What the banks’ three-year war on Dodd-Frank looks like

A fascinating account from the Sunlight Foundation of the gutting of a regulatory initiative by the kind of methodical persistence that can only be sustained by special interest groups with much to be gained from weak regulation:

In the three years since President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act, federal regulators charged with implementing it have opened their doors to the biggest banks over and over again – 14 times as frequently as they have to representatives of consumer and pro-financial reform groups, a new Sunlight Foundation analysis finds. 

By most accounts, the banks’ besiege-the-regulators strategy has yielded rich rewards in sapping, slowing, and stymieing regulations intended to prevent another massive financial crisis. The emerging consensus is that Dodd-Frank implementation is limping, while the big banks are poised to return to being the most profitable industry in the U.S.

The website feature an interactive showing the number of meetings by sector over the three years; you can mouse over the dots to see their identities. Is it any surprise that the Giant Vampire Squid is at the top with a whopping 222 meetings, followed closely by JP Morgan with 207? Each of these giants independently dwarfs the entire "pro-reform" group, that tiny cluster of dots on the other end of the graph.

Here's a chart depicting meetings by sector over time:

From the discussion:

In the 152 weeks our data cover, we find 59 weeks in which regulators met with financial sector representatives at least once every single day (Monday through Friday), and 47 weeks in which they met with financial sector representatives at least four times. 

... By contrast, active pro-reform groups appeared in only 153 meetings logs – only about one meeting for every 14 regulators held with financial institutions and associations. Moreover, 24.2 percent of pro-reform group meetings took place on a single issue: the Consumer Financial Protection Bureau. 

...Law and lobbying firms, largely working in service of financial institutions, appeared in 707 meetings. Other, non-financial corporate interests, largely energy and agricultural companies, participated in 381 meetings. These companies are major purchasers of derivative contracts, which they use to hedge against price risk.

Imagine you're a regulator. 3,000 meetings with finance industry lobbyists, lawyers, and other corporate interests over three years, each one doing their best to explain why you should undermine the law as written in some tiny way. Would you not want to tear your hair out? Quit in despair? Or just give in to the soothing balm of lobbyist favor? What could possibly be left of the law after this barrage? Meanwhile the anti-regulation crowd has worked very diligently to kill Dodd-Frank's provisions in other ways, such as the lawsuit against the corporate tax transparency provisions sponsored by the American Petroleum Institute.

Sunlight catalogues the delays and dismantling of Dodd Frank that has been accomplished by all this lobbying and litigating and concludes:

...Collectively, the data offer a powerful testament to the oldest and still perhaps most effective technique in the lobbyist’s playbook: sheer persistence. As the Dodd-Frank law passes its third anniversary, lagging on deadlines, and increasingly defanged, the meetings log data offer a compelling reason why: the banks have overwhelmed the regulators. 

Lobbying pays, and it pays whether it is done before, during, or after legislation has been passed. This represents a major governance crisis with no redress anywhere to be found.

Senate quietly easing restrictions on their own insider trading, to protect "national security"

I wish I could express surprise. I can, however, muster some dismay:

The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency. 

The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates. 

The House was expected to pass a similar bill on Friday.

MR posts links to the FT article, other sources, and says "Some officials suggested that transparency "could threaten national security," more detail on that here.  Here are some further interesting details."

Clearly, what we least need right now from our elected leaders is an assurance that we will know less and less about their business and financial dealings while they ostensibly serve in the public interest. For shame.

Bridge Over the River Detroit

Surprise--despite determined efforts to stop the process, the US has pushed through approval for the new Detroit-Windsor Bridge.  As you may know the new bridge is opposed by Matty Maroun, who controls much of the current cross-border traffic between these two cities via his ownership of the Ambassador Bridge. From the WSJ blog:

The Detroit-Windsor bridge would be the third international connections between the two cities, joining the 84-year-old Ambassador Bridge and the 83-year-old Detroit-Windsor Tunnel. Those two links are the busiest, and second-busiest, border crossings in North America, respectively, funneling tourists and trade between the two countries.

Canada agreed last year to provide as much as $550 million to build the new six-lane bridge, which would relieve congestion at the border. Under the deal, the private sector will cover the rest of the costs, sparing the already stretched Michigan taxpayers from having to pony up. 

The cross-border financing deal was a big issue and Maroun wanted to take the question to voters via a referendum with the help of some sympathetic funders, but apparently, he failed. Of course, there is the matter of staffing all the booths--that's going to be tough on the US side given sequester-driven cuts.

US to OECD: target your anti-BEPS regime carefully

This is rich. The US wants the OECD to not go overboard on the BEPS thing.  From Tax Analysts [gated], Treasury International Tax Counsel Danielle Rolfes said that the Treasury wants to

"make sure that any suggested solutions are targeted at addressing the source of the problems and don't go beyond the scope of the BEPS project."

