Macro Roundup

“Impossible to say from this article. Will need the CBO to opine, which they do every year. The article is very deceptive. You would think the law was written to say companies could not expense legitimate offshore expenses on products shipped to the US. That would tax them on revenue not profit. Fat chance Congress intended that. Interest is similarly a cost of goods sold for banks and therefore must be expensed. In both example, I would guess they wrote the law as Congress truly intended -- i.e. the economically logical way. The articles also say us tax revenues went down, not that corp tax rev specifically went down. Yes, there was a big middle class tax cut. Also baseline matters. Corps were never going to pay offshore taxes and never have. CBO assumes all offshore money will eventually return to the US so all offshore taxes would eventually be paid. True baseline economically is to assume they were not going to get paid. The tax law increased payment. CBO counts it as a reduction. US economy has far exceeded pre Trump (CBO) forecasts despite a failing world economy. Employment was supposed to top out a million plus jobs ago. Hard to say tax cut didn't work. Dems think taxes don't matter/slow growth. Hard to believe.”

The implied threat was clear: If the Treasury didn’t further chip away at the new tax, companies like Hanes, based in Winston-Salem, N.C., might have no choice but to move their headquarters overseas.

Otherwise, Mr. Purvis warned, “the GILTI regime will become an impediment to U.S. companies and their ability to not only compete globally as a general matter, but also their ability to remain U.S.-headquartered if they are to maintain the overall fiscal health of their business.”

The same month, the underwear manufacturer Hanes sent its own letter to Mr. Mnuchin. The letter, from Bryant Purvis, Hanes’s vice president of global tax, urged Mr. Mnuchin to broaden the high-tax exception so that more companies could take advantage of it.

In September, Chris D. Trunck, the vice president for tax at Owens Corning, the maker of insulation and roofing materials, wrote to the I.R.S. He pushed the Treasury to tinker with the GILTI rules in a way that would preserve hundreds of millions of dollars of tax benefits that Owens Corning had accumulated from settling claims that it poisoned employees and others with asbestos.

In the coming days, the Treasury is likely to complete its last round of rules carrying out the tax cuts. Big companies have spent this fall trying to win more.

This month, the Organization for Economic Cooperation and Development calculated that the United States in 2018 experienced the largest drop in tax revenue of any of the group’s 36 member countries. The United States also had by far the largest budget deficit of any of those countries.

The Internal Revenue Service is collecting tens of billions of dollars less in corporate taxes than Congress projected, inflating the tax law’s 13-figure price tag.

Companies continue to shift hundreds of billions of dollars to overseas tax havens, ensuring that huge sums of corporate profits remain out of reach of the United States government.

Two years after the tax cuts became law, their impact is becoming clear.

An Implied Threat

After months of meetings with lobbyists, the Treasury announced in June 2019 that it was creating a version of the exception that the companies had sought.

Other companies jumped on the bandwagon. News Corporation, Liberty Mutual, Anheuser-Busch, Comcast and P.&G. wrote letters or dispatched lobbyists to argue for the high-tax exception.

In essence, the “high-tax exception” that Mr. Caballero was proposing would allow companies to deduct expenses that they incurred in their overseas operations from their American profits — lowering their United States tax bills.

One lobbyist, Michael Caballero, had been a senior Treasury official in the Obama administration. His clients included Credit Suisse and the industrial conglomerate United Technologies. He met repeatedly with Treasury and White House officials and pushed them to modify the rules so that big companies hit by the GILTI wouldn’t lose certain tax deductions.

Several senators then met with Mr. Mnuchin to discuss the rules.

Lobbyists for Procter & Gamble and other companies turned to lawmakers for help. They asked members of the Senate Finance Committee to tell Treasury officials that they hadn’t intended the GILTI to affect their industries. It was a simple but powerful strategy: Because the Treasury was required to consider congressional intent when writing the tax rules, such explanations could sway the outcome.

But after the law was enacted, large multinationals in industries like consumer products discovered that the GILTI tax applied to them, too. That threatened to cut into their windfalls from the corporate tax rate’s falling to 21 percent from 35 percent.

