The more I study the present US jobless recovery and the staggering amount of US Debt, the more I realize the significant role played by US Multinational Corps in creating the 2000s Lost Decade. Thus, I think it is only fair that US Multinational Corps pony in a healthy amount of money to help fund near-term bold, quick-hitting private sector US Job Creation as well as to fund a heavy dose of US Debt Reduction in both the medium term and in the long term.
Just like the country as a whole, Big Corps would be helped immensely by bold private sector US Job Creation and by a substantial reduction of the US Federal Debt. But the trick is to derive ways for Big Corps to provide funding for these desirable initiatives but to do so in such a way that also minimizes the harm to Big Corps of their funding here. I think it can be done. Just read on.
First, let me quantify why the 2000s were the Lost Decade for the US.
Here’s average annual US real GDP growth in each of the six most recent decades:
…1950s Decade……..4.2%
…1960s Decade……..4.4%
…1970s Decade……..3.3%
…1980s Decade……..3.1%
…1990s Decade….3.2%
…2000s Decade…1.9% Whoa!
When real GDP growth averages only 1.9% for an entire decade, a country is going to have substantial economic problems. The way I look at it, since average annual GDP growth averaged 3.2% for the three decades immediately preceding the 2000s Lost Decade, to get out of this huge economic crater, as evidenced by the dismal 1.9% annual GDP growth in the 2000s Lost Decade, I think the US should have an economic goal of averaging GDP annual growth of at least 4.5% in the 2010s Decade (i.e. 3.2% + (3.2% - 1.9%)). How are we doing? Well, a 2.7% real GDP growth in the 1Q of the 2010 Decade is not encouraging, especially since it is off of an extremely low, economic crater base.
Here's the US unemployment rate at the end of each of the past six decades, along with the change from the beginning of the decade.
...1950s...5.3% at Dec 31, 1959, down 1.3%
...1960s...3.5% at Dec 31, 1969, down 1.8%
...1970s...6.0% at Dec 31, 1979, up 2.5%
...1980s...5.4% at Dec 31, 1989, down 0.6%
...1990s...4.0% at Dec 31, 1999, down 1.4%
..2000s..10.0% at Dec 31, 2009, up 6.0%
With the updated US Bureau of Labor Statistics, the US unemployment rate recently topped out in October 2009 at 10.1%.
Of those Unemployed, here are the median weeks they were unemployed at the end of each of the past three decades, and also at the most recent June 2010:
...4.9 Weeks at Dec 31, 1989
...5.8 Weeks at Dec 31, 1999
..20.5 Weeks at Dec 31, 2009
..25.5 Weeks at Jun 30, 2010
Also of those Unemployed, here are the percentage of them who have been unemployed for 27 weeks or more at the end of each of the past three decades, and also at the most recent June 2010:
...9.6% at Dec 31, 1989
..12.1% at Dec 31, 1999
..39.8% at Dec 31, 2009
..45.5% at Jun 30, 2010
And here's US citizens considered Employed, but Working Part-time for Economic Reasons, at the end of each of the last three decades:
...4.8 mil at Dec 31, 1989
...3.3 mil at Dec 31, 1999, down 1.5 mil, or down 32%
...9.2 mil at Dec 31, 2009, up 5.9 mil, or up 179%
From reviewing all of the above percentages and numbers, the thing that sticks out to me here is....what's with the Bill Clinton employment magic? He obviously was doing something right on the employment front. Man, I'd consider bringing both Robert Reich and Bill Clinton back to offer some insights on how to jump-start private sector job creation.
The number of US Citizens Not in the Civilian Labor Force increased as follows in each of the past three decades:
1980s Decade...up 2.6 mil
1990s Decade...up 6.0 mil
2000s Decade...up 15.2 mil, to 83.9 mil
My read on the above trend here is that the 2000s Lost Decade frankly drove many people to the sidelines....just giving up on finding a job.
In like manner, the portion of US Citizens Not in the Civilian Labor Force but Wanting a Job, increased by 1.9 mil in the 2000s Decade to 6.3 mil, up an incredible 44% in the 2000s Decade.
When you study the US Bureau of Labor Statistics for the past thirty years, the US must add an average of 130,000 jobs each month just to handle the Civilian Labor Force growth. This 130,000 jobs equates to 15.6 mil for a decade.
Here’s net US jobs added (lost) in each decade, from the US Bureau of Labor Statistics:
…1950s Decade…..10.6 mil added (+24%)
…1960s Decade…..17.1 mil added (+31%)
…1970s Decade…..19.4 mil added (+27%)
…1980s Decade…..18.1 mil added (+20%)
…1990s Decade…..21.7 mil added (+20%)
…2000s Decade…..944,000 LOST (-1%)
And even more to the point, on net US jobs added (lost) just in the private sector in each decade:
…1950s Decade…..8.2 mil added (+22%)
…1960s Decade….13.0 mil added (+19%)
…1970s Decade….15.7 mil added (+27%)
…1980s Decade….16.2 mil added (+27%)
…1990s Decade….19.3 mil added (+21%)
…2000s Decade…2,885,000 LOST (-3%)
Yeah, to get out of this economic hole, the focus must be on substantially growing private sector jobs, which cratered in the 2000s Lost Decade. The US Government can't just sit by and continue to enact modest job creation initiatives. We clearly need very bold action on job creation.