We are talking about a country that can't seem to distinguish between an au pair financing a trip to Europe and a billionaire stashing money in a series of hidden offshore accounts. Yet there's more:

...The BEPS project carries a risk of "scope creep," Rolfes said. ... "We want to stay mindful of what BEPS is and make sure that in trying to solve those problems we don't come up with solutions that are broader than necessary or that have other implications, particularly with respect to the allocation of taxing rights between two taxing jurisdictions," she said.

...While Treasury endorses the sense of urgency around the BEPS project and the feeling that the problems must be fixed, Rolfes said that U.S. officials intend to be thoughtful about how the rules should or should not be changed.  

I'm not sure what is meant by being thoughtful. Being thoughtful might mean thinking through what you need to change, how you mean to change it, how you avoid over-breadth and under-breadth at the same time, how much everyone has to spend in order to get the result you seek, and whether what you write as rules can be coherently implemented in practice.

Perhaps Rolfes is worried that if the OECD looks too closely at the allocation of taxing rights between two taxing jurisdictions, the world will see clearly that (1) the US is the most overreaching in this respect given that it taxes on the basis of citizenship and (2) the global North has long arranged the allocation to favor itself at the expense of the global South.  

Maybe it is just that Rolfes does not appreciate the finger pointing at US companies:

"It's not just U.S. companies that engage in BEPS. Moreover, all agree that the BEPS we are primarily concerned with is driven by tax planning that is perfectly legal."

Rolfes called some of the moralizing on this issue "ironic," though I think she means "hypocritical." It might not not sound right for the Treasury to use that word when talking about tax competition, so maybe this is carefully chosen rhetoric:

Rolfes [added]that while much of BEPS income lands in zero-tax jurisdictions, some of the elements of tax laws that enable BEPS are attributable to tax competition that's occurring between the same taxing jurisdictions that are trying to solve BEPS.

"This tax competition itself contributes to BEPS," she said.

She acknowledges that "many of the current international standards, such as those relating to transfer pricing and tax treaties, have been developed over many years by U.S. tax policymakers working with their counterparts in the OECD."  She says "We at Treasury are humbled ...And we want to make sure that any solutions we have are targeted to that problem and not to other problems."

Treasury economist Michael McDonald added that

The BEPS project should clearly undertake a cost-benefit analysis of the possible alternatives...clearly I think if the BEPS project is going to be successful, one has to weigh the benefits of the current [OECD] Transfer Pricing Guidelines, in addition to the costs."

Tax Analysts economist Martin A. Sullivan can't understand why the US is focused on the BEPS thing at all, since Dave Camp has a proposal for switching the U.S. to a territorial system:

"To me, that seems much more important than an OECD initiative. I don't understand how the two are going to work together. If Chairman Camp achieves his goal by the end of the year of putting the entire international tax system up for a vote, shouldn't that be our starting point?"

Rolfes responded that the BEPS project would still matter even if the US changed to territorial, since such a switch would not in any way make profit shifting less an issue. She also had some interesting things to say about participation and influence in tax policymaking via the OECD:

Treasury needs to be engaged in a significant tax policy initiative like BEPS, which would be undertaken by other countries with or without the U.S. ...Having a seat at the OECD table provides the United States the opportunity to be a part of the dialogue and to have an influence on how international tax rules are developed ... [and] other countries are not going to wait for the conclusion of the U.S. Congress's reform debate.

So the US sees the OECD as playing an important role, and one that could have negative impacts on US policymaking choices absent Treasury's involvement. And this exchange shows that at least some at the Treasury are capable of articulating at least a sense of understanding the concept of regulatory overbreadth. But you could interpret these statements as at best tepid support for the OECD's initiative, at worst a foreshadowing of resistance to come. The US torpedoed the OECD's efforts on harmful tax practices, only to come up with the much more expansive and awe-inspiring FATCA on its own. If the US torpedoes BEPS, what will be in store for the taxation of multinationals? It should be a fascinating ride.

Can States Shame Each Other into Good Behaviour?

Interesting new paper by Sandeep Gopalan & Roslyn Fuller, Enforcing International Law: States, IOs, and Courts as Shaming Reference Groups. From the abstract:

We seek to answer the question as to whether international law imposes meaningful constraints on state behaviour. Unabated drone strikes by the dominant superpower in foreign territories, an ineffective United Nations, and persistent disregard for international law obligations suggest that the sceptics have won the debate about whether international law is law and whether it affects state behaviour. We argue that such a conclusion would be in error because it grossly underestimates the complex ways in which IL affects state behaviour. ... We show that IL is enforced by states, courts, and international organizations by the imposition of shame sanctions on offenders and that these sanctions affect state behaviour in the same ways that traditional coercive sanctions do. In doing the above, we also develop the concept of a shaming reference group.

