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Outsourcing Corporate Responsibility And Taxation

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Henry Ford Corporate Responsibility
Mr and Mrs Henry Ford ride in the first Ford automobile

America and business: peanut butter and jelly

America has an illustrious, grand entrepreneurial spirit. Many generations of families started from humble beginnings to succeed. The United States was an incubator for business acumen. After the industrial revolution, we became the world leader. Amidst a growing infrastructure, companies and their entrepreneurs found success in the States.

Henry Ford was one of those genius businessman. He was responsible for designing the first moving assembly line, which greatly increased manufacturing and production time. Additionally, Ford instituted a $5-per-day income for his workers. The reasoning: He wanted his employees to be able to purchase the vehicles, decrease employee turnover, and increase the company’s bottom line, in turn.

Everybody won. He sold more cars, his employees saved and purchased more, and there was a pride in creation. This was an American company — fulfilling the American dream.

During World War II, production was reinstituted for a desperate military. An enemy stood to destroy entire races, religions, and peoples. The Allies came together to extinguish this enemy, but the pains were felt at home. Families rationed necessary foods for soldiers. People bought government bonds and women went to work. The U.S. needed its people, and they stepped up to defeat the Axis of evil. We were patriots.

Businesses were essential to a powerful rise in the middle class during the 50s and 60s. Taxation among executives and companies was high. This period is famous for 90 percent marginal tax rates in the highest income brackets. Despite the most social mobility and income equality ever, the system began to crumble.

Special interest groups, political power, and declines in average America

It all starts with special interest groups. Free market principles exalted an invisible hand that led to massive outsourcing. Much of the manufacturing industry disappeared as a consequence. We’ve lost nearly all customer service and basic technological leadership to Asian countries. It’s a rarity to find anything “Made in America.” Instead of stopping and correcting this course, America and its people have held steady — buying, consuming, and destroying as much as they can. Patriotism and pride in country be damned.

These economic principles, which largely took America by storm in the 80s, were lauded by the Reagan administration. Swift cuts to taxes were made for everyone, but they mostly benefited the richest of our population. Almost immediately, an increase in income inequality, social stratification, imprisonment, and use of tax havens increased.

Each time we’ve lost another layer of pride and power in America, corporate executives have argued that they are creating jobs, cutting inefficiencies, and raising shareholder value. We can’t fall for these tired logical fallacies. Jobs have been created elsewhere and people are paid less than ever. Wages are stagnating for most, as executives get rich. We’re stuck in the twilight zone of corporate disrespect, political power, lobbying groups, and massive outsourcing of everything. It’s dystopian in the powerlessness of average people. The last thing to go: corporate headquarters and revenue.

How to avoid taxation and book record profits

In the past, tax havens were simply “offshore,” Caribbean or Mediterranean islands. Rich doctors, businessmen, and criminals used these countries to store untraced funds. The money would be protected from extradition, taxation, and/or criminal prosecution. But as businesses grew with the new, global economy, tax practices changed in step.

Yet again, the start was in the 80s. Apple — yes, the iPhone and iPad maker — pioneered a strategy to avoid federal taxes “legally.” This gets complicated quickly. Essentially, Apple setup subsidiary corporations in other countries and booked intellectual property sales from those international locations. Income then sidestepped the higher-tax policies in America for lower-tax zones. This magical strategy is called, the “double Irish arrangement.”

Named for its home location, Apple set up a location in Ireland, where corporate taxes are 0%. Then, these new funds avoided billions of dollars in taxation and could still be reported as revenue and profit. This opened the floodgates for copycat companies to do the same (e.g., Facebook, General Electric, and Google).

By harnessing the power of this tax-dodging trick, some companies whittled down their tax liability to nothing. We’re talking about multibillion dollar profits — untaxed. More importantly, all of those loopholes lead to severe federal tax revenue shortages, despite record-breaking profits. Our people, infrastructure, and future are in the balance.

The regular American, a patriot

Warren Buffett is famous for saying that if you’re born as an American, you’ve already lucked out. This is still the land of opportunity. And frankly, I couldn’t agree more. The U.S. is still an incredible place. I have a lot of pride and feel humble for my opportunities. I couldn’t have done it without this place.

Over the last couple years, I’ve built a solid side income as a writer and entered a doctoral program. This is the life I want. I’ve carved out my niche. I feel fortunate for the privilege to be given room to explore and succeed. The financial successes also increased my tax burden.

My company, Frugaling, is based in America. I don’t have an LLC or formal corporation, but it’s my business. At the end of every year, I have to account for this revenue through a Schedule C form and self-employment taxes. Last week, I explained that I had begun to prepare for this accounting challenge, as self-employment taxes are about 30% of revenue. This is because medicare, medicaid, and social security aren’t withheld. But I’m happy to contribute and do my part.

I owe it to the place where I found success. I want others to have the opportunity to excel, as well. America is empty without a cyclical, contributing populace. What goes around comes around. I pay my taxes. Why don’t companies?