In the pharmaceutical and tech industries in particular, profits are often tied to patents. Companies had sold the rights to their patents to subsidiaries in offshore tax havens. The companies then imposed steep licensing fees on their American units. The sleight-of-hand transactions reduced profits in the United States and left them in places like Bermuda and the British Virgin Islands.

Back in 2017, Republicans said the GILTI was meant to prevent companies from avoiding American taxes by moving their intellectual property overseas.

The lobbying surrounding the GILTI was equally intense — and, once again, large companies won valuable concessions.

Heading to the Hill

“We were responsive to job creators,” he said.

He also said the Treasury decided that changing the rules for foreign banks was appropriate.

Mr. Morgenstern, the Treasury spokesman, said: “We thoroughly reviewed these issues internally and are fully comfortable that we have the legal authority for the conclusions reached in these regulations.” He said Ms. Nijenhuis was not involved in crafting the BEAT rules.

Over all, the BEAT is likely to collect “a small fraction” of the $150 billion of new tax revenue that was originally projected by Congress, said Thomas Horst, who advises companies on their overseas tax arrangements. He came to that conclusion after reviewing the tax disclosures in more than 140 annual reports filed by multinationals.

Officials at the Joint Committee on Taxation have calculated that the exemptions for international banks could reduce by up to $50 billion the revenue raised by the BEAT.

Even inside the Treasury, the ruling was controversial. Some officials told Mr. Harter — the senior official in charge of the international rules — that the department lacked the power, according to people familiar with the discussions. Mr. Harter dismissed the objections.

Some tax experts said that the Treasury had no legal authority to exempt the bank payments from the BEAT; only Congress had that power. The Trump administration created the exception “out of whole cloth,” said Mr. Wells, the University of Houston professor.

In September 2019, Ms. Nijenhuis took off her lobbying hat and joined the Treasury’s Office of Tax Policy, which was still writing the rules governing the tax law.

Among the lobbyists who successfully pushed the banks’ case in private meetings with senior Treasury officials was Erika Nijenhuis of the law firm Cleary Gottlieb. Her client was the Institute of International Bankers.

A few months later, the tax-policy office handed another victory to the foreign banks, ruling that an even wider range of bank payments would be exempted.

Late last year, Mr. Harter went to Treasury Secretary Steven Mnuchin and told him about the plan to give the banks a break. Mr. Mnuchin — a longtime banking executive before joining the Trump administration — signed off on the new exemptions, according to a person familiar with the matter.

Banks flooded the Treasury Department with lobbyists and letters.

“Foreign banks should not be penalized by the U.S. tax laws for complying” with regulations, said Briget Polichene, chief executive of the Institute of International Bankers, whose members include many of the world’s largest banks.

American regulators require international banks to ensure that their United States divisions are financially equipped to absorb big losses in a crisis. To meet those requirements, foreign banks lend the money to their American outposts. Those loans accrue interest. Under the BEAT, the interest that the American units paid to their European parents would often be taxed.

One of the most effective campaigns, with the greatest financial consequence, was led by a small group of large foreign banks, including Credit Suisse and Barclays.

Helping Foreign Banks

This month, the Treasury issued the final version of some of the BEAT regulations. The Organization for International Investment got what it wanted.

The group’s lobbyists were from PwC and Baker McKenzie, Mr. Harter’s former firms, according to public lobbying disclosures. One of them, Pam Olson, was the top Treasury tax official in the George W. Bush administration. (Mr. Morgenstern, the Treasury spokesman, said Mr. Harter didn’t meet with PwC while the rules were being written.)

The Organization for International Investment — a powerful trade group for foreign multinationals like the Swiss food company Nestlé and the Dutch chemical maker LyondellBasell — objected to a Treasury proposal that would have prevented companies from using a complex currency-accounting maneuver to avoid the BEAT.

Starting in January 2018, he and his colleagues found themselves in nonstop meetings — roughly 10 a week at times — with lobbyists for companies and industry groups.

Chip Harter was the Treasury official in charge of writing the rules for the BEAT and GILTI. He had spent decades at PwC and the law firm Baker McKenzie, counseling companies on the same sorts of tax-avoidance arrangements that the new law was supposed to discourage.

