Tuesday, May 21, 2013 - Apple Gimmicks

Apple Gimmicks

by Sinclair Noe

DOW + 52 = 15,387
SPX + 2 = 1669
NAS + 5 = 3502
10 YR YLD - .02 = 1.94%
OIL - .98 = 95.95
GOLD – 18.10 = 1377.00
SILV - .49 = 22.53

It's Tuesday. The markets moved higher. It's almost inevitable. The Dow Industrials have closed higher every Tuesday this year, with the exception of January 8^th; 19 consecutive Tuesdays. No, I don't know why.

Well, today, part of the reason could be traced to the Federal Reserve. A couple of Fed heads were talking up easy money. New York Fed President William Dudley said he cannot be sure whether policymakers will next reduce or increase the amount of purchases, due to the "uncertain" economic outlook. The QE taper may end up being a QE expansion. Dudley worries about investor over-reaction to a "normalization" of policy and suggests the FOMC may need to update what it needs to see to move in that direction. Earlier, James Bullard, president of the Federal Reserve Bank of St. Louis, urged the European Central Bank to consider employing a US style quantitative easing program to counter slowing inflation and recession in the euro zone.

Tomorrow, Fed Chairman Ben Bernanke will speak before a congressional panel, the Joint Economic Committee. The minutes of the Fed's latest policy-setting meeting will be released on Wednesday afternoon. When the Fed showers liquidity, the money flows to the markets, but I can't give a good reason for the Tuesday winning streak.

There is a certain symmetry in life: fire and ice, winter and summer, darkness and light, yin and yang. And this brings us to the IRS scandal; last week we learned about the demand treatment afforded some groups by the IRS, this week we learn about the generous nature of the taxman. It's not so much that the taxman is benevolent; we all no better; but some entities demand preferential treatment; powerful, giant corporations are holding governments and citizens up for ransom; taking tax breaks and subsidies from countries in the name of competitiveness; sheltering profits in off-shore tax havens.

Google, Amazon, Starbucks, GE, Apple, and pretty much every other major corporation and the big Wall Street banks siphon off profits via off-shore entities that are sometimes no more than a mailbox on a tropical island, and they don't pay taxes like the rest of us, because if they did it would destroy their ability to be competitive.

And today, Tim Cook, the CEO of Apple, ran down the aisles of Congress and hurled his hammer at the totalitarian overlords, metaphorically speaking. Actually, Cook appeared before the Senate Permanent Subcommittee on Investigations. Congressional investigators found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in California. By officially locating them in places like Ireland, Apple was able to, in effect, make them stateless — exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.

Apple Operations International, which has no employees but reported $30 billion in income over the four years, has not filed an income tax return in any country for the last five years, the subcommittee investigation found.

A second company, Apple Sales International, holds the economic rights to Apple's intellectual property in Europe, Asia and Africa. The subsidiary had $74 billion in sales income from 2009-2012 but paid less than 1% in taxes to Ireland.

The only taxes paid were on the interest earned by the cash pile and small sums in local markets. Senate investigators allege a total of $70bn has been sheltered this way in four years.

The tactic, which is legal, is possible through complex cost-sharing agreements that transfer the economic rights to the valuable intellectual property behind the iPhone, the iPad, and other products to subsidiaries outside the US.

Tim Cook told the senators: “We pay all the taxes we owe, every single dollar.” And that appears to be the case; Apple does pay a considerable amount of taxes in the US . Cook added: “We don't depend on tax gimmicks.” And that appears to be a slightly more dubious claim. Cook said he "personally doesn't understand the difference between a tax presence and a tax residence".

In a dramatic display of how threats from multinational corporations are driving down taxes across the world, Cook warned Congress that he would refuse to repatriate a total of $100 billion stashed offshore unless it acted to slash the 35% US rate. Cook said the tax rate for repatriated money should be set "in single digits" to persuade companies to bring it back. Standard tax for US profits should be, he said, in the "mid 20s". 

 Everyone "knows" that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand. There is a big difference between the headline rate of 35%, which is indeed tops in the OECD, and the effective rate of 12.1%, one of the lowest in the OECD.