I'm in general a skeptic, viewing the tripartite failures highlighted in this abstract as overwhelming evidence that in the international community, might makes right, full stop. The tenth anniversary of America's unprovoked war on Iraq, which is now clearly characterized as a strategy to gain control over its oil resources that was planned far in advance of 9/11, seems too ample evidence backing the skeptical view. But I'm willing to engage that social pressure might have some amount of impact on state behaviour in some cases. At least, I am willing to believe that states will work hard to appear to be good citizens in the international legal order, and that this might cause some leaders to make decisions differently than they might absent shaming in the international community. But I remain at heart a skeptic so I will continue to believe that in practice states will use any power they have to achieve their ends at the expense of other states (much as leaders will do the same at the expense of their own people if they can get away with it).

This skepticism is reinforced by the part in the paper that talks about how shaming is undertaken and shows that the resources of the "shamer" come to bear in important ways on who and what gets shamed:

States are likely to be the principal enforcers of shame sanctions. ... States make evaluative opinions about other states all the time. Some have the resources to make elaborate justifications and provide evidence for those opinions in a legal manner. One example is the United States State Department’s annual human rights reports. These have come in for harsh criticism as being partisan. ...partisanship is a major problem for shaming. The US has also been accused of hypocrisy. 

Attacks based on the lack of neutrality and credibility to engage in shaming are severely debilitating, and do suggest that neutrality, or a perception thereof, is important if shaming sanctions are to work. This is not to say that shaming by individual states should be ignored altogether. Some states will be persuaded by the US State Department’s reports, and it must ultimately fall to a process of democratic debate to determine if the state being shamed is indeed deserving of punishment. There is nothing stopping Iran and Venezuela from issuing shaming reports of their own. If members of the international community believe these reports are the products of serious investigation and research, they will be credible. On the other hand, if they are merely propaganda, they are likely to be ignored. 

This suggests major cognitive bias problems if shaming is to be a regime for uncovering egregious offenders, at least, if we seek any sort of even-handed regime. If we don't worry about that problem, I think we're back to might makes right, and shaming just becomes another resource for wielding power to act in self-interest, while simultaneously shielding the shamer from reciprocal pressure.

It also suggests the major role of geo-politics in the name and shame game. In a footnote to the above paragraph, the authors highlight a particularly disturbing example:

...William Schulz, executive director of Amnesty International USA, remarked on the occasion of the release of the State Department’s annual human rights report: “The content of this report has little correspondence with the administration’s foreign policy; indeed, the U.S. is increasingly guilty of a ‘sincerity gap,’ overlooking abuses by allies and justifying action against foes by post-facto references to human rights. In response, many foreign governments will choose to blunt criticism of their abuses by increasing cooperation with the U.S. war on terror rather than by improving human rights.” 

This is a frightening and ultimately very discouraging status quo. It suggests that when we talk about shaming the result will not necessarily be better behaviour, but rather behaviour aimed at currying the favor of those who decide whom to shame. It worries me if that is the best we can do to guard against states doing terrible things to each other and state leaders dong terrible things to their people.

Sheppard: OECD report on base erosion demonstrates OECD is not serious about base erosion

Lee Sheppard has a column today on the OECD's new-found vision for reversing course on the international regime of tax base erosion it created [gated]. She's not buying it. Highlights:

...the OECD Centre for Tax Policy and Administration has been adept at sweeping huge problems under the rug. It was long in the habit of denying the multinational tax avoidance problems that OECD guidance and the international consensus enabled. 

But the problems are now blindingly obvious, as leading investigative journalists have attached corporate names and faces to tax avoidance. The person on the street now knows that some household-name companies pay no corporate income tax anywhere in the solar system. And a new group of managers has come to the OECD, ready to at least admit to the problems. So with its newly issued report, "Addressing Base Erosion and Profit Shifting," the OECD promises to do something about the income shifting problem and meet its critics. 

The report contains some astonishing admissions against interest about the causes of the zero-tax results under the current international system. Putting the best face on it, the report is a baby step toward practical proposals -- which are supposed to be ready for the G-20 meeting in a mere four months! 

The report provides little in the way of proposals, and it leaves the reader worrying that the OECD will jump in front of the parade and carry on with its useless projects. 