And just what type of private sector US jobs have disappeared?....clearly Manufacturing Jobs top the list, due to the massive offshoring of these jobs by US Multinational Corps for lower tax and lower wage reasons in the 2000s Lost Decade. In fact, in the 2000s decade, the number of US manufacturing jobs declined by 5.7 mil, down a massive 33% from the beginning of the decade. Further, the number of US manufacturing jobs declined in each year of the 2000s decade. For a bit longer term perspective, in the past thirty years, the number of US manufacturing jobs has declined by 40%. And what happened to the number of all US private sector non-manufacturing jobs? They increased by 73% over the past thirty years. Clearly, the focus here must be on restoring the US manufacturing sector and the US middle class.
Also, I do find it interesting that in the 2000s Lost Decade, there were net government jobs added of 1,941,000, while there were net private sector jobs lost of 2,885,000. Also, in the past sixty years, the total net private sector jobs added increased by 185%, whereas the total net governmental jobs added increased by a much more substantial 278%. I think the country would be much better off economically, if the percentage growth in private sector jobs added increased much more markedly than those in the government sector, instead of the other way around.
Just focusing on US federal government jobs, in reducing the level of US Debt in the medium term and in the long term, I think a very fertile area lies in substantially reducing the present US federal government job mix. From my unfortunate first-hand experience, I am not so hot on the effectiveness of many US federal government employees. I saw first hand in a menacing IRS audit how US federal government employees target a taxpayer as prey, and with their continuing unbridled harassing, incompetence, dishonesty and substandard work ethic, can severely stifle small businesses for many years. It seems to me that whole-scale upgrading, changing the despicable culture, and training existing US federal government employees is much more needed than just adding more US federal government employees.
Also, I have observed in many instances where this federal government overkill has substantially slowed down businesses in their attempt to effectively deal with the ARRA Economic Stimulus Plan. I do think the Republicans are precisely correct when they assert that over-regulation is playing a major role in prolonging the jobless recovery. The country does need much more regulation due to the disastrous financial aftershocks from the laissez-faire 2000s Lost Decade. But clearly the Obama Administration has taken this initiative much too far....the necessary increased regulation must be wisely measured on a cost benefit basis, with particular focus on the impact on businesses, especially on smaller businesses, and on private sector job creation.
Here’s US Public Debt Outstanding and changes in each decade:
..All Years Through Dec 31, 1959….$..291 bil added
..1960s Decade………………………......$....78 bil added
..1970s Decade………………………......$..476 bil added
..1980s Decade………………………......$2,108 bil added
..1990s Decade………………………......$2,823 bil added
..2000s Decade…………………$6,535 bil added (53% of total)
=..All Years Through Dec 31, 2009…$12,311 bil
Clearly, the fiscal hawks are correct when they say the country must focus like a laser on reducing the US debt. Since the country also must spur job creation and GDP growth, what is needed are wise and prudent government initiatives that both spur economic growth and sustainable private sector job creation in the near term, and simultaneously reduce the US Deficit in the medium term and in the long term. Most pundits say this is impossible. I say it’s not….you just need to be financially savvy and a little bit creative.
Let me make the case for why I think large US multinational corps should help fund US job creation and US government debt reduction by studying in depth the annual reports and related footnotes in SEC filings of more than a decade of the 30 Dow Industrial companies.
In the 2000s Lost Decade, the present 30 Dow Industrial companies had Total Consolidated Worldwide Pretax Income from Continuing Operations of more than $2.9 trillion. Here is a breakdown of the companies in the top half of this $2.9 trillion:
…..#1.....Exxon Mobil…$458 bil
…..#2..Chevron………………$206 bil
…..#3..GE……………………...$198 bil
…..#4..Walmart………………$163 bil
…..#5..Microsoft……………..$163 bil
…..#6..Bank of America……$158 bil
…..#7..AT&T………………....$125 bil
…..#8..JNJ…………………….$120 bil
…..#9..IBM…………………....$116 bil
…..#10..Procter&Gamble…$106 bil
…..#11..JP Morgan Chase…$103 bil
…..#12..Verizon……………....$ 98 bil
…..#13..Pfizer………………....$ 98 bil
…..#14..Merck………………...$ 89 bil
…..#15..Intel…………………..$ 82 bil
To show the power at the very top of this top 15 list, #1 Exxon Mobil’s profit here is 16% of the total of the 30, and in combination with the profit of #2 Chevron, Big Oil makes up 23% of the total 30. Clearly, Big Oil is too dominant. I think the country was wrong in allowing Big Oil to merge in the late 1990s and I also think it would be wise to now break up Big Oil. When oil companies are this dominant, they have too much government influence and the rest of businesses, individuals, and all of Government suffer severely. Big Oil, with its substantial cost pressure on all of US businesses and US individuals, was a major player in creating the 2000s Lost Decade. And while they were severely damaging the US economy in the 2000s Lost Decade, Big Oil also were generating windfall profits. In the most recent three years (2007 through 2009), Exxon Mobil and Chevron combined generated Pretax Profits of $283.6 bil, up a massive 429% from their combined profits of $53.6 bil of a decade ago (1997 through 1999). And the US Government awarded all of Big Oil many lucrative tax loopholes, which turned these pretax windfall profits into after-tax obscene, windfall profits.
The bottom 15 of the $2.9 trillion includes some incredibly dominant, stellar companies such as Coca Cola, Home Depot, Cisco Systems, Hewlett Packard, Disney and McDonalds. However, the top 5 of the $2.9 trillion generated total profits which exceeded by $95 billion the profits of the entire bottom 15.
And it’s not just the two Big Oil companies that played a major role in creating the 2000s Lost Decade.