Apple is not an outlier in its efforts to produce 'stateless income'; income that is taxed neither in the US nor in the countries where its foreign customers are located, but it is audacious in its tax avoidance strategies. Apple shifted tens of billions of dollars of income without even breaking a sweat. Google followed the Apple playbook by using a low-tax Irish subsidiary to avoid taxes; Google is now under investigation in the UK. Starbucks' tax dodge was so blatant British consumers began boycotting the firm until it reversed course. In the US, we aren't indignant. Today, senators talked about how they considered Apple to be a great company, even if they did have concerns about the tax thing.

We have lots of great American companies that operate in a more or less free-market system that has allowed them to thrive on publicly-funded research, infrastructure, defense, and in the case of Apple – patent and intellectual property protections. And they show their gratitude by choosing to cut their taxes in half – or actually closer to one-third despite doubling their profits, so they may hold more than $1 trillion dollars of cash off-shore, and eliminate workers rather than create jobs. Or, as one Apple executive explained: “We don't have an obligation to solve America's problems.”

Which raises an interesting question; why should America have an obligation to solve Apple's problems? Apple enjoys the protections of US laws against patent and intellectual property infringement. Apple enjoys the ability to ship its products around the world, in part because the US has the largest, most powerful military making sure the avenues of commerce aren't crowded out by pirates on the high seas or in the skies. If Apple doesn't want to pay for those protections, they shouldn't be forced to. They could just stop using those services. You don't pay; you don't get – no gimmicks in that equation.

The scandals in Washington remind us to be ever vigilant about the dangers of government overreaching its authority, whether by the long arm of the IRS or the Justice Department, but that doesn't mean that we accept anarchy. We need to remember that government does provide important services and protections, and somehow we have to pay for that. Tim Cook and Apple don't want to pay. Nobody wants to pay. I understand. And so, not much changes

By the way, the World Bank estimates the total cost for a successful attack on malnutrition would be approximately $10.3 to $11.8 billion annually. Apple alone underpaid its 2012 taxes by $11 billion, based on a 35% rate. So, we could literally put an end to hunger in this world, if Apple paid it's taxes, but you know, it's not Apple's obligation to solve the problems of the world. 

Monday, November 12, 2012 - Render Unto Caesar, and Don’t Forget Interest

Render Unto Caesar, and Don’t Forget Interest
By Sinclair Noe

DOW – 0.31 = 12,815
SPX + 0.18 = 1380
NAS -0.62 = 2904
10 YR YLD = 1.60%
OIL - .50 = 85.57
GLD – 2.00 = 1729.80
SLV - .21 = 32.52

British lawmakers have criticized executives of Starbucks, Google and Amazon on Monday for not paying more tax in Britain and Amazon said it had received a $252 million demand for back taxes from France. Britain and Germany last week announced plans to push the Group of 20 economic powers to make multinational companies pay their "fair share" of taxes following reports of large firms exploiting loopholes to avoid taxes. One of the members of Parliament explained the problem: “You're either running the business badly, or there's some fiddle going on."

Starbucks seems to be selling a lot of coffee in the UK; over the past 3 years they’ve sold more than 3 billion pounds (weight) of coffee but they haven’t paid any tax. (fiddle) Amazon just refuses to answer questions by the British tax authorities.(fiddle)

And Google has apparently been playing the game. Google's filings show it had $4 billion of sales in the UK last year, but despite having a group-wide profit margin of 33 percent, its main UK unit reported a loss in 2011 and 2010. It had a tax charge of just 3.4 million pounds in 2011. (fiddle)

The search engine provider books European sales via an Irish unit, an arrangement that allowed it to pay taxes at a rate of 3.2 percent on non-US profits last year. Google is under audit by the French tax authority regarding its structure, but the company denied a newspaper report last month that it had received a back tax claim for 1 billion euros.

Meanwhile, a report in the Guardian shows:  that at least $21 trillion – perhaps up to $31 trillion – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy…,  the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than $6 trillion in 2010”…, a nearly 3-fold increase from 5 years earlier.

The report’s analysis, based on data from many sources including the Bank of International Settlements and the International Monetary Fund, indicates that enough money has left some developing countries since the 1970s to pay off all their debts to the rest of the world. “The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.”