Pressure Points 

The report identifies six pressure points in the international system, without ascribing blame. Here is the list, annotated with blame: 

• hybrid structures and instruments (U.S. check-the-box rules and European formalistic characterization rules); 
• treaty treatment of remote commerce (OECD model treaty); 
• tax treatment of related-party financial transactions (OECD model treaty); 
• transfer pricing, especially separation of income from relevant activity (OECD transfer pricing guidelines); 
• antiavoidance measures (American, British, and commonwealth courts); and 
• harmful preferential regimes (Vienna Convention on the Law of Treaties). 

Despite these admissions, the report is strangely solicitous of tender corporate feelings. The drafters appear to have inherited the OECD's long-standing fear of incurring the displeasure of the United States and its mighty multinationals. 

...The report makes the seemingly harmless statement that member countries have a common interest in stopping base erosion and establishing a level playing field. As the drafters understand, it is not at all clear that every OECD member is on board. The British are systematically dismantling their corporate tax base, and the Americans are being urged to follow. Those are the home countries of the most tax-aggressive multinationals. 

And ever mindful that its real constituency is multinational business, the OECD proposes to come up with its coordinated action plan in consultation with all the stakeholders! It was considerate of the OECD to include "civil society" among those to be consulted. The old order ignored nonbusiness groups. 

One could well ask why multinationals should be invited to this particular discussion -- not that they don't appear to have veto power over every OECD project. They have cast their votes already. They don't feel like paying corporate income taxes, thank you very much. What are they expected to do, apologize for stripping income out of every market country? 

... Maybe it's easier to blame globalization than to blame a highly discriminatory system that is a vestige of World War I. The international consensus was designed by the Europeans and Americans to minimize taxation of multinationals. 

...The report does not admit that a large part of the problem is the international consensus itself. Like a manager firing workers, the OECD blames globalization. 

...The report's suggested fixes are already being pursued by member governments: more government-to-government cooperation, more transparency, simplified transfer pricing guidelines, better documentation, antiabuse rules, and controlled foreign corporation rules. The report recognizes that some of these fixes are difficult to administer, leading only to counterproductive litigation against well-represented multinationals. 

A constructive suggestion is that intragroup financial transactions be subject to restrictions. This is a startling admission from the organization whose transfer pricing guidance has required recognition of nonsensical legal arrangements and self-serving intragroup contracts in all but the most drastic cases. 

...The report suggests that something be done about harmful preferential tax regimes. But the previous mangled effort was squelched by the United States two decades ago, and hypocritical to boot. European enablers were not included in the list of harmful regimes. The OECD gives itself credit for the Global Forum on Transparency, an effort to accommodate tax havens while signing a lot of unenforceable tax information sharing agreements. 

...The degree to which the OECD still acts like this is a real risk is shown by the report's suggestion that it should be easier for multinationals to get their money back in mutual agreement procedures. The real risk of collective action is, as always, veto by the United States, whose multinationals pioneered the techniques complained about in the report. 

...Having blessed restructuring to stripped-risk distributors and contract manufacturers as business motivated, the OECD now admits that it is a component of the base erosion problem. The restructuring nonsense recently added to chapter 9 of the transfer pricing guidelines hardly merits a mention in the base erosion report, which seriously undercuts that guidance. 

...If the OECD were serious, it would advise member governments to disallow deduction of payments by and to entities treated as tax nothings by the other government. Some governments treat hybrids the same way their home governments treat them. Either straightforward fix would claw back the benefits of the U.S. check-the-box rule. Essentially a check-the-box switchover clause, either approach would ensure that the income represented by the payment was taxed somewhere. 

...Several times, the report describes tax planning as reducing profits attributed to substantive operations while increasing the profits associated with legal constructs like intangibles holding companies. This is a huge admission for an organization whose own transfer pricing guidelines call for intragroup contracts to be respected except in drastic circumstances. 

...The report does not explain why affiliates with no assets and no activities should be respected in the first place -- only that the transfer pricing rules entitle them to very little income! Google had an APA approving its transfer of intangibles outside the United States. Google's Irish affiliate has 2,000 employees. The point of the arrangement was to keep intangibles income out of the United States and to siphon it out of Europe. 

What would the OECD do if it were serious about intangibles migration? It would be compelled to think about factor allocation of intangibles income to countries where they are exploited. ...

Oh so much more at the link. This is a lengthy and detailed criticism. I am with Lee that the OECD is not likely a true apostate when it comes to base erosion. I would like to be wrong but the institutional structure of tax policy norm-making being what it is, there is no reason for optimism. The OECD used to like referring to itself as the "market leader in international tax policy," as if tax policy was a commodity they were particularly adept at creating and selling. Recent developments show tax policy is a commodity all right, but the OECD understates its own market share: it holds 100%. It is a monopoly that created the regime it now professes to view as having failed to keep up with the times.

You can't call it base erosion when you've been operating the backhoe and preventing anyone from building a retaining wall for 50 years.

