econscius

Posts Tagged ‘Unemployment’

US Tax Code Driving Employers Overseas

In Job Creation on August 29, 2012 at 10:26 am

Europe as tax haven?  It is true for some companies.  Certain nations such as the United Kingdom, Switzerland and Ireland are more attractive than the United States for corporate taxes.  Big name companies are reincorporating, moving headquarters from places like Chicago to London, which is exactly what Chicago-bred AON is doing.  Employers fear the Byzantine, high marginal tax rate code will worsen in 2013 and beyond.  Wall Street Journal articles today and in recent months discuss the problem.

“More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes.

 

Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. A few cite worries that U.S. taxes will rise in the future, especially if Washington revamps the tax code next year to shrink the federal budget deficit….

 

The moves by Ensco and Rowan, which operate offshore oil rigs, show how one company’s effort to lower its tax rate can spur other shifts.

 

In moving from Dallas to the U.K. in 2009, Ensco followed rivals such as Transocean Ltd., Noble Corp. and Weatherford International Ltd. that had relocated outside the U.S. The company said the move would help it achieve “a tax rate comparable to that of some of Ensco’s global competitors.”

 

In fact, Ensco’s tax rate has declined. In the second quarter, the company said its “effective tax rate” was 10.5%, down from 19% in 2009. The savings: more than $100 million a year.

 

Around the time of Ensco’s move, Rowan executives fielded questions from investors and analysts about their own tax rate. In February, Rowan answered the questions, announcing plans to move to the U.K. from Houston. “We’re able to be competitive, with a low effective rate,” says Suzanne Spera, the firm’s director of investor relations. [1]

The off-shore moves include not only mature companies but IPO’s and even start-ups.

“When Austin, Texas-based Freescale Semiconductor Holdings, Ltd. went public last month in the U.S., the company followed the footsteps of generations of American high-tech companies… But unlike its predecessors, Freescale wasn’t going public as a U.S. company. As part of a private-equity buyout that took the chip maker private in 2006, it became a Bermuda incorporated company, according to securities filings. Freescale retained its incorporation in Bermuda, a tax haven, as the company returned to public trading.

 

As savvy investors and entrepreneurs search for ways to minimize the impact of the U.S. tax system, with its relatively high rates and global reach, they are increasingly incorporating overseas, tax experts say….”

 

 “U.S. start-ups are even beginning life offshore.”[2]

The Obama Administration supports making the US Tax Code even less friendly by extending taxation to overseas profits which are not yet repatriated (“tax deferral”).  Virtually no developed nations tax overseas profits.

Terming deferral “very, very important” to multinationals’ competitiveness, IBM Chief Executive Sam Palmisano questioned Mr. Obama about the issue during a televised meeting in mid-March. [3]
 
I think many on the American political Left do not look at tax issues as a matter of optimizing American business success, which leads to more jobs, or even maximizing tax revenues.  I fear they instead see corporate taxes as an issue of “fairness”, a subjective desire to increase taxes on so-called “big corporations”.  In reality, corporations will do what they need to do to be competitive in the global economy, which increasingly means moving to Switzerland or the United Kingdom.

[1] http://online.wsj.com/article/SB10000872396390444230504577615232602107536.html?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond

 
Picture of Aon Center, Chicago, USA, former HQ site, and London, UK, new HQ, from Wikipedia Commons.

How Does Utah Get 6.0% Unemployment?

In Economy, Job Creation, Unemployment, Utah on August 19, 2012 at 1:09 pm

In this time of economic stagnation and perpetual high unemployment, it is useful to look at the handful of states adding jobs and providing lower-than-average jobless rates.  Utah continues to be successful.

Utah’s 6.0% unemployment rate compares to California 10.7%, tourism-dependent Nevada’s 12.0% and Illinois 8.9% [1]  Utah was the third-fastest growing state in the decade ended 2010. [2]

The state offers good jobs.  Utah has the 14th highest median household income of the 50 states, ranking ahead of New York State and Illinois. [5]

Employers like Utah.  Its 5% corporate income tax is 1.6 points below the national average.  The Wall Street Journal points out that tax rate has been unchanged over the past 15 years, whereas New Jersey has revamped its tax code four times since 2000. [3]  Employers prefer planning with confidence in steady regulations and tax rates. 

