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The Big Three, Health Care and Tax Havens: Interrelated Issues that Need to be Solved Together
As everyone knows, the Big Three U.S. automakers are in big trouble. One problem has been overcapacity in the North American auto industry, which has been true for at least 20 years. A significant factor contributing to the maintenance of overcapacity has been the use of subsidies by state and local governments to attract new, mostly foreign, assembly plants. The new firms have generally located far from union areas, have no retirees, and have workers who are younger and therefore less expensive to insure. Given the fact of overcapacity, each new assembly plant leads to the closure of an existing plant, often on a one-to-one basis. This has made a big dent in the Big Three's market share.
Solving the crisis is a huge challenge, and I want to focus on health care. This alone contributes $1500 to the cost of a Big Three vehicle. As far as I can tell, the Obama health plan does nothing to address this issue, although I suppose it's possible the companies and the union could agree to opt into the default system. However, even this leaves the Big Three with large amounts of spending on health care.
Single payer, by contrast, would wipe out the $1500 cost immediately. Health insurance would be finance out of general tax revenue, and the money-losing automakers aren't going to have any profits to tax, probably for several years.
This brings us to the last link in the chain. If the health care system is paid through tax revenues, it is imperative that corporations not be able to game the system. That is, it must be made impossible for companies to abuse transfer pricing (prices for intra-corporate transactions), frequently using affiliates in tax havens, to make their profits show up in low-tax jurisdictions rather than the U.S. The easiest way from a technical standpoint is to adopt worldwide unitary taxation, whereby the IRS determines what portion of a multinational's opererations are in this country (usually based on sales, employment, and assets), and then taxes the company on that percentage of its worldwide profits. Transfer prices would then be irrelevant.
Politically, this is a tall order. Needless to say, multinationals worldwide are vociferously opposed, and it is not popular in the main forum for tax negotiations, the Organization for Economic Cooperation and Development. (I like to tell my students the OECD is the most powerful organization they've never heard of.) But the rest of the OECD's 30 members are in the same boat we are on the financial crisis, and the OECD wants to stamp out tax havens, an effort that has been hamstrung by the Bush administration. The renewal of the tax haven consensus with Obama's election may provide an opportunity to change the rules and end these tax shenanigans.
Solving the crisis is a huge challenge, and I want to focus on health care. This alone contributes $1500 to the cost of a Big Three vehicle. As far as I can tell, the Obama health plan does nothing to address this issue, although I suppose it's possible the companies and the union could agree to opt into the default system. However, even this leaves the Big Three with large amounts of spending on health care.
Single payer, by contrast, would wipe out the $1500 cost immediately. Health insurance would be finance out of general tax revenue, and the money-losing automakers aren't going to have any profits to tax, probably for several years.
This brings us to the last link in the chain. If the health care system is paid through tax revenues, it is imperative that corporations not be able to game the system. That is, it must be made impossible for companies to abuse transfer pricing (prices for intra-corporate transactions), frequently using affiliates in tax havens, to make their profits show up in low-tax jurisdictions rather than the U.S. The easiest way from a technical standpoint is to adopt worldwide unitary taxation, whereby the IRS determines what portion of a multinational's opererations are in this country (usually based on sales, employment, and assets), and then taxes the company on that percentage of its worldwide profits. Transfer prices would then be irrelevant.
Politically, this is a tall order. Needless to say, multinationals worldwide are vociferously opposed, and it is not popular in the main forum for tax negotiations, the Organization for Economic Cooperation and Development. (I like to tell my students the OECD is the most powerful organization they've never heard of.) But the rest of the OECD's 30 members are in the same boat we are on the financial crisis, and the OECD wants to stamp out tax havens, an effort that has been hamstrung by the Bush administration. The renewal of the tax haven consensus with Obama's election may provide an opportunity to change the rules and end these tax shenanigans.
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I recall posting a link (over a month ago) to an organization that promotes tax havens. A few weeks before the election they were speaking apocalyptic terms of how an Obama presidency would mean the end of their world....
Good ideas above and they could go a ways to helping the situation. Especially single payer. But so also could a high tariff wall to Japanese auto imports. Since they are already starting to off-load their t-notes, why not? That would solve the current over-capacity problem.
What do you think of Ronald Trost's suggestion of an industry specific bill, AIRA, to be passed by Congress as soon as possible to create a kind of hybrid chapter 11 solution to the Big 3's woes?
"Congressional enactment of a new, industry-specific federal restructuring statute is the answer. Here is how a proposed special federal statute, the Automobile Industry Recovery Act of 2008, or AIRA, which would be available to any of the Big Three, would work:
• AIRA would prescribe the reorganization plan available to an automobile company, including the terms for restructuring its labor contracts, including retirement and health care obligations, supplier contracts, dealer franchises and its pre-existing debt.
• State law dealer protection statutes would be pre-empted.
• The automaker would file a special restructuring case in a United States District Court, not in a Federal Bankruptcy Court.
• The president of the United States or his designee would appoint the trustee for the filing automaker, and the trustee would hire managers to assist him or her.