Warning! We’ve crossed the tipping point

Today, the largest corporation yet, Medtronic, filed to leave America. We’re talking about a pure formality that will make more tax revenue leave America. The medical device manufacturer just purchased another company — Covidien — that is incorporated in Ireland. Medtronic will switch to that legal address. BusinessWeek reported that this is becoming increasingly popular:

Minneapolis-based Medtronic joins some 44 American companies that have reincorporated abroad or struck plans to do so, including 14 in a recent wave of moves that began in 2012. Earlier this year, Pfizer Inc., the largest U.S. drugmaker, briefly proposed taking a U.K. address, a move that might have cut its tax bills by as much as $1 billion a year…Without a change in law, a congressional panel estimated last month, future deals will cost the U.S. $19.5 billion in tax revenue over the next 10 years.

For shareholders, this is wonderful news. Those tax savings can be directed to share buybacks, increased dividends, greater research pipelines, and better compensation for employees. But meanwhile, Americans will suffer. See, we are stakeholders in a way. We have a stake in what a company does or doesn’t do. Now that companies are fleeing the states in search for individual gain, at the cost of the whole, we must realize that the last pillar of corporate responsibility and patriotism is about to fall. As this disintegrates, and taxation revenue crumbles, so will our country.

Rich Kids, Plutonomy, and Income Inequality in the 21st Century

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Rich Kids of Instagram Plutocracy
Photos: Rich Kids of Instagram

The spoils of income inequality

On July 13, 2012, a Tumblr blog by the name of “Rich Kids of Instagram” started sharing public Instagram photos from the rich and sometimes famous. Every picture showed how the wealthiest enjoyed spending their money and the many adventures brought on by the good ol’ American dream. The site’s popularity spawned a reality TV show called, “Rich Kids of Beverly Hills.”

When I first saw photos from “Rich Kids” — driving in their brand new Ferraris and drinking Dom Perignon through glass AK-47s — I got mad.

“Look at how much money they spend on themselves, when there’s poverty, starvation, and war,” I thought.

We are talking about kids that grow up with American Express Centurion (“Black”) Cards and know that their parents have a total net worth in the hundreds of millions or billions of dollars. They spend money without care — because they needn’t have one. Their money is safe for many generations to come. This excess and desire for luxury goods and travel is nothing more than a symptom of years of compounded income inequality. And a select group are getting really rich in the process.

The takeaways:

  1. Buy a fast car
  2. Drink expensive liquor
  3. Make sure everyone around you is beautiful and knows you’re rich

Your stock portfolio and plutocracy

In 2005, I was in the middle of high school — loathing every minute of it. I never read. I didn’t get along with most of my teachers. I was mister average. I don’t think most of my teachers would remember me. The only thing that seemed to set me apart was a fervent inclination towards the stock market.

My interest developed after my late grandfather had bestowed a couple classic stocks to our family. I tracked these stocks religiously and would constantly check the newspaper for stock market updates. I remember depositing money into an investment account. I needed my parent’s custodial permission. Underage, I wasn’t supposed to trade alone, but I did. I constantly had to lie to brokers for trades to go through (“Yes, I’m Mr. Adult Lustgarten, and I’m the owner of this account…”). Commissions ate up my profits, but I loved every minute of it.

Citigroup Plutonomy Buying Luxury Income Inequality
Part 1 of Citigroup’s Plutonomy papers, which explained why investors should look to luxury brands for future profits.

Later that year I was exposed to the single-greatest financial paper I’d ever read. It was authored by three Citigroup employees: Ajay Kapur, Niall Macleod, and Narendra Singh. Only 16 years old, you couldn’t pay me to read The Odyssey or my European History textbook, but here I was passionately reading a paper entitled, Plutonomy: Buying Luxury, Explaining Global Imbalances. I was a total weirdo.

Basically, plutonomy is a fancy word for saying that a select few wield a disproportionate amount of influence and power over the economy. As the authors pointed out, “Plutonomies have occurred before in the sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S.” They posited that this was happening again.

“We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization [emphasis added].”

The authors argued that, “The World is dividing into two blocs — the Plutonomy and the rest.” They stated that the rich were getting richer and that had deep consequences to consumption. Effectively, the rich would make up “a disproportionate chunk of the economy.”

The authors’ premise was that investors could predict profitable companies based on their target audiences. For example, a wise investor — when accounting for greater plutocracy and income inequality — would be able to make more money in companies that catered to the rich.

The takeaways:

  1. Accept that income inequality exists and is growing — do nothing
  2. Learn how to make money from it
  3. Invest in companies that cater to the wealthy (i.e., Citizen, Coach, LVMH, etc.), while the middle class disappears

Thomas Piketty and a desire for systemic change

In late April, I started reading Thomas Piketty’s masterpiece. The book title, Capital in the Twenty-First Century, is a nod to Karl Marx’s Das Kapital (in case you haven’t had the time to read the near-700-page text, check out my 5-minute guide to Capital). Piketty was nicknamed “Marx 2.0” by Time Magazine.

Economists have long created mathematical formulas to predict financial events, but Piketty found that these methods were inherently flawed. Piketty explained that much of economics deals in a hyper-theoretical world, which is removed from history and doesn’t account for individual actors. For him, this was an opportunity to make economics a truer social science — blending sociology, psychology, history, and economics into one tome.