The Treasury Department had to figure out how to carry out the hastily written law, which lacked crucial details.

Almost immediately after Mr. Trump signed the bill, companies and their lobbyists — including G.E.’s Mr. Brown — began a full-court pressure campaign to try to shield themselves from the BEAT and GILTI.

An Exhaustive Lobbying Campaign

“The question,” he said, “is how creative and how expansive is Treasury and the I.R.S. able to be.”

Mr. Brown, now the head of international tax policy at the accounting and consulting firm PwC, said on a podcast this year that the Trump administration should bridge the gap between expectations about the tax law and how it was playing out in reality. He lobbied the Treasury on behalf of G.E.

Other companies, like General Electric, were surprised to be hit by the new tax, thinking it applied only to foreign multinationals, according to Pat Brown, who had been G.E.’s top tax expert.

Because such payments to Ireland wouldn’t be taxed, some companies that had been the most aggressive at shifting profits into offshore havens were spared the full brunt of the BEAT.

Let’s say an American pharmaceutical company sells pills in the United States. The pills are manufactured by a subsidiary in Ireland, and the American parent pays the Irish unit for the pills before they are sold to the public. Those payments mean that the company’s profits in the United States, where taxes are relatively high, go down; profits in tax-friendly Ireland go up.

In the BEAT, for example, Senate Republicans hoped to avoid a revolt by large companies. They wrote the law so that any payments an American company made to a foreign affiliate for something that went into a product — as opposed to, say, interest payments on loans — were excluded from the tax.

From the start, the new taxes were pocked with loopholes.

Built-In Loopholes

Sitting in the Oval Office on Dec. 22, 2017, Mr. Trump signed the tax cuts into law. It was — and remains — the president’s most significant legislative achievement.

The Joint Committee on Taxation, the congressional panel that estimates the impacts of tax changes, predicted that the BEAT and GILTI would bring in $262 billion over a decade — roughly enough to fund the Treasury Department, the Environmental Protection Agency and the National Cancer Institute for 10 years.

To reduce the benefit companies reaped by claiming that their profits were earned in tax havens, the law imposed an additional tax of up to 10.5 percent on some offshore earnings.

The other big measure was called GILTI: global intangible low-taxed income.

The BEAT aimed to make that less lucrative. Some payments that companies sent to their foreign affiliates would face a new 10 percent tax.

Instead of paying taxes in the United States, companies send the profits to countries with lower tax rates.

BEAT stands for the base erosion and anti-abuse tax. It was aimed largely at foreign companies with major operations in the United States, some of which had for years minimized their United States tax bills by shifting money between American subsidiaries and their foreign parent companies.

Two of the biggest new taxes were supposed to apply to multinational corporations, and lawmakers bestowed them with easy-to-pronounce acronyms — BEAT and GILTI — that belie their complexity.

Shifting Money

To close the gap between the $5.5 trillion in cuts and the maximum price tag of $1.5 trillion, the package sought to raise new revenue by eliminating deductions and introducing new taxes.

The bill’s cuts totaled $5.5 trillion. The corporate income tax rate shrank to 21 percent from 35 percent, and companies also won a tax break on the trillions in profits brought home from offshore.

To speed things along, Republicans used a congressional process known as “budget reconciliation,” which blocked Democrats from filibustering and allowed Republicans to pass the bill with a simple majority. But to qualify for that parliamentary green light, the net cost of the bill — after accounting for different tax cuts and tax increases — had to be less than $1.5 trillion over 10 years.

Republicans were racing to secure a legislative victory during Mr. Trump’s first year in office — a period marked by the administration’s failure to repeal Obamacare and an embarrassing procession of political blunders. Sweeping tax cuts could give Republicans a jolt of much-needed momentum heading into the 2018 midterm elections.

“The situation where companies are actually encouraged to move overseas and keep their profits overseas makes no sense,” Senator Rob Portman, an Ohio Republican, said on the Senate floor in November 2017.

When President Trump and congressional Republicans assembled an enormous tax-cut package in 2017, they pitched it in part as a grand bargain: Companies would get the deep tax cuts that they had spent years clamoring for, but the law would also represent a long-overdue effort to fight corporate tax avoidance and the shipment of jobs overseas.