The reason the Europeans are focusing on tax havens and collecting taxes is because they can’t squeeze blood out of a turnip, or in this case, they can’t get more taxes out of struggling average taxpayers. The economic outlook in the euro-zone is bleak. Meanwhile, the dollar was up against the euro,a s the dollar became a safe haven play despite the looming . "fiscal cliff," a combination of big spending cuts and tax increases if Congress does not act to curb the budget deficit that some believe has the potential to send the economy into another recession.

Greece stood at the forefront of investor concerns as euro zone governments disagreed on whether to disburse more money to the debt-ravaged country on Monday. Worries persisted even though the Greek government approved a tough 2013 budget, because of the lack so far of a consensus on how to make Greece's debts sustainable into the next decade. Despite the Greek parliament passing an austerity-filled budget this weekend, investors are still concerned that Greece will not receive its next tranche of funds in time to avoid defaulting on its loans.

No matter how bad things seem to be, there are always ways for them to become worse. While the campaign against Medicare and Social Security is being couched as an inevitability that has become familiar via European austerity measures, other lame duck session measures are moving forward in the hope no one will notice.

The Senate Homeland Security and Governmental Affairs Committee, under the direction of outgoing chair Joe Lieberman, plans to pass the Independent Agency Regulatory Analysis Act, S.3468, out of committee and into a fast track process. Mark Warner, Susan Collins and Rob Portman are the drives forces behind it. Americans for Financial Reform and other groups have raised alarms about it.

The bill would, according to AFR, strip away independence from various regulatory agencies, including the Securities and Exchange Commission, Commodity Futures Trading Commission, OSHA, the Nuclear Regulatory Commission, the FCC and the Consumer Financial Protection Bureau. These and more agencies would have to submit additional cost-benefit analyses to the executive branch, as well as submitting their rules and regulations for executive branch review. The immediate effect of this would be to slow implementation of things like Dodd-Frank. Review processes take time, and adding an executive branch layer gives Wall Street and other corporate interests another point of attack against various regulations. Heads of all the major regulatory agencies have already complained in a joint letter that the bill would give the executive branch far too much ability to influence their policy decisions.

Existing cost-benefit analysis requirements, and related legal challenges, are already a major source of delay in financial rulemaking. S. 3468 would add at least thirteen new resource-intensive analyses of regulatory costs before a rule can be finalized. In addition, the Office of Information and Regulatory Affairs (OIRA) would get to review any significant new rule, guidance, or policy – a process could add far more time and possibly lead to new rules being abandoned altogether. OIRA has a long standing reputation for blocking environmental and safety regulations, as well as generally being sympathetic to industry arguments that regulation is excessively costly. The big banks could use their influence to turn this tiny office into a bottleneck for all financial regulation. Wall Street lobbyists would have another powerful set of tools to delay and derail the implementation of the safeguards that are needed to protect our banking system and the wider economy.

“Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”  – Ben Bernanke, first usage of “fiscal cliff”, 29 Feb 2012

If policymakers don’t work out a solution by January 1st, the harm is not immediate. Nor is it irreversible, nor is it even all that perilous at first. And even to describe the various components as a single item is problematic: each would have a different effect on the economy. Last Friday the Congressional Budget Office released its latest forecasts for how damaging to next year’s economy each policy would be if left alone. But the forecasts assume either that the various policies going into effect on January 1 would remain in place throughout all of 2013, or that they would not be offset by some other negotiated measure. But this is unlikely; something that can be negotiated on December 28 can also be negotiated on January 4 or January 14 with only trivial economic damage in the meantime.

How do you raise taxes without raising taxes? The Tax Policy Center’s estimates for capping itemized deductions at $50,000. It would raise $749 billion over 10 years, within the $800 billion that Mr Boehner has previously agreed to. That’s also more than the $429 billion yielded from returning the two top rates to their pre 2001 levels.

The appeal for Republicans is that no one’s rates go up, and the preferential rate for capital gains and dividends is preserved. The appeal for Mr Obama is that it is highly progressive. According to the TPC, less than 1% of the bottom 60% of households would pay more tax while the top 1% would pay 79% of the additional revenue. The average tax rate for the bottom 60% wouldn’t change, while it would go up 2 percentage points for the top 1%.