More than any other company, #3 GE benefited incredibly by taking advantage of both lower income tax rates in foreign countries as well as US tax breaks. In fact, for the most recent four years (2006 through 2009), GE generated $82.2 bil of Consolidated Worldwide Pretax Income. And how much did GE pay in total to the US government currently in federal income taxes related to its US current federal income tax provision for those same four years? Nothing, instead GE got current US federal income tax refunds of $1.5 bil in total for those same four years.. And there are both Democrats and Republicans in the US Congress who support GE in obtaining this incredible largesse. I have to ask....How can the US Government be serious about US Deficit Reduction when it permits something like this to happen? And how in the world can some US Senators reject Unemployment Insurance emergency spending for the Unemployed because it increases the US Deficit, when they let a massively profitable Big Corp like GE pay nothing in federal income taxes for four years, which clearly increases the US Deficit from what in all fairness it should be.
#4 Walmart played a role in US job losses in the 2000s Lost Decade by sourcing much of its merchandise from China. And with its economic power, Walmart put many small businesses out of business.
Like GE, #5 Microsoft also accrued major economic benefits from taking advantage of the lower taxed environment in foreign jurisdictions.
Below is the annual trend in Total Consolidated Worldwide Pretax Income for the 30 Dow Industrial companies, along with the percentage change from the preceding year:
…1997…..$153 bil
…1998…..$156 bil, up 2%
…1999…..$189 bil, up 21%
…2000…..$231 bil, up 22%
…2001…..$184 bil, down 20%
…2002…..$185 bil, up 1%
…2003…..$228 bil, up 23%
…2004…..$274 bil, up 20%
…2005.....$321 bil, up 17%
…2006…..$384 bil, up 20%
…2007…..$404 bil, up 5%
…2008…..$390 bil, down 4%
…2009…..$305 bil, down 22%
In the most recent financially depressed year of 2009, Total Consolidated Worldwide Pretax Income for these 30 Dow Industrials was $305 bil, up 62% from the 1999 comparable item of a decade ago of $189 bil. However, such profit numbers on an after tax basis increased by a much higher 78%. And exclusive of Big Oil, the rest of the Dow Industrials had Total Consolidated Worldwide Pretax Income for 2009 which increased 42% from a decade ago, whereas the comparable after-tax profit numbers increased by a much higher 67%.
What’s in the world is going on with the much more favorable after tax profit growth percentages? It’s all about income shifting from the higher tax rate US to lower tax rate International jurisdictions. For all Dow Industrial companies other than the two Big Oil companies, the Total Consolidated Book Effective Tax Rate for 2009 was only 22.1%, a massive 11.4% below such comparable tax rate of a decade ago, in 1999, of 33.5%.
Here is an individual company breakdown of the Consolidated Book Effective Tax Rate Reductions higher than 5% between the decade ago 1999 to the most recent 2009:
……………………………………………………..............Lower Consolidated
………………………………………………………............Effective Tax Rate
………………………………….....2009……..1999…....From a Decade Ago
…..Caterpillar………………..(47.5)%.....32.0%..........79.5%
…..Bank of America……....(43.9)%......35.5%..........79.4%
…..GE………………………......(10.5)%.....23.0%..........33.5%
…..Verizon……………………..10.5%......37.0%..........26.5%
…..Merck……………………....14.8%.......31.7%..........16.9%
…..DuPont……………………..19.0%.......35.8%..........16.8%
…..Cisco Systems…………….20.3%.......36.8%..........16.5%
…..Coca Cola………………….22.8%.......36.3%...........13.5%
…..Kraft Foods……………….29.4%.......42.3%...........13.1%
…..Intel………………………...23.4%.......34.9%...........11.5%
…..Procter and Gamble…..26.3%……..35.5%............9.2%
…..IBM………………………....26.0%........34.4%............8.4%
…..Pfizer…………………….....20.3%........28.3%............8.0%
…..Microsoft…………………..26.5%........34.5%............8.0%
…..Boeing……………………....22.9%........30.5%............7.4%
…..Hewlett Packard………….18.6%........26.0%............7.4%
…..JP Morgan Chase…………27.5%........34.7%………...7.2%
…..AT&T……………………......32.4%.........39.4%............7.0%
…..Disney……………………....36.2%.........42.2%...........6.0%
…..3M……………………….......30.0%........35.8%............5.8%
…..McDonald’s………………..26.8%.........32.5%...........5.7%
…..JNJ………………………......22.1%.........27.6%...........5.4%
All Dow except 2 Big Oil.22.1%.......33.5%.........11.4%
And to illustrate this isn’t just a one year blip, for the most recent three years (2007-9), the comparable effective tax rate was 24.5%, which was 9.1% lower than that of the comparable three years of a decade ago (1997-9). Here is an individual company breakdown of the Total Consolidated Book Effective Tax Rate Reductions above 5% from the three years of a decade ago to the most recent three years:
……………………………………………………................Lower Consolidated
……………………………………………………….............Effective Tax Rate
……………………………….........2007-9…..1997-9.From a Decade Ago
…..Bank of America…………...15.0%......36.4%............21.4%
…..Cisco Systems……………....21.5%......40.2%...........18.7%
…..Verizon…………………….....20.3%......38.1%............17.8%
…..GE………………………............7.1%.......24.2%............17.1%
…..Merck…………………….......15.2%.......32.1%............16.9%
…..DuPont…………………….....18.6%.......34.1%............15.5%
…..Kraft Foods………………....29.6%.......43.2%............13.6%
…..Pfizer……………………........16.3%.......27.5%............11.2%
…..Caterpillar………………......21.6%.......31.9%............10.3%
…..Coca Cola…………………....22.8%........33.0%............10.2%
…..JP Morgan Chase…………..26.2%........35.5%………....9.3%
…..Microsoft………………….....27.3%........35.8%.............8.5%
…..Intel……………………….......26.2%........34.5%.............8.3%
…..Procter and Gamble………26.7%……..34.8%.............8.1%
…..Hewlett Packard…………...20.0%........27.6%............7.6%
…..JNJ………………………........22.1%.........27.8%.............5.7%
…..IBM……………………….......26.7%.........32.2%.............5.5%
All Dow except 2 Big Oil.......24.5%.........33.6%.............9.1%
Whoa, it looks like the Corporate International Tax Staffs are key players in Big US Multinational Corps’ after-tax profit improvements in the past decade.
