicative of an underlying trend we've seen with the growth of multi-national companies able to shift resources and revenues to maximise revenues, minimise costs and minimise taxes by playing off countries against each other.

This is a driver for government budget deficits over time, along with actual cuts in corporate tax rates.

The Economist has an amazing chart below showing the trends in corporate profits and corporate taxes. 

It's a stunner.

No wonder governments are now waking up and challenging the likes of Apple, Google, Facebook and Starbucks on how much tax they pay and where.

Now they somehow need to talk to each and stop playing into the hands of the multi-nationals. 

It's a classic case of a Prisoner's Dilemma. Here's the Economist:

THE pressure on tax-avoiders is mounting. In the latest episode Tim Cook, Apple’s boss, was called before a Senate subcommittee to explain why the tech giant had paid no tax on $74 billion of its profits over the past four years—though it has done nothing illegal. This comes at a time when America's corporate profits are at a record high, thanks to the swift sacking of workers at the start of the recession, lower interest expenses, and the fact that cheap labour in emerging markets has eroded union power, allowing firms to move production offshore and defy demands for pay rises. 

Meanwhile corporation tax, which makes up 10% of the taxman’s total haul (down from about a third in the 1950s) has plummeted. An increase in businesses structuring themselves as partnerships and "S" corporations, which subject profits to individual rather than corporate income tax, is in part to blame. But tax havens are also culprits, as they lower their tax levels to lure in bigger firms.

 

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2. How Apple does it - The New York Times explains how Apple uses Ireland to do its tax-reducing work.

The secrets of how Apple avoided billions of dollars in taxes lie in a low-slung building of glass and brick in the hills of County Cork.

There, in the Hollyhill Industrial Estate and elsewhere in Ireland, Apple employs a mere 4 percent of its global work force. But there, too, Apple recorded a staggering 65 percent of its worldwide income — $26 billion last year — enabling the company, according to Senate investigators, to markedly reduce its tax bill in the United States and the rest of the world.

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3. 'Don't blame us' - Irish politicians have piped up to say Ireland should not be blamed. The argument seems to be: 'We can do this to benefit our country at your expense, so don't blame us for exploiting the commons'.

Down that path sanctions and brute economic power lies. Just ask the Swiss how they feel about being forced by the Americans to open up their secretive banking system.

The brazenness of the Irish is stunning. They even blamed other countries for allowing companies to jump through loop-holes into Ireland. The Dutch-Irish sandwich comes to mind.

Ireland’s deputy prime minister, Eamon Gilmore, on Tuesday disputed the Senate report’s contention that Apple paid a special rate, saying “Ireland doesn’t negotiate special tax rate deals with any companies.” He said that if Apple was not paying its fair share elsewhere in Europe, the fault lay in “loopholes” in other European countries that make it too easy for companies to avoid taxation.

“That’s an issue that has to be addressed first of all in those jurisdictions,” Mr. Gilmore told reporters in Brussels.

The charge by the Senate subcommittee that Apple avoided paying $44 billion in taxes in the United States by keeping the bulk of its $102 billion cash hoard offshore has struck a nerve here in a recession-racked country where unemployment is 15 percent and the government is looking for ways to repay an 80 billion euro bailout, now equivalent to $103 billion, that it received from the European Union and the International Monetary Fund in 2010.

“There is something wrong with this picture — the revenues of these companies keep increasing while our workers are getting crushed,” said Peter Mathews, a chartered accountant who is also a member of the Irish Parliament for the governing Fine Gael party. “Apple’s cash pile is about the size of our national income. Why not have them pay a 4 percent levy to contribute to our national recovery?” 

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4. The tragedy of the commons - There's an element of this dilemma in the international tax situation too. 

Ireland is essentially 'buying' jobs and investment by offering a lower tax rate that means other countries are helping fund Ireland's expansion through lower tax revenues.

It's cynical and in the end will be self-defeating when the Americans and others get their acts together to bully the Irish into increasing their corporate tax rate.

Europe tried to use its leverage when bailing out Ireland, but the Irish clung hard to those tax breaks.

How long before the Americans and Europeans threaten Ireland with bankruptcy unless it complies with a global corporate tax standard. Luckily for New Zealand, we didn't go down the tax haven route the John Key suggested a while back. 

Here's why Ireland is fighting hard to keep its haven open:

Apple, which set up its first overseas headquarters in 1980 in Cork to assemble Macintosh computers, has a long history with the Irish. Its 4,000 workers — the largest Apple labor force in Europe — is significant in a country of only 4.6 million people. Apple’s employees assemble iMacs and Mac Pros and are also engaged in research, customer service and other support functions. “Our tax system may be lax, but in exchange we get jobs and more foreign investment,” said Stephen Kinsella, an economist at the University of Limerick who contributes to the influential Irish Economy blog. “No doubt about it, the benefits outweigh the costs.”

(Irish) government figures show that in 2010 the effective rate on the gross income of companies here was only 6 percent, and economists say that in some cases — as with Apple — it can go lower than that. That stands in contrast to the effective corporate tax rate in other countries: 29 percent in the United States, 22 percent in Britain, 27 percent for France and 24 percent for Germany. More than 600 American companies have set up in Ireland, employing 100,000 Irish workers and enjoying the advantages of an English-speaking work force and low taxes.

5. Where's the creative destruction? - Schumpeter would be turning in his grave. America is the poster child for 'creative destruction', which is the 'Austrian' School's idea to describe the process of businesses being bankrupted or restructured to destroy jobs and then recreate them in more modern, sustainable, productive and profitable areas. 

Yet Peter Orszag writes at Bloomberg about fresh research showing the rate of job destruction and creation in America has halved over the last decade. 