The Obama administration and lawmakers from both parties have tried to combat this profit shifting, but their efforts mostly stalled.

Google, Apple, Cisco, Pfizer, Merck, Coca-Cola, Facebook and many others have deployed elaborate techniques that let the companies pay taxes at far less than the 35 percent corporate tax rate in the United States that existed before the 2017 changes. Their playful nicknames — like Double Irish and Dutch Sandwich — made them sound benign.

In the late 1990s, American companies accelerated their efforts to claim that trillions of dollars of profits they earned in high-tax places like the United States, Japan or Germany were actually earned in low- or no-tax places like Luxembourg, Bermuda or Ireland.

Ever since the birth of the modern federal income tax in 1913, companies have been concocting ways to avoid it.

Racing for a Win

Of course, companies didn’t get everything they wanted, and Brian Morgenstern, a Treasury spokesman, defended the department’s handling of the tax rules. “No particular taxpayer or group had any undue influence at any time in the process,” he said.

It is the latest example of the benefits of the Republican tax package flowing disproportionately to the richest of the rich. Even a tax break that was supposed to aid poor communities — an initiative called “opportunity zones” — is being used in part to finance high-end developments in affluent neighborhoods, at times benefiting those with ties to the Trump administration.

“Treasury is gutting the new law,” said Bret Wells, a tax law professor at the University of Houston. “It is largely the top 1 percent that will disproportionately benefit — the wealthiest people in the world.”

Through a series of obscure regulations, the Treasury carved out exceptions to the law that mean many leading American and foreign companies will owe little or nothing in new taxes on offshore profits, according to a review of the Treasury’s rules, government lobbying records, and interviews with federal policymakers and tax experts. Companies were effectively let off the hook for tens if not hundreds of billions of taxes that they would have been required to pay.

Thanks in part to the chaotic manner in which the bill was rushed through Congress — a situation that gave the Treasury Department extra latitude to interpret a law that was, by all accounts, sloppily written — the corporate lobbying campaign was a resounding success.

The blitz was led by a cross section of the world’s largest companies, including Anheuser-Busch, Credit Suisse, General Electric, United Technologies, Barclays, Coca-Cola, Bank of America, UBS, IBM, Kraft Heinz, Kimberly-Clark, News Corporation, Chubb, ConocoPhillips, HSBC and the American International Group.

The lobbyists targeted a pair of major new taxes that were supposed to raise hundreds of billions of dollars from companies that had been avoiding taxes in part by claiming their profits were earned outside the United States.

Starting in early 2018, senior officials in President Trump’s Treasury Department were swarmed by lobbyists seeking to insulate companies from the few parts of the tax law that would have required them to pay more. The crush of meetings was so intense that some top Treasury officials had little time to do their jobs, according to two people familiar with the process.

Laws like the 2017 tax cuts are carried out by federal agencies that first must formalize them via rules and regulations. The process of writing the rules, conducted largely out of public view, can determine who wins and who loses.

HIDING A HAVEN Many companies appear to have found ways around disclosing how overseas taxes will affect them.

One consequence is that the federal government may collect hundreds of billions of dollars less over the coming decade than previously projected. The budget deficit has jumped more than 50 percent since Mr. Trump took office and is expected to top $1 trillion in 2020, partly as a result of the tax law.

But big companies wanted more — and, not long after the bill became law in December 2017, the Trump administration began transforming the tax package into a greater windfall for the world’s largest corporations and their shareholders. The tax bills of many big companies have ended up even smaller than what was anticipated when the president signed the bill.

Corporate executives, major investors and the wealthiest Americans hailed the tax cuts as a once-in-a-generation boon not only to their own fortunes but also to the United States economy.

The biggest change to the tax code in three decades, the law slashed taxes for big companies, part of an effort to coax them to invest more in the United States and to discourage them from stashing profits in overseas tax havens.

The overhaul of the federal tax law in 2017 was the signature legislative achievement of Donald J. Trump’s presidency.