So just how was this accomplished? It’s all about income shifting from the higher taxed US to the mostly lower taxed Intl jurisdictions. Here is the US Pretax Income Mix as a percentage of Worldwide Pretax Income in total for all of the 30 Dow Industrial companies for each year in the past decade:
…..1999…..71.1%
…..2000…..67.4%
…..2001…..61.6%
…..2002…..61.4%
…..2003…..61.6%
…..2004…..54.7%
…..2005…..58.6%
…..2006…..54.1%
…..2007…..50.6%
…..2008…..41.0%
…..2009….39.2%
The amount of the country’s Debt grows from the lower corporate income tax receipts when a multinational corp shifts income from the US to Intl. Here are some of the larger individual company US income mix percentage reductions in the past decade from 1999 to 2009:
……………………….......US Pretax Income Mix
…………………….....2009…...1999…...Decrease
Bank of America…(158)%...100%.......258%
Caterpillar………...(114)%......74%.......188%
GE…………………........(5)%......81%.........86%
Pfizer………………....(34)%......45%.........79%
Microsoft……………..28%.......90%.........62%
Cisco Systems……….21%........65%........44%
Merck……………….....35%........65%........30%
JP Morgan Chase……39%........68%........29%
Chevron……………......7%........34%........27%
Exxon Mobil…………..7%........29%.........22%
3M…………………......50%........70%.........20%
Dupont……………….....8%........27%.........19%
Kraft Foods…………..54%........65%.........11%
JNJ………………….....45%........56%.........11%
All 30 Dow Cos…39%........71%.........32%
And then here’s an individual company breakdown of the US Pretax Income reductions above $1 bil in the past decade:
…………………………....US Pretax Income……………
…………………………...2009……….1999……..Reduction
Bank of America…$(6.9) bil…..$12.1 bil…..$19.1 bil
GE……………………...$( .5) bil…..$11.3 bil…..$11.8 bil
Pfizer…………………$(3.6) bil…...$ 3.1 bil…..$ 6.7 bil
Microsoft……………$ 5.5 bil…...$10.6 bil…..$ 5.1 bil
Intel……………………$ 3.2 bil…...$ 7.2 bil…..$ 4.0 bil
Verizon………………$ 10.7 bil….$13.2 bil…..$ 2.5 bil
Caterpillar……………$( .6) bil…...$ 1.1 bil…..$ 1.7 bil
Boeing………………...$ 1.6 bil…...$ 3.3 bil…..$ 1.7 bil
JP Morgan Chase…$ 6.3 bil…...$ 7.8 bil…..$ 1.5 bil
Alcoa………………….$( .5) bil…....$ .6 bil…...$ 1.1 bil
Consolidated Worldwide Pretax Income for 2009 of these 30 Dow companies of $305 bil is 62% higher than that of a decade ago in 1999 of $189 bil. In looking at the global location of this consolidated worldwide profit, Intl Pretax Income for 2009 of these 30 Dow companies of $185 bil is 236% higher than that of a decade ago in 1999 of $55 bil. And then, for the same time period, US Pretax Income for 2009 is only $120 bil, or down 11% from that of a decade ago in 1999 of $134 bil. Thus, what you have here is a major income shift and the huge losers are the US Government, the State Governments, both in substantially lower tax receipts, and the US middle class from the much higher US employment/underemployment rates and the much lower real wages resulting from US jobs being massively offshored in the 2000s Lost Decade.
In 2009, US Pretax Income of these 30 Dow companies totaled $120 bil, which was 39.2% of Worldwide Income. If the 71.1% US Mix of a decade ago had not changed, US Pretax Income for 2009 would have been $97 bil higher. In like manner, US Pretax Income for these same companies in 2008 totaled $160 bil, which was 41.0% of Worldwide Income. If the 71.1% US Mix of 1999 had not changed, US Pretax Income for 2008 would have been $117 bil higher. For the entire 2000s decade, if the 1999 US Mix of 71.1% prevailed, total US Pretax income for these 30 Dow companies would have been $513 bil higher. When you extrapolate this over the entire universe of US multinational corps, you should get several trillions of dollars of what would have been higher US Pretax Income for the 2000s Lost Decade.….and what we missed in the 2000s Lost Decade were substantially higher US corporate income tax receipts and also substantially higher US individual income tax and payroll tax receipts from the offshoring of US jobs.