The state is considered business friendly.  “Barriers to business creation are minimal,” as Utah ranked fourth amongst states in Pacific Research Institute’s most recent US Economic Freedom Index (from 2008). [3]

The economic growth and state-level fiscal sanity is even more impressive given Utah is the nation’s youngest state with the nation’s highest fertility rate. [4]  One quarter of youth are minority. [3]  Large numbers of young children cost the schools and require other infrastructure but are future taxpayers.

Did Utah embark on a spending binge to battle the economic turn-down in 2008?  No.  Utah cut its budget with state-agency budgets sliced an average 19%, totaling $2 billion cut in the first two years of the downturn. [3]  The economy buzzed along.

[1] http://bls.gov/lau/ July 2012 data, retrieved 8/19/12.

[2] http://www.utah.gov/governor/news_media/article.html?article=3963

[3] A nice full-length Utah story is behind the pay-wall at the WSJ: http://online.wsj.com/article/SB10000872396390444405804577559582223445656.html

[4] http://www.ksl.com/?nid=148&sid=13186729

[5] http://en.wikipedia.org/wiki/Household_income_in_the_United_States, 2009 data, retrieved 8/19/12. 

Pictures from Wikipedia Commons.

Occupy Chicago Is Completely Wrong on CME Tax & Job Claims

In Illinois, Income Tax Rates, Job Creation, Occupy Wall Street Protests, Political Rhetoric on October 15, 2011 at 12:51 am

Occupy Chicago protesters rally Thursday in the Loop, echoing their Occupy Wall Street counterparts in New York. But how about a march on Main Street by the wealthy? That may be just the catharsis America needs.

I heard a theatre teacher from Occupy Chicago talk on the radio about the movement’s demands.  The various Occupy movements have been criticised in many corners for a lack of specific proposals, but Occupy Chicago has a specific demand.  A quick analysis shows the math does not work behind an Occupy Chicago idea and the concept is completely divorced from reality.

Occupy group Stand Up Chicago is demanding the City of Chicago place a 25 cent per trade tax on all contracts traded at the Chicago exchanges, of which the CME is the largest.   Occupy Chicago says this would earn $1.4 billion of fresh tax revenue, which it claims could be used to create 40,000 new City of Chicago jobs. [1] [2]

One sign of a complete lack of perspective and knowledge is how Stand Up Chicago’s statement demanding the tax calls the Chicago exchanges “giant casinos” it claims brought on the financial crisis.  Considering the financial crisis was caused by subprime mortgages going bad, it is quite curious to blame Chicago’s options and futures markets.  The CME and Chicago Board Options Exchange did not make loans nor did they bundle mortgages for securitization.   CME is the parent of the legendary Chicago Mercantile Exchange and iconic Board of Trade.  Clearly, Stand Up Chicago does not understand.

It just so happens the CME was already negotiating with Florida and Texas about relocating its operations.   Illinois raised its state income tax in January, becoming the 3rd highest in the nation.  [3] The CME then announced its attention to look at alternatives.  Illinois was desperately trying to keep the CME from leaving before Occupy Chicago’s idea of a fresh $1.4 billion tax came along.  Such a tax certainly is not going to stop the CME from leaving.

The idea of taxing the Chicago exchanges will not work.  Surely, the CME will leave and Chicago will end up with fewer taxpayers and thus fewer taxpayers as a result.  CME employs 2,000 in the Chicago area, but it has a large multiplier effect because of the numerous trading firms that reside in Chicago to be near the CME’s trading floors.  Banks and other financial institutions employ many who service the CME and trading firms.  Large private firms maintain traders and support staff, for example, meteorologists who predict weather patterns on behalf of agricultural companies’ hedging activities.  “Some estimates place the job count from the trading industry here, which includes the Chicago Board Options Exchange, at more than 60,000.” [3]

But Occupy Chicago’s ideas are even more outlandish than they seem at first blush.  Let us look at the math.  First, the CME had 2010 revenue of $3 billion, on which it earned a profit of $951 million. [3]    A $1.4 billion tax on a local industry where the primary firm, the CME, earned less than $1.0 billion is a very significant tax, indeed. 

