Serious Implications

“So if the U.S. makes changes in the tax code that discourage drilling in gulf waters, they will go elsewhere and take their jobs with them.” – Jack N. Gerard, president of the American Petroleum Institute

In a previous post, I questioned David Brooks’ characterization of “democratic capitalism” where he asserted that the U.S and BP were “on the same team.” I don’t believe they are on the same team.

Despite the fact that the U.S. military patrols the Persian Gulf and fights wars in Iraq and Afghanistan to prevent radical Islamists from taking over the Middle East and its vast oil reserves, oil companies don’t seem much interested in sharing the costs. Next time Transocean has a problem with terrorists threatening their operations, maybe they should call the Panamanian Army for help.

As reported here:

Over the last 10 years, oil companies have also been aggressive in using foreign tax havens. Many rigs, like Deepwater Horizon, are registered in Panama or in the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations. American producers have also aggressively exploited the tax code by opening small offices in low-tax countries. A recent study by Martin A. Sullivan, an economist for the trade publication Tax Analysts, found that the five oil drilling companies that had undergone these “corporate inversions” had saved themselves a total of $4 billion in taxes since 1999.

Transocean — which has approximately 18,000 employees worldwide, including 1,300 in Houston and about a dozen in Zug, Switzerland — has saved $1.8 billion in taxes since moving overseas in 1999, the study found…

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits. These companies’ returns on those investments are often higher after taxes than before.

So far, through a combination of political campaign contributions and intimidation, the oil companies have pretty much controlled their tax destinies.

Jack N. Gerard, president of the American Petroleum Institute, warns that any cut in subsidies will cost jobs.
“These companies evaluate costs, risks and opportunities across the globe,” he said. “So if the U.S. makes changes in the tax code that discourage drilling in gulf waters, they will go elsewhere and take their jobs with them.”

Here’s Gerard speaking on API’s website about some new ads they’re running on TV:

“Americans have historically been suspicious of taxes on the industry that produces most of the energy they consume. They deserve to be informed about new proposals that would increase those taxes by many billions of dollars a year. The ads are part of the national debate on energy and tax policy. We hope they will help ensure decisions affecting our economic and energy security are not made in a vacuum or based on incomplete information,” said Gerard.

Suspicious? Who’s suspicious? They can pay their fair share just like everybody else. As we all celebrate the Fourth of July, these oil companies would do well to consider where they’d be without the United States.

“We need to make the Bush tax cuts permanent.” - John McCain

He originally voted against Bush’s tax cuts in 2001 and 2003, calling them fiscally irresponsible. Now he’s not only for them, he wants to make them permanent, according to this Bloomberg report. By favoring Bush’s tax cuts, McCain’s campaign money problems are probably behind him. Here’s why:

The Center on Budget and Policy Priorities (CBPP) has this article that analyzes what income groups benefit most from making the Bush tax cuts last for another decade. The top 1-percent of income earners would capture $1.1 Trillion. The top 1-percent income group would receive 31% of the total tax cut benefit. The top 20-percent income group would receive 74-percent of the tax cut. As for the others:

Lowest 20-percent: 0% of tax cut benefit
Second 20-percent: 4%
Third 20-percent: 8%
Fourth 20-percent: 14%.

The Bloomberg article linked above discusses the unlikely prospects for the tax cuts being offset by spending cuts or other additional revenues. The odds look slim, which means going deeper into debt. McCain has a history of fighting deficits. Did he “strike a bargain with the devil?” Is that the price of securing the Republican nomination?

Not to mention McCain’s 100-year committment to Iraq. Did he have to commit to that to get the Bush loyalists behind him?

Forget the futile and fiscally irresponsible temptation to stimulate the economy by borrowing more money. The tax rebate currently being discussed would be nice to have show up in the mail, but it is just another loan. If the politicians really believe that it’s key to put money into the hands of lower income families who will spend it, then the right thing to do is raise the minimum wage.

Today, the U.S. minimum wage is $5.85, although some states have set higher standards.

In Canada, minimum wage is set by the ten provinces. In Quebec and Ontario, the two most populus provinces, the minimum wage is $8.00 (Canadian dollar) per hour. The Canadian and U.S. dollars are close to parity.