Companies are required to disclose in their income tax footnotes the amounts of their foreign tax breaks they received as compared with the 35% US federal statutory rate. For the 20 Dow companies that disclosed them, here are the total foreign tax breaks by year, along with the percentage increase over the preceding year:
1999…..$4.2 bil, +39%
2000…..$5.1 bil, +24%
2001…..$5.8 bil, +13%
2002…..$8.4 bil, +44%
2003…..$9.4 bil, +12%
2004…$12.4 bil, +32%
2005…$13.7 bil, +10%
2006…$17.0 bil, +24%
2007…$18.8 bil, +11%
2008…$23.5 bil, +25%
2009…$20.2 bil
Decade Total…$134 bil
Clearly, these huge foreign tax breaks from Intl income shifts didn’t start picking up steam until the start of the 2000s decade, as can be seen by how the 1999 total foreign tax breaks for these 20 Dow companies of only $4.2 bil are dwarfed by such foreign tax break totals for 2008 of $23.5 bil and for 2009 of $20.2 bil. When you think about the above explosive annual growth trend here, where the foreign tax breaks of these 20 Dow companies in 2008 and 2009 are 4.9 times and 5.7 times the foreign breaks of a decade ago in 1999, and then extrapolate these 20 Dow companies over the universe of all US multinational corps, if the same pattern holds, the total foreign tax breaks for the 2010s decade should be substantially north of $1 trillion.
And then here is an individual company breakdown of the total amount of foreign tax breaks received by these 20 Dow companies over the 2000 decade:
…..GE…………………....$29.3 bil
…..Pfizer………………..$16.7 bil
…..JNJ…………………...$12.6 bil
…..Merck………………....$ 9.7 bil
…..Hewlett Packard……$ 9.0 bil
…..IBM………………….....$ 7.5 bil
…..Cisco Systems……….$ 6.8 bil
…..Coca Cola……………..$ 6.5 bil
…..Microsoft……….........$ 6.4 bil
…..Procter&Gamble.......$ 4.8 bil
…..Intel……………..........$ 3.4 bil
…..United Technologies$ 2.9 bil
…..Dupont………………...$ 2.7 bil
…..JP Morgan Chase……$ 2.7 bil
…..Walmart……………....$ 2.5 bil
…..McDonald’s…………..$ 2.1 bil
…..Bank of America…….$ 2.1 bil
…..American Express….$ 1.4 bil
…..Alcoa……………….....$ 1.3 bil
…..3M…………………......$ 1.2 bil
And it’s not just a Dow company phenomenon. From a very quick review, I found 53 non-Dow companies with more than $90 mil of foreign tax breaks reported in just 2009. Here are the total foreign tax breaks of these 53 non-Dow companies for the past three years:
…..2007…..$14.5 bil
…..2008…..$17.3 bil, up 19% over 2007
…..2009…..$19.2 bil, up 11% over 2008
And these foreign tax breaks for 2009 reduced the consolidated worldwide effective tax rate of these 53 companies in total by an amazing 13.5%.....thus, the clear incentive to shift US income and US jobs overseas.
Here is an individual company breakdown of the foreign tax breaks of these 53 non-Dow companies for just the most recent year of 2009:
...Citigroup............ $2.0 bil
...Google................ $1.3 bil
...Abbott Labs......... $1.2 bil
...Amgen................. $1.0 bil
...Philip Morris........ $0.8 bil
...Eli Lilly............... $0.7 bil
...Goldman Sachs..... $0.7 bil
...Oracle................. $0.7 bil
...Medtronic............ $0.7 bil
...Apple.................. $0.6 bil
...PepsiCo................ $0.6 bil
...Schlumberger........ $0.6 bil
...Bristol Myers Squibb $0.6 bil
...Baxter................. $0.5 bil
...eBay................... $0.5 bil
...Qualcomm............ $0.4 bil
...Gilead Sciences..... $0.4 bil
...Covidien.............. $0.3 bil
...Nike.................... $0.3 bil
...Boston Scientific... $0.3 bil
...EMC..................... $0.2 bil
...Archer Daniels Midland $0.2 bil
...Stryker................ $0.2 bil
...Morgan Stanley..... $0.2 bil
...Amazon................ $0.2 bil
...First Solar............ $0.2 bil
...Honeywell............. $0.2 bil
...Emerson Electric.... $0.2 bil
...Danaher................. $0.2 bil
...Corning.................. $0.2 bil
...Bunge.................... $0.2 bil
...Eaton.................... $0.2 bil
...Celgene.................. $0.2 bil
...Yum Brands............ $0.2 bil
...Dell........................ $0.2 bil
...Accenture............... $0.2 bil
..Thermo Fisher Scientific$0.1 bil
...McKesson................ $0.1 bil
...Marvell Technology.. $0.1 bil
...Cognizant Technology $0.1 bil
...Praxair..................... $0.1 bil
...Tyco Electronics....... $0.1 bil
...Ingersoll-Rand......... $0.1 bil
...Coca Cola Enterprises $0.1 bil
...Monsanto................ $0.1 bil
...Becton Dickinson...... $0.1 bil
...Forest Labs.............. $0.1 bil
...NetApp.................... $0.1 bil
...Texas Instruments.... $0.1 bil
...Zimmer Holdings...... $0.1 bil
...Cardinal Health......... $0.1 bil
...Franklin Resources.... $0.1 bil
...Adobe........................ $0.1 bil
Total all 53 non-Dow Cos $19.2 bil
Now let me turn my attention to the US Pretax Income and the resultant US current federal income taxes paid or payable in each year by these 30 Dow Industrial companies, as reported in their income tax footnotes in their annual reports .
The US Current Effective Federal Income Tax Rate is defined as the US Current Federal Income Tax Paid or Payable in each year divided by the US Pretax Income in the same year. Below here is such US Current Effective Tax Rate in total for all 30 Dow companies, except for Pfizer in 2009, since it had a large foreign earnings repatriation related to its acquisition of Wyeth.
