EoW November 2008

Transat lant ic Cable

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?

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 22 nd and 23 rd 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

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 12 th 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 (13 th 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 7 th 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.

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EuroWire – November 2008