The International Energy Agency (IEA) says the United States will overtake Saudi Arabia and Russia as the world's top oil producer by 2017, with North America becoming a net oil exporter by around 2030 and the United States becoming almost self-sufficient in energy by 2035. The United States could overtake Russia as the biggest gas producer by a significant margin by 2015. If fewer steps are taken to promote renewable energy and curb carbon dioxide emissions, oil was likely to exceed $250 per barrel in nominal terms by 2035 and reach $145 in real terms -- almost level with the record highs seen four years ago. The share of coal in primary energy demand will fall only slightly by 2035. Fossil fuels in general will remain dominant in the global energy mix, supported by subsidies that, in 2011, jumped by almost 30 percent to $523 billion

What is your biggest single expense. It might just be interest;  a stunning 35% to 40% of everything we buy goes to interest.  This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP.  You’ve heard the old saying, the rich get richer and the poor get poorer; the reason is the simple arithmetic of our private banking system.

Compound interest is baked into the formula for most mortgages.  And if credit cards aren't paid within the one-month grace period, interest charges are compounded daily. Even if you pay within the grace period, you are paying 2% to 3% for the use of the card, since merchants pass their merchant fees on to the consumer.  Visa-MasterCard and the banks are at both ends of these interchange transactions charge; and even debit cards charge an average fee of 44 cents per transaction--though the cost to them is about four cents.   

Maybe you are one of those rare birds who do not have a mortgage, no car loan, no student debt, and you pay off your credit card immediately. Maybe you think you aren’t paying interest – think again. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills.  They must pay for labor and materials before they have a product to sell and before the end buyer pays for the product 90 days later.  Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer.  And so it is interest layered on top of interest.

In 2006, the financial sector in the US was responsible for a whopping 40% of business profits; that’s up from 7% of profits made by the banking sector in 1980.  Bank assets, financial profits, interest, and debt have all been growing exponentially.  Exponential growth in financial sector profits has occurred at the expense of the non-financial sectors, where incomes have at best grown linearly.

By 2010, 1% of the population owned 42% of financial wealth, while 80% of the population owned only 5% percent of financial wealth.  The bottom 80% pay the hidden interest charges that the top 10% collect, making interest a strongly regressive tax that the poor pay to the rich.

Exponential growth is unsustainable.  In nature, sustainable growth progresses in a logarithmic curve that grows increasingly more slowly until it levels off.  Exponential growth does the reverse: it begins slowly and increases over time, until the curve shoots up vertically. Exponential growth is seen in parasites, cancers . . . and compound interest.  When the parasite runs out of its food source, the growth curve suddenly collapses.    

The implications of all this are stunning. In 2011, the U.S. federal government paid $454 billion in interest on the federal debt--nearly one-third the total $1,100 billion paid in personal income taxes that year.  If the government had been borrowing directly from the Federal Reserve--which has the power to create credit on its books and now rebates its profits directly to the government--personal income taxes could have been cut by a third.  Borrowing from its own central bank interest-free might even allow a government to eliminate its national debt altogether.  No spendthrift government can be blamed in this case. Compound interest explains it all!

It is not just federal governments that could eliminate their interest charges in this way.  State and local governments could do it too.  Consider California.  At the end of 2010, it had general obligation and revenue bond debt of $158 billion.  Of this, $70 billion, or 44%, was owed for interest.  If the state had incurred that debt to its own bank--which then returned the profits to the state--California could be $70 billion richer today.  Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.

The only US state to own its own depository bank today is North Dakota.  North Dakota is also the only state to have escaped the 2008 banking crisis, sporting a sizable budget surplus every year since then.  It has the lowest unemployment rate in the country, the lowest foreclosure rate, and the lowest default rate on credit card debt.

The Bank of North Dakota underwrites the bond issues of municipal governments, saving them from the vagaries of the "bond vigilantes" and speculators, as well as from the high fees of Wall Street underwriters and the risk of coming out on the wrong side of interest rate swaps required by the underwriters as "insurance."