…..2000…..28.5%
…..2001…..27.1%
…..2002…18.2%
…..2003….19.7%
…..2004…..28.4%
…..2005…..28.8%
…..2006…..28.8%
…..2007…..29.0%
…..2008…25.7%
…..2009…18.7%
As you can see, all of these above effective federal income tax rates are significantly below the US federal statutory tax rate of 35%. Also, the major reason for the lower US current effective tax rates above for 2002 and 2003 was probably due to the first year 30% bonus tax depreciation enacted after 9/ll. Likewise, the main reason for the lower US current effective tax rates in 2008 and 2009 was probably due to the first year 50% bonus tax depreciation.
But there’s a clear problem here with the first year bonus tax depreciation. Here is the net US private sector jobs added (lost) in those years:
…..2002……..773,000 jobs lost
…..2003……..129,000 jobs added
…..2008…..3,807,000 jobs lost
…..2009…..4,660,000 jobs lost
The morale of the story here is the first year bonus tax depreciation doesn’t create jobs. In fact, it does just the opposite, since technological investments are made to make companies, especially large corps, more productive and thus they end up reducing jobs. And it also reduces the US Government coffers substantially in the short term.
Big Corps push for first year bonus tax depreciation and their US Congressional shills, on both sides of the aisle, cave in to them, despite the very harmful effects to the country. I wouldn’t implement bonus tax depreciation, unless a company gets it only if it is also accompanied by US full-time payroll count increases and retention requirements.
I think it would be helpful to lay out the US current effective tax rate by company for the most recent two years (2008 and 2009 combined) which are either unusually low vs. the 35% US federal statutory tax rate or which are much lower than such effective tax rate for the preceding four years (2004 through 2007 combined).
……………………….........US Current Effective Tax Rate……
………………………….....2008-9…....2004-7….Reduction
…..GE…………………(74.5)%.........8.5%........82.9%
…..Boeing…………….(1.6)%...........5.5%..........7.1%
…..Verizon……………(1.0)%........22.2%.......23.2%
…..DuPont………………3.2%.........22.4%........19.2%
…..IBM……………………4.5%...........5.7%..........1.2%
…..Hewlett Packard…9.4%..........14.8%..........5.4%
…..Merck………………...9.5%........101.5%........92.0%
…..AT&T……………….10.2%..........27.9%.........17.7%
…..UTX……………………..14.9%..........17.2%...........2.3%
…..Caterpillar…………….15.4%.........32.8%..........17.4%
…..Procter & Gamble….15.4%..........27.3%.........12.1%
…..Exxon Mobil…………17.0%..........30.2%.........13.2%
…..3M……………………....21.1%.........34.6%..........13.5%
…..JNJ……………………...34.6%.........44.8%..........10.2%
Clearly, from a review of the above US current federal effective tax rates, existing tax law permits many companies to pay incredibly low federal corporate income taxes. I think an in depth review of the recent Schedule M-3’s filed by these companies should easily trigger why these above current US effective tax rates are so low and, coupled with some creativity and financial savvy, what tax law changes should be enacted to have all companies pay a fairer amount of US corporate income taxes.
But I have to point out that for some members in the US Senate to now assert that they don't want the government to pay clearly emergency Unemployment Compensation Benefits to the Unemployed because it increases the US deficit, when these same US Senators were also the enablers of Multinational Corp offshoring, which both substantially increased the US Deficit due to massively lower US tax receipts, and simultaneously, created much of the reason so many are now unemployed, at no fault of their own....is flat out incongruous and frankly mean-spirited. And then for these same US Senators to pile on by permitting Big Corps' US income that is not offshored to be taxed at such incredibly low federal income effective tax rates, and in some cases, even negative federal effective income tax rates....is frankly disgusting and US citizens should be outraged.
The above analysis clearly shows that many of these Big US Multinational Corps have gotten substantial economic tax benefits in the 2000s Lost Decade from shifting a substantial amount of income, and the related US jobs, overseas and also from the ability to minimize their current corporate income taxes paid to the US government. But on the downside, as a result of these actions, the US unemployment and underemployment rates have ramped up dramatically, the US Federal Deficit has ballooned, and State Government coffers have plummeted. Thus, I think it is only fair that Big US Multinational Corps now pony in money to help pay for the desperately needed US private sector job creation and for US Debt reduction in the medium term and in the long term.
To better understand how Big Corps think, their overriding goal is to increase reported GAAP earnings. Thus, the focus in deriving the best strategy to have Big Corps fund US private sector job creation and US deficit reduction is to find ways where the Big Corp impact on their reported GAAP earnings is softened.
For Big Corps to make partial estimated deposits on their outstanding tax audit liabilities already recorded on their books is clearly both fair and a funding winner. There would be no earnings charge to the Big Corps for this funding initiative because it has already been recorded on their books. But yet the positive CB0 scoring to the US Government over the next ten years is just massive.
A second wise funding gem is to use measures that end up being Big Corp temporary tax differences (i.e. the total tax deductions don’t change, they just get moved to later years). These temporary tax difference funding approaches don’t impact Corp reported earnings. I think the best approach here is to time the tax deduction reduction so that it starts after the horrible US structural recession has ceased (perhaps after say three years) and then to move the offsetting higher tax deduction to outside the ten-year CBO scoring window. There are hundreds of funding opportunities that could incorporate this temporary tax difference strategy. Here are eight of them, most of which could yield positive ten-year CBO scoring that is very substantial.