Even if the CME were to stay in Chicago despite the special tax, there is nothing stopping aspiring exchanges in Singapore, London, Dubai, Mumbai, Hong Kong, Shanghai or Tokyo from working to steal away the CME’s business.  Since they are not in Chicago and thus not subject to a special tax, these international competitors would gain a significant opportunity.

Would $1.4 billion create 40,000 new jobs for the City of Chicago? 

No.

A quick check of the City of Chicago budget shows the City employs 32,922 employees at a cost of $3.3 billion.  [4]The average city worker earns about $75,000. [5]  The average worker costs about $100,000, including benefits.  That means a $1.4 billion tax, even if enacted and collected, would employ one-third of the claimed 40,000 but rather 14,000.  Adding 40,000 employees would more than double the entire City of Chicago workforce. 

Adding the 40,000 workers would require a tax of $4.0 billion, or more than 4X the entire profit of the CME.  As a reference for the relative size of a hypothetical $4.0 billion Occupy Chicago tax, consider that the entire city budget, serving 2.7 million residents and long known as one of the least efficient and most corrupt of municipal governments, is $6.2 billion. [6]

The cost of an employee is more than just payroll and benefits.  The 40,000 hypothetical workers will require new leases of office space, and expenses for business cards, computers, telephone connections, pens, staplers, and many other things, all costing money.  Any tax will hire fewer City workers because of these other overhead costs.

The Occupy Chicago tax idea and related job claims may make for good populist press, but they are so divorced from reality they must be dismissed out of hand.  Chicago’s financial industry is already at serious risk of leaving the city over the tax burden already in effect.  A $1.4 billion tax increase would certainly drive it out altogether, putting as many as 60,000 private sector jobs at risk.  The Occupy Chicago claims of 40,000 new City of Chicago jobs are triple what a $1.4 billion tax could realistically pay for.  [7] The Chicago exchanges are not in the mortgage business and did not cause the financial crisis.   Just as protesting capitalism will not create any jobs, excepting the occasional protester paid by a union to attend, a huge tax on financial transactions will cause Chicago to lose jobs, not gain them.

 

 

[1] http://articles.chicagotribune.com/2011-10-11/news/ct-met-take-back-chicago-20111011_1_protesters-demonstration-cboe-holdings

[2] http://www.chicagonow.com/chicago-muckrakers/2011/10/40000-jobs-for-25-cents-a-new-plan-for-job-growth-in-chicago/

[3] http://www.suntimes.com/business/5854347-417/cme-group-leaders-cite-illinois-taxes-in-threat-to-leave-chicago.html

[4] pg. 5 of http://civicfed.org/sites/default/files/ChicagoFY11BudgetAnalysis.pdf 

[5]  http://anthonytrendl.blogspot.com/2011/06/chicago-city-worker-salaries.html

[6] pg. 3 of http://civicfed.org/sites/default/files/ChicagoFY11BudgetAnalysis.pdf

[7] I take the $1.4 billion tax revenue claim at face value though it seems a bit rich.  The CBOE had 1.124 billion contracts trade in 2010 ( http://ir.cboe.com/releasedetail.cfm?releaseid=549018) and the CME approximately 3.0 billion contracts (based on daily avg. 12.2 million contracts (http://cmegroup.mediaroom.com/index.php?s=43&item=3088) multiplied by 250 trading days a year).  Apply 25 cents to 4.124 billion contracts and we only get $1.0 billion in tax.  There are a few other small, inconsequential exchanges.

Pictures from Wikipdia Commons, except Chicago protest from Chicago Tribune (credits embedded in picture).

Obama Jobs Solution: Suing Employers For A Job?

In Economy, Job Creation, Lawsuits, Obama Administration, President Obama, Unemployment on September 27, 2011 at 8:07 pm

The “Jobs” Bill that President Obama sent to Congress “includes a provision that would allow unsuccessful job applicants to sue if they think a company of 15 more employees denied them a job because they were unemployed.” [1]

While I understand the frustration of the unemployed, the President’s idea is likely to be counterproductive and lead to even less hiring of the unemployed.