How Big Companies Won New Tax Breaks From the Trump Administration

Jesse Drucker and Jim Tankersley, "How Big Companies Won New Tax Breaks From the Trump Administration,"New York Times, December 30, 2019, https://www.nytimes.com/2019/12/30/business/trump-tax-cuts-beat-gilti.html

Peter Hooper, Frederic S. Mishkin, and Amir Sufi, "Prospects For Inflation In A High Pressure Economy: Is The Philips Curve Dead Or Is It Just Hibernating?" National Bureau of Economic Research, May 2019, https://www.nber.org/papers/w25792

"....National data going back to the 1950s and 60s yield strong evidence of negative slopes and significant nonlinearity in those slopes, with slopes much steeper in tight labor markets than in easy labor markets. This evidence of both slope and nonlinearity weakens dramatically based on macro data since the 1980s for the price Phillips curve, but not the wage Phillips curve. However, the endogeneity of monetary policy and the lack of variation of the unemployment gap, which has few episodes of being substantially below zero in tis sample period, makes the price Phillips curve estimates from this period less reliable. At the same time, state level and MSA level data since the 1980s yield significant evidence of both negative slope and nonlinearity in the Phillips curve. The difference between national and city/state results in recent decades can be explained by the success that monetary policy has had in quelling inflation and anchoring inflation expectations since the 1980s.We also review the experience of the 1960s, the last time inflation expectations became unanchored, and observe both parallels and differences with today. Our analysis suggests that reports of the death of the Phillips curve may be greatly exaggerated....Figure 3.2 shows a scatterplot and regression line of nominal wage inflation against the unemployment rate for the state-year level panel. The sample covers the 50 states and the District of Columbia from 1981 to 2017. To ensure that the scatterplot matches the regression specifications below, both the unemployment rate and nominal wage inflation are first regressed on state and year fixed effects before being plotted. As a result, the scatterplot contains deviations from the state and year mean for each state-year level observation. As the table below shows, the estimated coefficient on the unemployment rate is -0.41. Figure 3.2 shows a steep slope in the state-year level wage-Phillips curve. A state with a negative deviation from its normal unemployment rate sees a larger than average increase in nominal wage inflation. Column 1 of Table 3.1 shows the point estimate of the regression line, which is -0.41. Column 2 of Table 3.1 includes a control variable for lagged core price inflation at the regional level...The inclusion of this control variable is meant to capture inflation expectations or any other factor that may be determined by lagged inflation in that region. The point estimate on the unemployment rate is almost identical. The specification reported in Column 2 includes year fixed effects, which implies that the negative slope coefficient is not driven by national inflation dynamics. The state-year wage-Phillips curve shows a significant and steep negative slope.. the coefficient estimates for the wage-Phillips curve are similar for the national- and state-level specifications, both in terms of the level and the evidence for nonlinearities.... The state and MSA data, which has many more observations with very tight labor markets, suggests that the Phillips curve with nonlinearities might be alive and well. Thus the reports of the death of the Phillips curve might be greatly exaggerated. We should not discount the possibility that substantial nonlinearities are present in today’s Phillips curve and so a high-pressure economy could lead to inflationary pressures. Second, our evidence, both in the macro, time-series data and the state and MSA data in Sections 4 and 5, suggests that the wage-Phillips curve is alive and well.This is consistent with the observation that wage inflation has marched steadily, if slowly, upward in recent years as the labor market has tightened, as shown in Figure 6.1. However, Chair Powell (2018b) has noted, we did see something like this in the late 1990s-early 2000s without an inflation lift (Figure 6.2). But that was also a period during with strong dollar helped keep a tight lid on inflation, and the tight labor market was cut short by the recession of 2001, Could we see this play out again? Wage inflation did rise significantly in the late 90s (both in nominal terms and in excess of productivity trends), as it had in the mid 1960s. While the wage Phillips curve may have flattened some over time, it remains much steeper and evidence of nonlinearities much more robust than for the price Phillips curve in the post-1988 sample period. It is possible that the link between wage and price inflation has become weak, but this is a puzzle that requires further research..."