Hearings on tax evasion & tax havens in the Canadian parliament tomorrow

Meeting of the Standing Committee on Finance beginning at 8:45 in Room 7-52, 131 Queen Street, featuring a fascinating line-up:

Tax Evasion and the Use of Tax Havens		Fraude fiscale et le recours aux paradis fiscaux
Witnesses		Témoins
Canadian Bankers Association		Association des banquiers canadiens
Marion Wrobel, Vice-President Policy and Operations		Marion Wrobel, vice-président Politiques et opérations
Darren Hannah, Director Banking Operations		Darren Hannah, directeur Opérations bancaires
Canadians for Tax Fairness		Canadiens pour une fiscalité équitable
Dennis Howlett, Executive Director		Dennis Howlett, directeur exécutif
Videoconference - Cambridge, United Kingdom		Vidéoconférence - Cambridge, Royaume-Uni
Tax Justice Network		Tax Justice Network
Richard Murphy, Director		Richard Murphy, directeur
Videoconference - Austin, Texas		Vidéoconférence - Austin, Texas
As an individual		À titre personnel
Arthur Cockfield, Professor Faculty of Law, Queen's University, Fulbright Visiting Chair in Policy Studies, University of Texas

US and Canada do some more dancing on energy

From the FT: US approves $18bn Cnooc bid for Nexen. That headline struck me as odd--why would one non-US company acquiring another non-US company require US approval? But this is the oil & gas industry, and that impacts US security, so bring on a committee review:

Tuesday’s approval from the Committee on Foreign Investment in the US, a multi-agency body that reviews large deals that could affect US security, gives Nexen “all of the requisite approvals to proceed to close”...

Late last year it looked as if Cfius might challenge the deal. In November, Cnooc and Nexen resubmitted their agreement for approval, raising concerns that Cfius was taking a hard line.

Though less than a tenth of Nexen’s assets are in the US, those that are include a series of oil platforms in the Gulf of Mexico. Some of those are near US military assets, leading some to believe that Cfius might block the deal or require mitigation agreements.

The US (or at least two American brothers) has pretty high financial stakes in the Canadian oil & gas industry, as a recent real news interview of BBC's Greg Palast reveals: if the Koch brothers (yes, those down-home folks with their "plan to reshape America")  can get that pipeline through, they can cut out their Venezuelan competition with a cheap alternative, putting an additional $2B or so in their pockets each year. But this time the US interest is not about its energy security, at least according to Palast. Rather, the plan here is to sell the supply on to the Caribbean. From the transcript:

[The Koch brothers says to themselves] If we can use our political muscle to jam a pipeline through the guts of the United States down to Texas...we can make a killing. 

And by the way, they're making an extra killing. When the Republicans were talking about the XL Keystone pipeline making us energy-independent...We're not energy-independent if it comes from Canada. But if it comes from Canada, let's assume that this is our buddies, because they'll give us the oil cheap, and that's what makes them our buddies. 

It also undermines Hugo Chávez. They have to undermine Chávez, which they want to do for geopolitical reasons. 

But then the oil will not be used in the United States. It will be refined mostly for gasoline that will be sold at a premium in the Caribbean. Remember, these refineries are in the Gulf coast. Selling it, then running that stuff back into New Jersey is not a moneymaker. The way you make the money is you sell gasoline in places that don't have the refining capacity and will pay a premium, like, you know, Jamaica, Santa Domingo. That's where your money's going to be made. So this is oil from Canada which will then go into the Koch refineries and sold into the Caribbean.

I admit I am puzzled. How is it in the interest of either Canada or the US to build a mechanism for the Koch brothers to insert themselves as intermediaries in an energy supply chain to the Caribbean? From Canada's perspective, why not cut out the middleman, or to out it another way, why be such good buddies?  Is this a question of risk, cost, technological capacity, logistics, something else? And for the US, if the environmental hazards to communities across the nation are as Palast describes, why subsidize that risk for the greater personal profit of billionaires when the political costs of support for the pipeline seem so high? 

I also don't know the financing of the pipeline, haven't studied it. I am scared to go and look, if I am going to find out that the entire infrastructure is to be underwritten by government.

US fights EU on data privacy law, says EU should respect US right to regulate

For the life of me I cannot understand the FT's headline, which reads "Brussels fights US data privacy push."  No, it's the US sending a team of lobbyists to fight against EU regulation--the penultimate sentence of the article even labels this "aggressive lobbying."