In 1998, various surveys suggested that 8 percent to 10 percent of American workers switched jobs. In 2010, just 5 percent to 6 percent did. This trend predated the last recession (although declines are always larger during recessions). And very little of it can be explained by shifts in the demographic makeup of the U.S.

Similarly, economists Steven Davis of the University of Chicago, Jason Faberman of theFederal Reserve Bank of Chicago and John Haltiwanger of the University of Maryland have found that from 1990 to 2010 the rate of job change gradually declined. As the authors note, their finding indicates that U.S. labor markets have become “less fluid and dynamic.”

Orszag makes some excellent points about inter-generational income mobility.

Intergenerational income-mobility rates appear to also have dropped. That is, the chances that a middle-income child becomes a high-income adult, or a high-income child becomes middle-income, appear to be lower today than in the past. I will also explore this topic in future columns, but the important point for now is that the loss of intergenerational mobility points to a less dynamic society.

So we are left with a puzzle: Most Americans feel their lives are more fluid than in the past, while the data suggest otherwise. At least with regard to job changes, big moves and mobility across generations, America appears to be getting stuck in place.

6. Living wages - It's interesting to see the Auckland Council and Hamilton Councils adopting the campaign for a living wage for their workers of NZ$18.40/hour, well above the current minimum wage of NZ$13.75.

The Warehouse's decision to adopt this Living Wage concept a couple of weeks ago has really put the cat among the pigeons.

Businesses are mostly quite hostile, but they shouldn't be surprised.

Five years after the Global Financial Crisis, workers are seeing very little wage growth, significant profit growth, low and falling corporate taxes, asset price explosions they can't benefit from, and a lack of job growth.

They, rightly, are asking: how do we capture some of that money that's flying around and win back some of the income share now going to profits?

7. The begining of the end of QE? - Or is it, to paraphrase Churchill, just the end of the beginning? This is the big question for financial markets. When will central banks start withdrawing stimulus?

Can they use the forklift to remove the swimming pool-sized punchbowl from the ballroom without running over half the party, smashing the door and breaking bowl?

Will economic growth become self-sustaining when it does happen? Will all this money circulating and blowing up bubbles in financial markets actually squirt out into the real economies to create jobs and wages and new products and services?

Here's hoping. 

The FT reports  some of the first murmurings from outgoing US Federal Reserve Chairman Ben Bernanke:

Ben Bernanke said the US Federal Reserve could start slowing the pace of its asset purchases “in the next few meetings”, but only if the labour market showed sustained improvement.

The Fed chairman’s remarks came ahead of the release of the central bank’s minutes from its last meeting that showed a “number” of officials are ready to start to tapering off the Fed’s $85bn-a-month, third round of quantitative easing as early as June.

It provided the clearest picture yet of how the Fed is likely to wind down QE3: starting fairly soon, but then would ratchet the rate of purchases up or down in response to changing economic conditions.

8. A revival of unionism? - The living wage campaign referred to above seems to be striking something of a chord in America too, David Dayen reckons at Naked Capitalism.

Fast food and retail workers have been systematically striking, one city at a time, under the banner of a $15 per hour living wage. Workers in New York City, Chicago, Detroit, St. Louis and Milwaukee have walked off the job in the one-day wildcat strikes. SEIU and a variety of community groups have been behind the stoppages. It would be natural to expect chronic one-day strikes like this at the beginnings of union formation. This is exactly how voiceless workers in the 1880s and 1890s began to mass their collective power. That doesn’t mean it will succeed, but it means it’s following a very similar script.

Yesterday’s action in Washington involved the 2 million workers paid, directly or indirectly, by the federal government, who make $12 an hour or less. The federal government is actually the largest low-wage job creator in America, higher than Walmart, McDonald’s or anyone else. The Demos report detailing this is very thorough and has already spurred a House Democratic investigation

9. "Austerity: the history of a dangerous idea" - Here's John Cassidy from the New Yorker with a review of a book that is resonating in Europe at least. 

The big mystery isn’t why austerity has failed to work as advertised: anybody familiar with the concept of “aggregate demand” could explain that one. It is why an area with a population of more than three hundred million has stuck with a policy prescription that was discredited in the nineteen-twenties and thirties. The stock answer, which is that austerity is necessary to preserve the euro, doesn’t hold up. At this stage, austerity is the biggest threat to the euro. If the recession lasts for very much longer, political unrest is sure to mount, and the currency zone could well break up.

So why is this woebegone approach proving so sticky? Some of the answers can be found in a timely and suitably irreverent new book by Mark Blyth, a professor of political economy at Brown: “Austerity: The History of a Dangerous Idea.” Adopting a tone that is by turns bemused and outraged, Blyth traces the intellectual and political roots of austerity back to the Enlightenment, and the works of John Locke, David Hume, and Adam Smith. But he also provides a sharp analysis of Europe’s current predicament, explaining how an unholy alliance of financiers, central bankers, and German politicians foisted a draconian and unworkable policy on an unsuspecting populace.

The central fact about Europe’s “debt crisis” is that it largely originated in the private sector rather than the public sector. In 2007, Blyth reminds us, the ratio of net public debt to G.D.P. was just twelve per cent in Ireland and twenty-six per cent in Spain. In some places, such as Greece and Italy, the ratios were considerably higher. Over all, though, the euro zone was modestly indebted. Then came the financial crisis and the fateful decision to rescue many of the continent’s creaking banks, which had lent heavily into property bubbles and other speculative schemes. In Ireland, Spain, and other countries, bad bank debts were shifted onto the public sector’s balance sheet, which suddenly looked a lot less robust. But rather than recognizing the looming sovereign-debt crisis for what it was—an artifact of the speculative boom and bust in the financial sector—policymakers and commentators put the blame on public-sector profligacy.

10. Totally Jon Stewart on Canada's crack industry