Overall findings:

Additionally they speculate that, “…. another possible reason for the steeper slope of the Phillips curve using MSA-level data is that this slope is not affected by the endogeneity of monetary policy. Monetary policy is the same for all MSAs and so is necessarily exogenous in this data. Hence the MSA-level data would not be subject to the bias that flattens the estimated slope of the Phillips curve and so could display steeper Phillips curve estimates. While the regional level data may help better identify the slope of the Phillips curve given more variation in the employment environment and the exogeneity of monetary policy, this comes at a theoretical cost. Such state and MSA level specifications are less well grounded in theory….”

They also note that the steeper estimates for MSA (Metropolitan Statistical Areas) are likely driven by sample size,"…One potential reason for the steeper estimate in MSA-level data is more statistical power for identification...If the price-Phillips curve is non-linear and especially steep at unemployment rates below 4% (as suggested by Table 3.2), the national level specification after 1988 will have a difficult time identifying this effect. In fact, from 1988 to 2017, there is only one year (2000) in which the unemployment rate reached 4% or lower. The post 1987 national sample Phillips curve estimate is produced with almost no data from the unemployment regime in which the MSA-level data say the slope is steepest. In contrast, there are a large number of observations (115) in the MSA-year level data with unemployment rates below 4%...."

Reviewed paper Sufi paper mention in WSJ that found Phillips curve working on local level. You asked, “ ….how do they reconcile local price increases drive by tight utilization to tight national utilization without increases?...”

Overall they finds that the difference btw national and city/state results can be explained by several factors (though they don’t attempt to estimate each factors contribution)“…. The difference between national and city/state results in recent decades can be explained by the success that monetary policy has had in quelling inflation and anchoring inflation expectations since the 1980s…”

Philip Hoxie, Daniel Shoag and Stan Veuger, "Moving to density: Half a century of housing costs and wage premia from Queens to King Salmon," American Enterprise Institute, December 2019, https://www.aei.org/wp-content/uploads/2020/01/Hoxie-Shoag-Veuger-Moving-to-Density-WP.pdf

"....Have workers stopped moving to the highest-density, highest-productivity places in the country because of a decline in the urban wage premium, or because the rent is too high? We analyze how important these two explanations are by studying them in one and the same empirical analysis. We find that that non-college workers now effectively face a housing-inclusive urban wage penalty, while workers with college education continue to face a significant urban wage premium.....Our results suggest that the decline in the urban wage premium for non-college workers has been especially steep once housing costs are taken into account. This has had dramatic consequences for the attractiveness of high-density areas:for non-college workers, there is now, on average, an urban wage penalty after accounting for the cost of shelter....find that non-college workers now effectively face a housing-inclusive urban wage penalty, while college workers continue to face a significant urban wage premium...For college workers, shown in blue, the steep gradient of the slope relating wages to prior density shows that the wage premium has remained large over the past half century. A back-of-the-envelope calculation may be helpful in interpreting the size of the wage premium here: whether one moves from 2.7 to 3.1 on the log scale, as in the 1970 panel, or from 2.9 to 3.3, as in the 2015 panel, hourly wages increase by some 50%. On the other hand, workers with only a high school degree or less, shown in red, have seen their wage premium in dense areas decline, especially after the year 2000, from about 35% in 1970to 10% in recent years. This decrease in high-density wages for low-skilled workers makes migration toward high-density areas less attractive for such workers, ceteris paribus...Incorporating housing costs does not change the steep urban wage premium facing workers with at least some college much. However, non-college workers saw that housing-inclusive premium starting to erode during the 1980s, before watching it turn into an urban wage penalty of almost 20% between 2000 and 2015. This means that not only have relative wages decreased dramatically for non-college workers in dense areas, their housing costs have escalated as well...Panel B shows that, in 1970, non-college workers could expect a housing inclusive wage premium of over 10 percent when moving from the 25th percentile of commuting-zone density to the 99th percentile of commuting-zone density. In 2015, that same move would instead be associated with an urban penalty of over 10 percent. The wage gradient is not only negative in 2015, but at all densities non-college workers are worse off in real terms in 2015 than at any other point on the table...."

New from your friend Stan Veuger (and Shoag of Ganong/Shoag) looks at the urban wage premium, supports Ganong/Shoag and finds that non-college workers are now net negative if you include housing costs.