Lawrence Lorber, a labor law specialist who represents employers, said Mr. Obama’s  proposal “opens another avenue of employment litigation and nuisance lawsuits.” [1]  Most employers are small and do not have lawyers on staff to defend against these lawsuits.  Even larger companies with a slew of in-house legal counsel have no desire to be sued over matters that are difficult to disprove.

Why would an employer discriminate against the unemployed?

(1) It is an open secret in the business world many employers formally downsize under-performing employees in order to avoid law suits.  A downsizing of just one person in a large company may actually be a polite way of firing an underperformer.  Most workers are the member of some protected class (female, racial minority, veteran, over age 45, etc.).  If the underperforming employee has not made themselves easy to fire (e.g. by repeatedly skipping work), it can be difficult to prove in Court the subjective judgments that a particular employee’s work is mediocre or worse.  Defending a wrongful termination case is something many companies try to avoid.  Even when the company wins, it racks up legal expenses.  Many companies feel it is better to pay a small severance package and let the employee be downsized “not for cause” rather than terminated “for cause” at the risk of a lawsuit.

This open secret is one reason employers have long preferred to hire someone employed at another company rather than someone who is unemployed.  

(2) Employers think other companies let go of underperformers first and hold on to top performers.  The thinking is that, when XYZ Company lets 10% of its workforce go, it probably is mostly letting go of its 10% least desirable employees.  

(3) Lastly, companies feel that people who are out of the workforce for extended periods of time, such as two or three years, may lose some of their work-related skills.

Are these beliefs always correct?  No, though they surely are at least partly accurate some of the time.  In a normal job market, these biases against the unemployed are not a big deal.  Does every employer feel this way?  Undoubtedly no. 

Unemployment surely is always a disadvantage, but America has traditionally had enough jobs to go round so that most any able-bodied unemployed person would, sooner or later, find something.    In today’s bad job market, the already existent bias against the unemployed is a bigger issue for the unemployed because there are so few jobs available. 

There are other small biases that exist in hiring: in favor of the tall, in favor of the attractive and in favor of people with degrees from prestigious universities.  Studies have shown taller people earn more [2] and more attractive people earn more [3].  These facts add insult to injury to men because studies also show women prefer taller and wealthier men; attractiveness is universally desired in a mate.  But, I would not recommend a federal statute banning discrimination on account of height; how does one even begin to measure such discrimination in a real world situation?  Would it not open to the door to frivolous lawsuits?

 

What would happen if the President’s bill passes and the unemployed are allowed to sue employers for discrimination?  Would the long-term unemployed now quickly find jobs?   I think the answer is no

Let’s think ahead and assume President Obama’s bill becomes law.  It is not clear that employers who are predisposed against the unemployed would be any more likely to actually hire the unemployed.  There are myriad reasons an employer can give (“doesn’t fit our culture”) for passing over an applicant.

But, the new law would make it far more risky to interview the unemployed.  Any unemployed person who applies for a job but is not hired would have legal standing to try to file a lawsuit against the employer.  The safest bet for an employer hoping to avoid these lawsuits would be to try not to interview the unemployed in the first place.  How might they do that?  Obvious options would be to employ recruiters who cold call people already employed elsewhere, look to internal (already employed) candidates, outsource to another country, or automate rather than hire anyone at all.

I know this is cold comfort to the long-term unemployed, but the idea of forcing employers to hire the long-term unemployed through lawsuits will backfire and make it even tougher for the unemployed to get interviewed and may result in fewer new jobs.  A much better idea to actually accomplish that goal would   be a carrot, rather than the stick:  a tax credit for hiring the long-term unemployed.

Unfortunately, this is another example of President Obama- who has no experience whatsoever in private business – proposing something that would actually be counterproductive.   The continuous flow of proposed high taxes, new regulations and laws such as this one creating a new protected discrimination class of unemployed people are exactly what is making American business skittish to hire at all.  The private sector creates jobs, not the government through new laws allowing for more lawsuits.

As always, comments are welcome.

[1] http://news.yahoo.com/blogs/lookout/obama-proposes-letting-jobless-sue-discrimination-191042168.html

[2] http://www.sciencedaily.com/releases/2009/07/090710092226.htm

[3] http://money.cnn.com/2005/04/08/news/funny/beautiful_money/

Pictures from Wikipedia Commons.