In the U.K., minimum wage is 5.52 Lbs per hour for workers over 22 years of age. That’s about $10 per hour U.S.

The minimum wage in the U.S. should be no less than $8.75 per hour (about half of the average pay for non-managerial workers in the private sector) and this change could be made immediately.

No more ATM cash advance economics; no more credit card prosperity to grow the budget deficit.

Our economy should reward work by paying a living wage.

The previous three blogs have spoken to the insidious and destructive influence of “easy” personal credit, usually involving credit cards, on the financial lives of ordinary Americans. What appears for many of us to be a comfortable affluence on the surface, is often bought on credit. Interest payments grow like a cancer, limiting our job options, our investments, what we put away or our kids, and prevent us from living fuller lives.

The same is apparently true for the nation. The International Institute of Management (IIM) has released its white paper U.S. Economy Risks and Strategies for 2007-2017 written by its President, Med Yones. The paper is highly readible, although it could have used some grammar edits, and a highly rational approach to the current and future U.S. economic predicament.

From its introduction:

On Jan 31st, 2007, the president of the United States gave his speech on the State of the Economy citing strong economic growth, record Dow Jones performance and low unemployment rate. This report finds a different picture than the one announced. A deeper look into the economy reveals that the painted rosy picture is based on selective facts instead of a neutral assessment of all relevant numbers and economic trends. According to the author of the white paper, It is true that the U.S. Economy grew at 3.5 percent rate in 4th quarter of 2006, but the economic real growth is much less than advertised. Since 2001, economic growth have been largely fueled by rapid increases in asset prices (housing bubble) and expanding consumer debt rather than development projects, which results in non-sustainable and unhealthy (debt-driven) growth. In order to address the emerging socioeconomic risks, policy makers must acknowledge the economy’s strengths, weaknesses, opportunities and threats. The the U.S. government must be candid in communicating with the American public and the approach must be direct.

Perhaps the saddest aspect of the economic policies of the last six years, greatly compounded by the war in Iraq, is the American commitment to paying interest on debt – largely owed to foreign entities. Again, from the IIM report:

National debt

In 2000, the U.S. government had a surplus (profit) of about $237 billion (the largest in U.S. history). In 2006 the budget deficit was about $390 billion (loss). For information on Whitehouse budget details please visit http://www.whitehouse.gov/omb/budget/fy2006/tables.html
Although 2006 budget deficit (loss) is only about 3% of GDP, the problem is the accumulation of losses over multiple years (and therefore the debt to finance the deficit). By the end of 2006 (over a period of 6 years), the accumulated national debt was about $8.3 trillion! (the largest in U.S. history). Note: The U.S. government has borrowed that money to pay for tax breaks, new Medicare drug benefits, the war in Iraq and other policies.
A large national debt is bad. Why? The government has to pay interest on the debt, as the debt and the interest payment grows, eventually all the government can do is pay the interest payment, and no money left over for other critical socioeconomic expenditures. If uncontrolled, this could leads to bankruptcy and major socioeconomic crises.
In Fiscal Year 2006, the U. S. Government spent $406 Billion of its budget on interest payments to the holders of the national debt. Compare that to Education at $61 Billion, and Department of Transportation at $56 Billion. When interest payment becomes larger than other critical socioeconomic development budgets, this calls for a major concern.

The things we need to invest in, especially our 21st Century energy infrastructure, may simply be beyond our means. The interest payments and health care costs will smother the innovations and developments we need to adapt to a post-petroleum world – that’s the danger.

The IIM paper goes on to make some rather “quaint” suggestions to make the U.S. political process more rational, such as having non-partisan academics and other experts establish a set of socioeconomic metrics that would be used as a national agenda that candidates would address in their campaigns. After elections, those in government would be objectively evaluated on the basis of improving or deteriorating metrics. The politicians would be rewarded on the basis of their performance in meeting the clearly defined criteria. There would also be much stricter oversight of potential conflicts of interest, such as giving no-bid contracts to campaign supporters.

It’s a good paper, well worth the 15 minutes or less it takes to read. The report was reprinted by New Zealand’s Scoop Independent News