EoW November 2008

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EuroWire – November 2008 23
Transat lant ic Cable
The economy
A summit of financial titans generates
very little in the way of encouragement
The 2008 edition of the annual symposium hosted by the Kansas
City Federal Reserve took place 22nd and 23rd August at Jackson
Hole, Wyoming. As expected, it drew prominent central bankers,
finance ministers, academics, and financial market participants
from around the world. Also as expected, it disappointed those
who sift the reports out of this meeting for at least a few grains
of comfort.
The Kansas City branch of the Fed is one of 12 regional banks
in the system, located in major cities across the country and
acting as fiscal agents for the US Treasury. Each year since 1978,
this midwestern branch has convened a symposium on an
important economic issue facing the US and world economies.
Among those addressing this year’s topic, Maintaining Stability
in a Changing Financial System, was Federal Reserve chairman
Ben S Bernanke, who reached the bad news by sentence two of
his speech to the gathering. “Although we have seen improved
functioning in some markets, the financial storm that reached
gale force some weeks before our [2007] meeting has not yet
subsided,” Mr Bernanke said. “And its effects on the broader
economy are becoming apparent in the form of softening
economic activity and rising unemployment. Add to this mix
a jump in inflation, in part the product of a global commodity
boom, and the result has been one of the most challenging
economic and policy environments in memory.”
Mr Bernanke, whose talk was entitled “Reducing Systemic Risk,”
saw two means to this end: increasing the resilience of the
global financial system by strengthening its infrastructure; and a
systemwide approach to more effective government regulation
and supervisory oversight of financial institutions. None of his
colleagues and counterparts resisted the Bernanke prescription.
But nor do they expect near-term improvement in the global
financial picture.
Mario Draghi, governor of the Bank of Italy, told the conference,
“More than a year into the most challenging financial crisis of our
times we now face a complex and interlocking combination of
rising inflation, declining growth, tightening credit conditions
and widespread liquidity tensions.” Mr Draghi, who is also a
member of the governing council of the European Central Bank,
said it would take a few years for the financial markets to recover
their confidence, and warned of tough times coming up: “These
adjustments will not be painless, and ensuring that they take
place in an orderly manner will pose substantial challenges for
policymakers.”
These views were echoed at the outskirts of the conference. ❈ ❈
“[We are] in the middle of a financial crisis, with the economy
sliding into recession, with monetary policy at maximum
easing, and fiscal transfers impotent,” Reuters was told by
Harvard economist Martin Feldstein, until recently head of
the US National Bureau of Economic Research.
John Lipsky, first deputy managing director of the International
Monetary Fund (IMF), told Reuters correspondents Alister
Bull and Mark Felsenthal that the US economy might contract
slightly in the second half of the year, even if it manages to
evade the generally accepted rule of thumb for a recession: two
consecutive quarters of contraction. He warned of a sluggish
period ahead, with the IMF forecasting growth of 1.3% for
2008 and 0.8% in 2009. Mr Lipsky detected “greater clarity” at
this year’s “more sombre” conference. “A year ago there was a
real sense of uncertainty and confusion,” he said. “People were
perplexed by the turmoil that had come on quite suddenly.”
By now, presumably, the world’s leading fiscal managers are
more or less accustomed to the turmoil. The question is, are they
any closer to putting an end to it?
Two-thirds of US corporations avoided
federal income taxes over
the period 1998-2005
Two out of three American corporations paid no federal
income tax for the seven years through 2005, according to
the Government Accountability Office. A GAO report released
12th August also said that some 68% of foreign companies doing
business in the US avoided corporate taxes over the same period.
According to the GAO estimate, taken together the two sets of
companies reported trillions of dollars in sales.
The GAO study was requested by two senators, both Democrats.
It did not address why corporations had not paid federal income
taxes or corporate taxes and it did not identify any corporations
by name. It noted that companies might escape such taxes if they
have suffered operating losses or taken tax credits. The findings
also suggest that corporations file their tax returns under tax
codes they consider more beneficial to them. As reported
by the Chicago Tribune (13th August), an outside tax expert,
Chris Edwards of the libertarian Cato Institute inWashington, said
increasing numbers of limited liability corporations (LLCs) and
‘S’ corporations pay taxes under tax codes for individual payers.
[S corporations are similar to LLCs in that they provide owners
with limited liability protection while offering the tax structure of
a partnership.] “Half of all business income in the United States
now ends up going through the individual tax code,”Mr Edwards
told the newspaper.
The Tribune pointed out that the GAO study did find that the
percentage of large US companies paying at least some federal
tax grew to 75% in 2005. This was the highest level of tax
payments by large companies since 1998, when 78% paid at least
some tax, the GAO said. The results for 2005, when corporate
profits were surging, compares with 62% in 2001, when the
country was in recession, the report said.
Of related interest . . .
The Internal Revenue Service (IRS) has offered to permit some ❈ ❈
45 American corporations to settle disputes over certain
tax shelters that have been used to defer paying billions
of dollars in taxes. The agency said on 7th August that
corporate users of the shelters may keep 20% of their
claimed tax losses through 2007 if they agree to get out of
the shelters by December 2010 at the latest. Corporations
that agree would not have to pay steep penalties, typically
20% of the taxes owed.