First, the timing of when certain marketing, selling and advertising costs are tax deductible could be lengthened to either one year, eighteen months, two years or perhaps some even longer term. And this life lengthening shouldn’t start until after the US structural recession is over, say start scaling it in starting in the fourth year. From a fairness standpoint, many of these marketing, selling and advertising costs are in essence Investments, which benefit the corporation for many, many years.
Second, the IRS has devised both Class Life systems and Property systems for depreciable property. The strategy here is to not change the total tax depreciation but to instead move some of these tax deductions to outside the ten-year US Government CBO scoring period.
I would focus first on the Seven-Year Property category, which includes property with a Class Life of 10 to 16 years. By depreciating this property for tax purposes as Seven-Year Property, the present tax depreciation deductions occur over a period of eight years. If instead, this tax deduction was lengthened to say the midpoint of this Class Life, or 13 years, the US Government’s CBO scoring will be substantially positive. I would make this change now for just the property additions of just the next two years, since those would be the only ones where you would get positive ten-year CBO scoring for now. And then down the road in several years, you could do this again…it ends up being a ten-year positive CBO scoring funding strategy that keeps giving. I would even consider making it eventually an annual funding vehicle as a key part of the annual tax extenders. And from a fairness standpoint, the tax depreciation for this Class Life Property is already receiving the very attractive tax benefit of an accelerated depreciation method. Further, the IRS has determined that this property’s Class Life is from 10 to 16 years, not the much shorter 7 or 8 years.
Also, I would follow a similar scheme on Ten-Year Property, which has a Class Life of 16 to 20 years, Fifteen-Year Property, which has a Class Life of 20 to 25 years, and some of the Twenty-Year Property, which has a Class Life of 25 years or more.
Third, Section 197 Intangible Assets include a multitude of items and are now tax deductible over a 15 year period. In all fairness, many of these intangible assets have economic benefits to the business far beyond 15 years. I would extend the tax life here to 20, 25 or even 30 years.
Fourth, many insurance companies, including health insurance companies, are able to deduct each year for federal income tax purposes some of their estimated insurance claim liabilities, even though they are not fixed in amount. I would delay the tax deductibility here until the years these claims become fixed in amount, which is the general tax rule. In all fairness, these insurance companies are presently getting the benefit of a tax loophole here, not enjoyed by many other industries. And there will be no hit to insurance companies' earnings for this tax change.
Fifth, many insurance companies, including health insurance companies, are able to defer each year for federal income tax purposes the taxability of some of their unearned premiums received in cash. I would make these premiums taxable when the cash is received, consistent with the general tax rule on when revenues are taxable. It seems only fair to close this tax loophole, not enjoyed by many other industries. And insurance companies would not get a hit to their earnings for this tax change.
Sixth, with all of the horrible financial havoc swaps and other financial derivatives have played on the US and world economies, I think the last thing we want to do is to give tax incentives for any financial derivative. If anything, we should give tax disincentives for them. The financial firm arranging the swaps and other financial derivatives incurs a lot of internal costs in designing, implementing and marketing the swaps and other derivative transactions, and also could have lucrative compensation programs for various executives and employees in which compensation is based on measures like fees or positive interest spreads earned in swap or other financial derivative transactions. Thus, I think all the substantial costs incurred by the financial firm to generate the fees received by the financial firm, including all compensation driven by the level of swap fees and other financial derivative fees, should not be tax deductible in the year these costs are incurred. Instead, in all fairness, they should all be deferred for tax purposes and spread over the life of the related swap and other financial derivative transactions.
And seventh, for all large financial firms, there are substantial internal costs incurred which are necessary to acquire each of their many financial assets and financial liabilities. These would include employee salaries, commissions, incentive compensation, employee benefit costs, travel and many other costs. And there are also a lot of external costs to acquire these assets and liabilities…examples would be items like external legal costs and CPA firm services for accounting and tax advice. My understanding is that many of these costs are presently tax deducted when they are incurred. I would instead enact tax legislation that would require all of these internal and external costs to be initially allocated to the related asset or as a reduction to the related liability, and then to have the timing of the tax deduction of these allocated assets or reduction to liabilities follow the movement of the related assets and liabilities. This seems to me to be a very fair approach in timing the tax deduction.
The large financial firms that I would include in my sixth and seventh proposals above would include US firms like JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, GE Capital, AIG and others. In addition, I would include large foreign firms with significant US operations like Barclays, UBS, Credit Suisse, ING, Deutsche Bank, and others.
I think my sixth and seventh proposals above related to large financial firms (i.e. deferring financial derivative-related costs and also deferring other internal and external costs related to many financial assets and financial liabilities, and instead spreading both of these tax deductions over the life of the related financial derivatives, financial assets and financial liabilities) seems to me to be a much better way to have the large financial firms pay for all of TARP ONE and the remaining shortfall of TARP TWO than to impose a substantial annual stand alone bank tax. When I do the estimated mathematics here, the positive CBO scoring to the US Government over the next ten years of these two proposals could well cover both of these TARP shortfalls. And then the positive CBO scoring to the US Government after the first ten years just keeps growing and growing annually by leaps and bounds. Also, both my sixth and seventh above proposals do not impact Corp reported earnings, since they are treated as temporary tax differences, whereas a stand alone bank tax would reduce Corp reported earnings.
Eighth, the LIFO Inventory tax loophole should be closed for all companies above a certain size in all industries. There's no earnings hit here. Nearly all companies now using LIFO would switch their inventory accounting. And as an added benefit, the switch out of the unrealistic LIFO accounting will result in much stronger financial statements of these companies....much higher cumulative earnings and higher equity. I wouldn't have corps start paying for the federal income taxes resulting from this switch out of LIFO until after the country is completely out of this horrible structural recession...thus start scaling it in after say three years.
