Daily Archives: April 8, 2016

Economics Builds a Tower of Babel

By Noah Smith – The modern economics profession made a collective decision, long ago, to develop a system of jargon in which words have multiple, sometimes contradictory meanings.

Want some examples? There’s no shortage.

Let’s take the word “investment.” Most people think this means buying some financial assets, such as stocks or bonds. That’s basically a form of lending — you give someone money today, and you hope they’ll give you back more money tomorrow.

Economists call that “financial investment,” but the kind of investment they usually talk about is business investment, meaning a company’s purchase of capital goods.

Since companies use debt to buy capital goods (or use their own cash, which is essentially the same thing), this kind of “investment” is actually a type of borrowing.

So economists use the same word to mean both borrowing and lending! That couldn’t possibly result in any confusion, right?

Two similar examples are “capital” and “equity.” more> http://goo.gl/UOnhaC

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What Tax Inversions and the Panama Papers Have in Common

By Rana Foroohar – The crackdown certainly signals that business as usual for global firms that can move money and people anywhere they like is under siege.

But it also underscores a deeper issue in the U.S. tax code. The code rewards debt rather than equity, something that not only causes financial bubbles (by encouraging over-leveraging) but also leads to some of the dodgy inversions and tax offshoring and evasion that we are reading so much about.

It’s all part of the same issue, which is that the free flow of financial capital, a key part of globalization, works best for big companies and very wealthy people.

The bottom line is that both the Panama Papers and the tax inversion phenomenon call into question whether our system of national borders and nation states is actually working, economically, in a globalized world. more> http://goo.gl/NOmj3f

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Updates from GE

Blair Glencorse: The Path to Integrity Comes from Within
Richard Messick: The Missing Ingredient to Corporate Integrity — Enforcement
By Blair Glencorse – To achieve accountability, businesses need to foster a culture of integrity.

Meanwhile, most businesses — particularly multinationals — have developed robust anti-corruption compliance programs that encompass everything from risk-identification measures to mitigating activities to internal control mechanisms.

The problem with these efforts, however, is that while they might fight corruption, they are not building a culture of corporate integrity. Laws are seen by many as expensive and tiresome to enforce, while compliance programs are often “check-the-box” exercises to fulfill requirements without truly changing behaviors.

Competition is intense, and the profit-motive is often overwhelming.

The problem is not a lack of rules and regulations — it is the lack of shared, accepted values of integrity that underpin honest business practices …

By Richard Messick – Corporate culture can only go so far. It’s vigorous law enforcement that creates the incentive for companies to operate with integrity.

The world would most certainly be a better place if all companies voluntarily embraced those four ingredients. But what incentive do they have?

That is, beyond the satisfaction of contributing to the common good? And if a few don’t respond to that incentive, won’t it be hard for others to stay the course?

What’s missing is an incentive for a company to toe the line — no matter the quality of its leadership or the training its employees receive or whether honest employees are rewarded or what companies it does business with.

That’s where law enforcement comes in. If a company’s executives and board members know they can be fined — even jailed — if employees pay bribes or conspire with competitors or pollute the environment or otherwise violate the law, you can be sure strong, effective steps will be taken to ensure they don’t. more> http://goo.gl/n4IiGB

Inversions Are the Least of It

Bloomberg – It’s hard to overstate just how bad the U.S. corporate tax code is.

Imagine it was designed by foreign saboteurs — and prepare to be impressed by their ingenuity.

It taxes profits at 35 percent, one of the highest rates in the world.

This excessive rate applies to a base riddled with exemptions and exceptions. U.S. companies pay taxes on their non-U.S. earnings, but only when the money is brought home, thus creating an incentive to park profits abroad. In these and other ways, the system manages to combine maximum economic damage with relatively meager revenue collection.

A sensible tax system would eliminate the incentives both for inversions and for parking income abroad. Actions like the administration’s shouldn’t be confused with reform. In fact, they make the code even more complicated when it desperately needs to be simpler.

By relying on executive discretion rather than legislation, they make the system less predictable. more> http://goo.gl/qkrz2i

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