• At or before the filing of the restructuring case, the automaker would enter into a debtor financing package for $$ billion. The loans would be made by private banks and guaranteed by the federal government. The debtor financing would be secured by liens with a priority over all other liens and claims. The government would receive substantial compensation for the guarantee.
• The package would provide for financing that would guarantee payment of all warranty claims on cars whether sold before or after the filing.
• If necessary because of market conditions, a government-sponsored entity would be created that would buy automobile loans from dealers.
• The remedies of holders of credit default swaps or the like against non-debtor parties would be enjoined while the proceeding under the special law is still pending.
• The reorganization plan would require no solicitations or consents on the part of creditors and other constituencies. The Federal District Court would implement the plan upon finding that the statutory conditions have been met, resulting in a “Newco” or new company, with pre-existing debt converted, in whole or in part, to equity in Newco.
• Confirmation of the plan would require a finding by the judge that the business was viable."
http://www.creditslips.org/creditslips/2008/11/how-congress-co.html
Now there are some problems with Trost's novel idea: the burden on the judge to find viability would be onerous to say the least. And we can see an appeal on any such finding, all the while the money is running out in the Big 3's coffers so they would probably wind up asking for another bridge loan anyway.
December 4, 2008 11:36 PM | Reply | Permalink
My TPM post from November 16,
http://www.talkingpointsmemo.com/talk/blogs/doctoraaron/2008/11/how-real-health-care-reform-ca.php
makes the argument for combining a single payer health reform with a phased in tax to pay for it as a hybrid which would provide an economic stimulus, via relief from the burden of health insurance costs, while providing for unprecedented health security.
The question of how to structure the tax remains to be determined. Most health insurance reform proposals which require significant additional government spending have proposed raising funds through a payroll tax.
A value added tax would be better.
Payroll taxes seem reasonable largely because of the precedent of Medicare. Payroll taxes are paid by employers and would come in some sense as a replacement for the voluntary payments employers now make for employee health insurance. Further, payroll taxes economically are thought ultimately to be paid by workers in the form of reduced wages, which appeals to those who believe that health insurance should be an individual responsibility. Politically, however, payroll tax increases can generate opposition because they are resented by workers and employers alike, are extremely visible on weekly paycheck stubs, and are paid as a consequence of work while the benefits of the program that would be supported are enjoyed by all. Furthermore, if capped at any level (and because payroll taxes exclude non-payroll income) these taxes are generally regressive.
In contrast, a value added tax has the benefit of being hidden within the prices of goods generally and being widely paid by all consumers. If basic needs such as food and health care expense are excluded, value added taxes are less regressive than a payroll tax—even those who live entirely on unearned income must pay them. Unfortunately, the United States has no experience with a value added tax and so using this as a financing tool for single payer would introduce another measure of novelty to the change which would by itself raise potential opposition.
I would imagine that either a payroll tax or a value added tax would avoid the problem of gaming the system as discussed above.
December 5, 2008 1:06 AM | Reply | Permalink
Thanks for the replies. Let me note quickly that it's possible to game value added tax just as you can game corporate income tax. Here's an example from Italy: http://www.hemscott.com/news/static/tfn/item.do?newsId=65116001468881
I know the Tax Justice Network ( http://www.taxjustice.net/cms/front_content.php?idcat=2) has also posted news reports on avoidance/evasion of the VAT in the UK.
I'm not an expert on bankruptcy law, but I see that Trost was an architect of the successful Chrysler bailout, so his proposal merits careful study.
While we could certainly "win" an all-out trade war with Japan since we have such a huge bilateral trade deficit, that doesn't mean we should risk one via unilateral tariff walls on Japanese cars. Maybe a better route would be to negotiate a Voluntary Export Restraint as in the 1980s, and keep some semblance of following WTO trade rules. I'm not necessarily recommending that, but it's something to think about.
December 5, 2008 1:54 AM | Reply | Permalink
Looks like single payer health care is like a hub of a wheel for so many of us. Why are Americans so easy to scare? Fear is keeping them from sane public policy!
December 5, 2008 2:52 AM | Reply | Permalink
I remember someone asking Jack Balkin if there could be, in principle, a rights-enhancing decision by the Supreme Court that would be "wrong"
Prof Balkin had no problem simply answering, "Yes". Liberal jurisprudence isn't philosophically bound to some kind of iron wheel of perpetually expanding rights.
But in the economic realm things are different. In a financial emergency, is there such a thing as a mistaken subsidy by the government to keep some part of the private sector functioning? There surely is, so our problem besides setting out the basic philosophy of why we feel so, is to come to some general theory of what limits should there be to government/private sector entanglement.
A pressing project, for the next 9 months are going to present our government with a very target-rich environment for its dwindling largess.
What I see happening currently is a reactive and not deeply thought-out set of measures that have no clear conceptual kinship other than a kind of instinctive desire to inject capital into the central pumps with the idea that it will act as a kind of lubricant allowing the rotors to spin and money to flow in its accustomed paths.
We seem to lack a general theory of rescue or more precisely a general theory of exigent arrangements.
I fear lacking that, we are headed into unknown consequences land.
December 5, 2008 6:50 PM | Reply | Permalink