But also, in all fairness, we need some US Big Corp funding sources that act as disincentives to offshore US jobs, the financial aftershocks of which are one of the main reasons for the double economic disaster we now face: low unemployment/underemployment rates and a nosebleed level of US Debt.
Well, the unremitted foreign earnings of more than 1,000 US Multinational Corps are estimated to now be a massive $1.6 trillion and continue to grow like weeds. I think the country should take advantage of this massive funding vehicle in very wise, measured ways.
One measured way to soften the Big Corp negative earnings impact of this funding is for the US Government to keenly use foreign earnings repatriation tax rule tweaks to incentivize US Multinational Corps to fund US directly-related job creating investments, US R&D expenditures, and US directly-related job-creating capital expenditures. The potential favorable CBO scoring here is just massive.
Also, to address the financially devastating offshoring problem, for 2010 and going forward, I think a multinational corp above a certain size should pay an additional US income tax for years in which its US Pretax Income Mix (i.e. as a percentage of its Worldwide Pretax Income) is clearly unreasonably low in comparison with its US Revenue Mix. To soften the blow on the hit to earnings of multinational corps here, a multinational corp should have the option of paying for this annual tax by a like amount of foreign earnings repatriation tax related to its foreign earnings repatriated, which should be given an incentivized Dividend Received Deduction. The favorable CBO scoring to the US Government on just this proposal could be substantial.
Further, as another measure to address the devastating offshoring problem, for 2010 and going forward, I think a US multinational corp above a certain size, manufacturing products in a low wage or low tax haven offshore and then subsequently selling this product back to a US customer, should pay a US tax computed as a percentage of the sales price to the US customer, with a portion of this tax being transferred to US States in some reasonable manner. To soften the blow on the hit to earnings of multinational corps here, a multinational corp should have the option of paying for this annual tax by a like amount of foreign earnings repatriation tax related to its foreign earnings repatriated, which should be given an incentivized Dividend Received Deduction. Depending upon what percentage of sales is chosen, the favorable CBO scoring to the US Government on just this proposal could be off the charts.
And then as a final initiative to disincentivize offshoring of US jobs, but this initiative doesn't use a foreign earnings repatriation funding vehicle, I think all separation costs and all other costs, resulting from a plant closing in which a US plant is moved offshore, should not be tax deductible by the corporation moving its plant offshore. Also, the US manufacturer moving its plant overseas should get a reasonably computed and fair tax recapture of its Domestic Production Activities Tax Deduction for all past years in which it received this lucrative tax deduction (this tax deduction started in 2005). And further, in all subsequent years, the Domestic Production Activities Tax Deduction percentage for companies that have moved US jobs overseas would be reduced to below the present 100 percent. To derive this lower than 100% percentage, for the numerator, I would subtract the number of cumulative past jobs lost when they were moved overseas from the number of all US employees; and the denominator would be the number of all US employees. And the money raised from the tax recapture of the past Domestic Production Activities Tax Deduction and from the disallowance of separation and related costs should be used to provide direct tax and other incentives for new manufacturers and other companies to invest in the city or area where the plant was closed and moved overseas.
Rapping this up, for the past nearly three years, the country has faced a horrible double economic crisis with the horrendous unemployment and underemployment rates and with the massive US Debt. And these two economic disasters feed on each other…high unemployment continues to increase the Federal Deficit and the high and growing US Debt load has prevented the US government from taking bold action on real, private sector job creation.
Frankly, I think that even though they are very well intentioned, the economic team of the Obama Administration has continued to severely overestimate the private sector job creation in the ARRA Economic Stimulus Plan and to severely underestimate the magnitude of the country's structural recession that we still face.
I also think that members on both sides of the aisle in the US Congress have let the country down in their handling of the economy in the past 18 months. I think the intense focus of each has been centered on blaming each other for the economic mess the country is now in, instead of trying to solve the problem.
I think the growing private sector jobless problem of nearly the past three years is clearly due to insufficient US business demand. For whatever reasons, the US Congress has decided that it is not necessary to spur US business demand sufficiently enough to trigger private sector job creation. Citizens are angry, and get angrier by the day, that the government continues to work on what the government wants to work on, instead of working on what US citizens want them to work on....which is clearly private sector, long-term job creation, wisely funded.
Although it did create many jobs, I think the expensive ARRA Economic Stimulus Plan could have been better designed, using businesses as key partners with the US government, to directly create more US long-term, private sector jobs. Further, I have seen many other things enacted by the US Congress since then, which in the aggregate were quite expensive, but have done little or nothing to improve the jobs picture or the horrible housing situation. That said, that is the past, we have to deal with what we now have….a horrible jobless recovery, severely pressured by a substantial US Debt load.
Big US Multinational Corps will benefit greatly from wise initiatives that both spur US private sector job creation and also reduce the US Debt. Despite this, I think there is still a portion of the Big US Multinational Corp community, along with their supporters in the US Congress, who are not willing to work with the Obama Administration to help get the country out of this horrible economic mess it finds itself in. Instead, I think there are some of these Big Corp supporters in the US Congress who are doing everything in their power to see to it that the Obama Administration fails, despite the disastrous economic consequences to the country and to its citizens. I think this strategy is not in the best interests of the country, and frankly disgusting.
Big US Multinational Corps can and should play a key role in getting the country out of its current economic crater. And the US Government must act much more boldly, quickly and wisely to address this economic mess.