Why are the US lobby troops going into battle? Because the EU seeks to impose a fine of 2% of global annual revenues for any company, anywhere in the world, that violates the data rights accorded to EU citizens. US lobbyists and a sympathetic administration seem all too eager to push other countries to ease up on their regulatory burdens on US companies, so it is not surprising to see them in full force against the EU parliament here. But this effort is especially rich given that it comes at the very moment that the US is seeking to impose a fine of 30% on any company, anywhere in the word, that violates its own data sharing requirements. From the story:

Viviane Reding, EU commissioner for justice, said that the EU was determined to respond decisively to any attempts by US lobbyists – many working for large tech groups such as Google and Facebook – to curb the EU data protection law.

“Data protection is a fundamental right in Europe which is clearly enshrined in the Charter of Fundamental Rights. Whilst this may not be the case in other parts of the world, one thing is clear: if companies want to tap into the European market they have to apply European standards.” 

Ms Reding’s firm approach is likely to spark a diplomatic battle between Brussels and Washington, which has actively been trying to water down the EU’s tough new privacy legislation by handing US companies a de facto exemption from it. 

“Europe, the United States and other democracies around the world share many of the same values,” said William Kennard, US ambassador to the EU at a conference on European data protection and privacy. “We need to accept that each of these democracies has the right to choose whatever legal framework is suited best for them to defend and protect those values.”

Translation: respect our sovereign authority to write the laws we want to write to regulate our companies; don't use sanctions or threat of sanctions to force our companies to abide by your laws.  Or, do that to other countries, but give us an exemption because we're good guys that share your values.  Further:

US tech companies are trying to shield themselves from the legislation as they argue that it would be unfair for them to be subject to EU laws that are too stringent and could result in expensive administrative burdens and hefty fines for errant companies.

So here we have a US ambassador stating the cause for US companies that complain of the "unfairness" of stringent and expensive compliance costs backed by hefty penalties for noncompliance. The EU's position is, we are trying to protect our people wherever they go in the global market. The world is our jurisdiction to the extent it impacts the people we call "ours," and we aim to protect our people.

Are we not coming to a place where it is becoming obvious that global markets cannot peacefully co-exist with autonomous states?  Not one world government at all but instead an impenetrable mass of overlapping and conflicting regulatory states, a venn diagram of massive and chaotic proportions, and no possible way for anyone to comply with all of it.  Stock tip: invest in data compliance companies, they might be the most important drivers of the global economy in the near future.

Obama admin taking the high road on FATCA reciprocity?

I have predicted that real FATCA reciprocity would not fly in the US once people began to understand what the details entailed, but I would like to be wrong about that, and I have argued that the best course forward for FATCA is real reciprocity coupled with adherence to residence-based taxation. Here's a sign from the Chicago Tribune that I could get at least one of my wishes:

Foreigners' accounts in U.S. banks eyed in tax crackdown

The Obama administration may soon ask Congress for the power to require more disclosure by U.S. banks of information about foreign clients' accounts to those clients' home governments, as part of a crackdown on tax evasion, sources said on Monday. 

In a move facing resistance from some in the U.S. banking industry, two tax industry sources said the administration was considering asking Congress in an upcoming White House budget proposal for the authority to require more disclosure from U.S. banks. 

...At the heart of FATCA is a law requiring more disclosure by non-U.S. banks of information about Americans' accounts to the Internal Revenue Service, with the goal of exposing Americans' efforts to dodge U.S. taxes through secret offshore accounts. 

As Treasury has implemented FATCA, some countries - possibly including France, Germany and China - were said to be driving a hard bargain. They have been saying that if their banks have to tell the IRS about Americans' secret accounts, then U.S. banks should have to reciprocate by disclosing more information about the U.S. accounts of French, German and Chinese nationals. 

...China has been publicly dismissive of FATCA, but it is talking with U.S. officials behind the scenes, sources said.

...France and Germany "have been asking for something more like full reciprocity," said Jonathan Jackel, a lawyer with the law firm of Burt Staples & Maner LLP in Washington, D.C. 

The story says that "The IRS this year started disclosing to some foreign governments information about bank interest payments earned by their citizens with U.S. bank accounts."--but I am not sure that that is true, given that the only country currently on the list for automatic info sharing on portfolio interest is Canada-and Canada was already on that list anyway.


The story quotes Itai Grinberg, who has to be the foremost expert on the legislation and really ought to be listened to on the underlying principles:

"The United States should be moving toward full reciprocity," said Georgetown Law School Professor Itai Grinberg, a former Treasury official, adding it would be "deeply hypocritical" of the United States to ask for U.S. taxpayer information "without offering some kind of reciprocity."

Progress, perhaps. But this is America, so here comes a lawsuit:

The Texas Bankers Association is considering a lawsuit against the government to stop accountholder information sharing with Mexico, said Eric Sandberg, the group's president.

Why, what s the problem?  Well, you see, it's financial privacy.

