Sunday, February 24, 2013

Shifting Eroding Bases

We should know that we're in trouble when bureaucrats make up words to describe behavior which, if stated literally, would incite consternation and outrage.  Just in time for Spring Training for America's pastime, we've added yet more accountability shifting phrases to the lexicon of irresponsibility: "Base Erosion" and the more descriptive "Profit Shifting".  The former is especially cool because you really have little clue what it actually means.  We know that erosion is usually considered to be bad but, if we're chemistry minded for example, we could imagine that this could refer to some precise form of surface etching using a caustic substance which could be good.  Profit shifting feels like it should be good - particularly if profits are being shifted towards social benefits.  Imagine if a company realized that it had been extracting excessive returns; the idea that they'd shift their profits for supporting community needs would be great.  This nomenclature is reminiscent of one of my favorite jargon artifacts: "anti-dumping".  Having grown up during the birth of eco-awareness, the idea that you'd recycle more and dump less sounds quite good.  That is, until you find out that anti-dumping actually has nothing to do with limiting what goes into landfills.  Quite to the contrary, 'dumping' is an over supply of goods (usually in excessive amounts) to flood markets and drive down domestic produced prices.  And anti-dumping practices - for which the General Agreements on Tariffs and Trade organization (the forerunner to the WTO) formed committees and policies - actually were protectionist measures to support price support and, at times, inflation in domestic markets.  "Sequestration", "Base Erosion", somehow I feel like we're in Oz.  I want to see the Wizard because every time we add a word or phrase to mask what's really going on, I feel like there's a Wicked Witch hiding in a tornado and we'll end up a long way from Kansas wearing really weird shoes.

Base Erosion, a term re-introduced at a G-20 gathering in Russia several days ago refers to tax evasion.  When companies like Google, Starbucks and Apple - stalwarts of the American capitalist ideal - declare their businesses to be variously domiciled in Ireland, Bermuda, or other 'tax-friendly' jurisdictions, investors have been encouraged to applaud these moves as a means of keeping revenue remote from the long arm of the tax collector.  Nearly $200 billion in corporate collections at the Federal and State level are lost each year by relocating the official domicile of businesses and profits to off-shore jurisdictions.  In 2011, over 1/2 of the U.S. Fortune 500 companies used off-shore tax havens with an estimated $1.6 trillion in profits being declared outside the U.S. for business exclusively done in the U.S. by U.S. consumers.  On its face, it's quite easy to suggest that the tax-aggressive companies are corrupt.  In many cases they are.  While establishing corporations purely for tax evasion is a violation of U.S. and many international laws, both the perpetrating companies and their accounting firms do so with impunity in part because of a lack of enforcement and in part because of complicity purchased each election cycle which sidelines credible tax reform.

But corporate Base Erosion is a symptom of a deeper pathology, not the disease itself.  We just passed the 74th anniversary of the Internal Revenue Code of 1939 which was the refinement and restatement of the 1874 taxation statutes in the Revised Statutes of the United States.  The 1939 Act has been substantially altered with major revisions in 1954, 1986, and minor revisions in nearly every Congress.  Whether you're a bootlegger in Virginia during Prohibition or the modern day outlaws further West, the incentive to evade taxes is fueled not as much by greed and profit motives but by sociopathic contempt.  This contempt extends to (and emanates from) the government seen to be both incapable of effectively stewarding the public interest and maintaining integrity when challenged.  Additionally, this contempt is directed towards consumers and shareholders who are both asked to pay premiums for goods and services and accept that profit-sharing or dividend distribution is beneath the role of enterprise.  This week, Federal District Judge Richard Sullivan sided with Greenlight Capital's David Einhorn who brought a lawsuit against Apple for seeking to change it's corporate charter to shield its profits from its shareholders!  Yes, this is the same Apple who famously in 1984 promoted non-conformity from the Orwellian machine.  That same Apple, now rotten to its core, has become a nightmare even Orwell couldn't have imagined.  Contempt.  Disdain.  Derision.  As if seeking not to be outdone, the U.S. Congress this week evidenced the same contempt for the U.S. and global economy choosing the blunt object of sequestration of expenditures rather than addressing the accountability demanded to reform our national fiscal position. 

Is Ireland to blame for establishing a tax regime that provides predictability and simplicity to corporate tax planners?  Probably not: they're probably simple opportunists. Are tax havens a natural byproduct of contempt for one's own public sector dysfunction?  Probably yes: in a world where money is the preferred arbiter of power, its movement with contempt and impunity speaks volumes.

This week the U.S. economy will be subject to the theatrics of self-imposed tragedy yet again.  Having created the illusion of a temporal milestone of fiscal accountability, we'll watch as markets shudder and stress under the weight of timely Lenten guilt.  But as with Lent, odds are good that our prayers for mercy and forgiveness for our indiscretions will soon be once again drowned in the cacophony of consumption.  Debating Base Erosion - today's version of dumping only this time with money - is futile until we address the root of public contempt.  And public contempt will remain unexamined until we address its root entangled in our manic surrogacy - our demand for a redeemer to absolve the consequences our thoughtless behaviors. 

It's time that we realize that treating symptoms of contemptuous neglect is itself an exercise in futility.  It's time we turn our attention to a foundation for productive engagement which calls for our best in the common interest of the ecosystems in which we operate.  Only then will we shore up the eroding base and begin to build again.

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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave