I hear a lot of panic-infused grumblings from economic-savvy types about the imminent demise of the US treasury bond as China's the world's stable-investment of choice and how the heck are we going to afford our meager overly generous welfare state -- nevermind economic stimulus -- if the federal government can't even take out a loan.  Well, the 2-second panic in the foreign currency exchange markets the other day after *some* "journalist" paraphrased Mr. Geithner as supporting China's call for a new global currency spurred me to do a little unpaid research.  turns out, China's saber-ratting isn't all that fearsome.  Important part of china central bank's policy statement highlighted below:

III. The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all

 

The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal [to base a global currency on the value of 30 or so commodities], is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

 

Special consideration should be given to giving the SDR [this is special drawing rights for lesser developed countries from the IMF, and therefore currently doesn't have any substantial impact on the rest of the world] a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries. Specifically, the Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997 should be approved as soon as possible so that members joined the Fund after 1981 could also share the benefits of the SDR. On the basis of this, considerations could be given to further increase SDR allocation.

you can find the rest at: http://www.pbc.gov.cn/english//detail.asp?col=6500&ID=178

it's not that long, and honestly, not that crazy. 

I've got this professor -- the kind that's been retired for 20 years, was born a century ago, and rather than spending time at home with wife and family celebrating his lucrative job earning a ton of money helping big multinationals evade taxes legally such a long and successful career in order to pontificate on the virtues of laissez faire capitalism teach law students sadly ignorant of the basics of economics and finance  -- who's driving me nuts enough to vent online to strangers under cover of relative anonymity. 

Okay, I'm no huey L, and I've spend enough time in corporate america to at least listen to both sides.  Often I find myself in some strange netherworld where the liberals look at me like I'm something stuck on the bottom of their shoe when I, e.g., take five minutes to explain that a lot times, asbestos defendants *aren't* actually guilty in this day of age...but I get the "oh *wack*-o" stare from the biz friendly coworkers when I talk about how maybe drug legalization isn't a bad thing and how could we possibly think slavery's social reverberations have possible gone away forever.   But this old dude is KILLING ME.

He's got his panties in a twist for fear the obama administration's going to eliminate corporate tax deferral.  and then US multinationals will be "forced" to pay US tax rates on ALL their income and therefore they will not be competitive (this of course is given in absolute terms) and america will go down the toilet.  I mean, to the extent it hasn't already.  no offense, thailand. 

here's a primer (and I have said old guy to thank): US multinationals with subsidiaries (separate legal entities, but owned and controlled by US corporations) overseas don't generally pay tax on the income of the sub until the subsidiary issues dividends back to the US corporation.  this is called tax deferral. 

so basically treasury gives US multinationals an interest free loan in the amount of their tax liability on foreign income. But back in the 60s the kennedy administration was resolved to make sure they paid at least part of their fair share, and created Subpart F -- a fond nickname for an exception and a loophole to the exception and an exception to the loophole to the exception to tax deferral.  Basically, it's this: US multinationals have to pay US tax immediately on foreign income that can easily be moved around.  Ie, such income doesn't require, oh, an office with workers actually working or a factory actually making.  Real industry, not "I get paid for doing nothing" income.  You know, the kind that gets all those preferable tax rates.  But I digress.

So basically, passive income gets taxed right away--it doesn't get deferred til it comes on home through the form of corporate dividends.  This is designed, for example, so people dont move their trust fund to, oh, caymen or bermuda, solely to avoid income tax.  "real" honest to goodness business income located overseas because, uh, there's a market and workers there -- that still gets deferral.

So why is this cat so upset??? why the doom and gloom??? he drank the kool aid for 60 years, so I guess I forgive him, even though he calls me "sweetie."  still, when you're only response is: "Japan's the only other country in the world who taxes its citizens on their foreign income," well, that sounds a little like kindergarten-style deflection to me. 

And here's another question.  why does everyone worry about the corporations remaining competitive when *I* dont get tax breaks.  and isn't it *my* available cash that buys the crap at wal-mart that allows wal-mart to make money and be productive and create more jobs (somewhere, at least)???? since when does wal-mart make better use of a buck than I do??? (okay, I know I didn't *need* that second pair of red pumps, but the point still stands).

has anyone ever actually done a study on the effect of country x vs country y tax rates, along with the PLETHORA of other variables that determine where a business wants to locate (governance issues, access to capital markets, labor force, natural resources, etc) such that we should actually start taking the "my taxes...sniff...are too *high*" argument seriously?