"We are concerned with Latin American countries like Mexico," said Fran Mordi, senior tax counsel at the American Bankers Association. "In the past, U.S. banks didn't report interest payments to non-resident aliens ... IRS is now saying you have to report that."

Translate how you will. I think it's a clear illustration of the state at war with itself over how to gain the maximum advantage from a combination of cooperation and competition with other states on taxation. Information sharing is going to benefit the US more in terms of dollars in the economy if it is one-way street that catches US shirkers but doesn't prevent taking advantage of other countries' ignorance about the location of their own taxpayers' resources. I think the mercenary state will prevail in the end--cooperate in principle, defect in practice--but I am very much hoping to be wrong.

Paper: Putting the Reign Back in Sovereign

I've just posted a draft of my paper, "Putting the Reign Back in Sovereign: Advice for the Second Obama Administration," which I presented at Pepperdine last week. Abstract:

In its first term, the Obama administration enacted two pieces of legislation, each designed to protect an increasingly vulnerable income tax base, and each of which had the potential to set a new and unprecedented course for no less than the regulation of the global economy by the nation-state. The first, the Foreign Account Tax Compliance Act (FATCA), sought to end global tax evasion through tax havens.  The second, a little-noticed two-page addendum to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), sought to end the contribution of American multinationals to corruption in governance by codifying the transparency principles of the global Extractive Industries Transparency Initiative (EITI).  Both of these reforms reasserted a role for the nation state in regulating people and resources. But neither has yet to fulfil its potential. First, each has raised difficult questions about what the state can and cannot do to enforce disclosure and compliance on a global basis; failing to answer these questions is impeding implementation and aggravating an already-flagging taxpayer morale. Second, neither is broad enough: FATCA should be truly reciprocal and EITI should expand beyond the extractive industries. By acknowledging and responding in a principled way to the obstacles that limit their effectiveness, a second Obama administration could take significant steps to bring each piece of legislation to its potential, while ensuring that its scope focuses on its intended target in each case. This article outlines how these proposals could be accomplished and makes the case that they should be attempted.

I would be happy to have comments.  And in case it is of interest, here is a link to my powerpoint from the presentation as well (I don't know how to embed that here); you can actually watch the entire conference video here (my presentation was second to last).

Lobbying pays: rewards for legislative favors edition

Sungmun Choi asks, “Do Interest Groups Reward Politicians for their Votes in the Legislature?” And answers: of course they do.  Choi examined monetary contributions paid by interest groups to members of the U.S. House of Representatives and found evidence that the politicians who voted for the 2008 bank bailout were rewarded in the form of "more monetary contributions from the interest groups in the financial sector after passage of the EESA."  Conclsion; "interest groups reward politicians for their favorable votes in the legislature, at least in the case of the EESA. Of the two hypotheses that I develop in the theoretical part of the paper, I find evidence for the hypothesis of the long-term relationship between interest groups and politicians." Paper at the link.

So let's recap.

• Politicans need money to get (re-)elected: lobbying pays for that.
• Politicians need jobs when they retire from public office: lobbying pays for that.
• Lobbyists need clients who benefit from legal reform: lobbying pays for that.
• And now we see that politicians need to be rewarded for their legislative votes: lobbying clearly pays for that, too.

Billionaires Warn Higher Taxes Could Prevent Them From Buying Politicians

Satire.  but is it, really?

WASHINGTON (The Borowitz Report)—Introducing a new wrinkle into the already fraught fiscal cliff showdown, a consortium of billionaires today warned that if their taxes are raised they will no longer have enough money to buy politicians.

The group, led by casino billionaire Sheldon Adelson, commissioned a new study showing that the cost of an average politician has soared exponentially over the past decade. 

...The Vegas magnate complains that the media has ignored billionaires’ essential role in giving jobs to politicians who would otherwise have difficulty finding “honest work of any kind.” 

“Billionaires are providing employment for a group of seriously incompetent and marginal people,” Mr. Adelson says. “You raise taxes on us, and who’s going to create those jobs? I really don’t think people have thought this through.” 

Well done.

Money does not buy happiness: Senate banking committee edition

After Spending $9 Million To Defeat Her, Wall Street Watches Sen-Elect Warren Join Banking Committee

The securities and investments industry contributed just $245,000 to Warren and spent $3 million supporting her opponent Scott Brown, according to OpenSecrets data from mid-October. The industry was Brown’s top supporter. 

The Financial/Insurance/Real Estate sector followed suit and contributed $6 million to Brown and a puny half-a-million to Warren. Businesses also favored Brown heavily, and his top contributors came straight from Wall Street. And though there wasn’t much outside spending in the race because of a pledge made by the two candidates, the U.S. Chamber of Commerce, whose members include business and financial interests, spent $400,000 on the race in support of Brown and against Warren.

If you've never explored opensecrets before, you should, it's fascinating.

Tremblay: I fought the corruption but the corruption won

As expected, the mayor of Montreal has resigned under the pressure of the ongoing investigation into widespread corruption through all levels of Quebec's government.  The transcript of his resignation speech is here.  He continues to deny any personal wrongdoing, and claims he is the victim of "unbearable injustice."   That's an all-too familiar refrain, I am sorry to say, and shouldn't elicit much sympathy at this stage.  There is an awful lot of self-pity in this transcript.  Excerpts:

Was I sceptical? Yes. Did I ask questions? Yes. Was I vigilant? Yes. But unfortunately, it was only after the facts that I was given documents, files and internal memos, dating from 2004, 2006 and 2009. 

When I finally received the information, I asked the public servants and the councillors why I had not been informed about this, especially when the individuals in charge had done nothing. 

The trust I had on some, was inevitably betrayed; I assume the full responsibility. 

However, every time, as soon as I was informed of irregularities, collusion and corruption, I took action. The information was immediately given to the appropriate authorities. I shall produce the proofs at the right time and the right place. 

...I fervently hope that one day there will be recognition about the fact that I fought - often alone - this system of collusion and corruption as the Charbonneau Commission is revealing it had existed since at least 1988. 

...As for the allegations of collusion and corruption, I would have expected a more attentive and more urgent hearing from the government, especially when dealing with the obligation to award contracts to the lowest bidders. 

In politics, it seems that perception matters more than the truth. Especially when this perception is manipulated by multiple factors, not to say agendas, and when we're not given a chance to reveal the truth or, when it is stated, no one believes it. 

...I now must suffer an unbearable injustice. I never thought my life could be subjected to such a fury in a society of Law and Justice. But, one day, justice will prevail. Under these circumstances, I cannot help any more. The success of our city is much more important than my personal interest. 

...To those who relied and trusted me all these years, I want you to know that I have never betrayed you.

The sheer number of "I"s in the transcript is just too telling--I tried, I was duped, I was deceived, I am shocked, shocked at the allegations and the shoddy investigations and the lack of a chance to defend myself.  Certainly this story is not over.

RIP Prince Roy, Sealand's Head of State

This is a special shout out to tax policy at UW, fall 2011-slash-international tax spring 2012, you know who you are.  I am sorry to inform you that one of our favorite personalities has just died.  I have not yet found any information on succession: Sealand's wikipedia page has only "the Bates family" listed in the leadership category.  So please do inform me if you have any info about who now reigns over our beloved quasi-sovereign territory.  For other readers, if you don't know about Sealand and why it explains everything you need to know about international tax policy, you really must watch this video:

After which you should remind yourself of the importance of flags in establishing sovereignty:

Goodbye Prince Roy, I am very sorry I never got to meet you.

If you're entitled, you probably don't deserve it.

What does it mean to be entitled to something?  It used to mean you earned it, and are owed it, and it would be unfair not to give it to you.  Now it means you are demanding something that you have not earned, are not owed, and cannot in fairness be given.  I view this rhetorical shift as a subtle but very destructive development for spending programs that are tied to revenue sources, e.g., social security in America.  Roosevelt famously insisted on tying the benefit to the tax that funded it:

“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits,” he reportedly responded. “With those taxes in there, no damn politician can ever scrap my social security program.”

But if it becomes rhetorically acceptable to use entitlement to mean the opposite of entitlement, this creates a license for the damn politicians to scrap these programs after all.  This is so even if, like social security, such programs are not actually in fiscal straits.  Rhetoric matters, maybe far too much, in politics.  It is all too easy to convince people that entitlements are not deserved, therefore anything called an entitlement can and should be eliminated.  Worse, so long as you use another term to describe other benefits doled out by government, you get a pass from this scrutiny and judgment.  "Tax incentives" is a ready candidate to fil that rhetorical space, as we have seen in this campaign.  

Elites call for higher taxes in France, stamp feet when their wish is actually granted

Its fascinating to me that elites will only accept high marginal tax rates for purposes of destruction, namely, war.  When it comes to building something, a marginal 75% tax rate on top incomes is seen as outrageous and out of the question-no sane person could support it.  Tax resistance is really anti-social in that way.

Trickle down government...wha??

I'm still scratching my head over this. So...is trickle down nonsense now? Or is it affirmed as solid doctrine, but bad if it involves government? Is it an argument that government should inure to the benefit of the top, whose contributions to society will have the effect of trickling government largesse down to the 47%? Or is it to say that government programs aimed at the top are no good because they will (or will not?) trickle down? I'm stumped.