“For far too long, economists have neglected the distribution of wealth, partly because of Kuznets’s optimistic conclusions and partly because of the profession’s undue enthusiasm for simplistic mathematical models based on so-called representative agents.”
–Thomas Piketty

Capital is just another exclamation point in a long list of those calling for income inequality action — across political parties and professions. As noted, even financial analysts acknowledge plutocracy and income inequality when the differences can be exploited for extra profit.

Now that Piketty’s book is atop much of the world’s bestseller lists, it is attracting a growing number of critics.

With patronizing polarity, Forbes’s Avik Roy wrote, “The American Left has worked itself into another one of its frenzies about income inequality.” After a cursory glance at Piketty’s Capital principles, Roy taunted readers by saying, “Is it really so great to live in a country where everyone is equally poor?” Unfortunately, this appeal to consequences is but a mere distraction from the content and character of the book’s concerns. Of course we don’t want to live a world that’s equally poor — Piketty never advocated for this dystopian, communist world.

Roy’s argument is partisan and illogical, but more evidence-based concerns have risen since then. The Financial Times issued a scathing critique of the book. The author, Chris Giles, says,

I discovered that his estimates of wealth inequality – the centrepiece of Capital in the 21st Century – are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.

These discrepancies between what Giles calculated from Piketty’s data led him to report that Capital’s biggest fault is in reporting greater than expected income inequality in Britain. Giles contends that Piketty “cherry-picked data” to make it seem worse.

As any ethical professor and scholar would do, Piketty tailored a response to these claims. His rebuke suggests that he made adjustments to data because statistics and economics is highly variable and interpretable. Essentially, The Financial Times calculated differences in their models because they chose different measures of estimation; even then, there was still growing income inequality.

The takeaways:

  1. There is growing income inequality, globally
  2. In many places, we have returned to near-Gilded Age and pre-Great Depression times for inequality
  3. Piketty’s statistics hold up upon closer inspection

Now, will we do anything to change this?

The 5-Minute Guide To Thomas Piketty’s Capital In The Twenty-First Century

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Capital in the twenty-first century Thomas Piketty
The cover of Thomas Piketty’s Capital in the Twenty-First Century

Everyone is talking about Capital in the Twenty-First Century, but few people have read it. In fact, I was watching Real Time with Bill Maher the other day, and the entire panel was debating the virtues of the book — then they admitted no one had read it.

Meanwhile, The Guardian wrote, “This is a huge book, more than 700 pages long, dense with footnotes, graphs and mathematical formulae. At first sight it is unashamedly an academic tome and seems both daunting and incomprehensible [emphasis added].” Well, I just spent an inordinate amount of time reading his masterpiece, and have quickly placed every lesson in the following article. I’ve tried to link to further explanations, should you care to spend the time.

Here’s everything you need to know about Capital in the Twenty-First Century in 5 minutes or less. 

  1. Income equality is increasing.
  2. We are approaching another Gilded Age.
  3. Net worth is not trickling down.
  4. A global wealth tax is proposed.
  5. Marginal tax rates used to be much higher.
  6. Income inequality undermines meritocratic values.
  7. Marx couldn’t properly account for technological progress.
  8. Industrialization and economic shift is inherently advantageous to a select few.
  9. War and taxation created a by-product of economic equality in the 40s/50s.
  10. Theoretical and mathematical interpretations fail to account for individual actors and historical data.
  11. Inequality is not necessarily bad, but the reasons for it could be.
  12. Top managers can control their own paychecks.
  13. Profit is necessary to attract capital; at least, as the economy currently stands.
  14. Per capita income averages hide disparities (median versus mode).
  15. There are errors and gaps in tax revenue due to tax havens.
  16. Foreign direct investment hasn’t led to a convergence in economies.
  17. Economic growth is unsustainable, as compounded growth will kill the planet (think climate change and food shortages for a growing population).
  18. Social mobility is at the heart of moderating income inequality.
  19. Inherited wealth is monopolizing income distribution.
  20. Those with capital and assets can increase wealth faster than beginning entrepreneurs.

Now go out there, act like you read it, and sound smart!

Starbucks Reserve Coffee: A Symptom Of Income Inequality

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Starbucks Reserve Coffee Expensive Income Inequality
Just got a fresh cup of Starbucks Reserve coffee. It only costs $4 per cup!

More companies are moving to two-class business models — catering to a growing divide in income brackets. Essentially, it’s the difference between the dollar-menu and the deluxe package. Look no further than your local Starbucks, where they created an elite status for coffee drinkers. It’s called, “Starbucks Reserve.” Like our broader economy, it’s not made for everyone — intentionally.

Reserve drinks come in a black Starbucks drink sleeves which say, “Exotic, rare and exquisite coffee.” Today, I got to order one because I’m using a free drink reward from a 12oz bag of coffee. In a way, I’m circumventing the traditional class system of drinks.

Before choosing a Reserve coffee, the employee tells me she recommends the fancy-something-sundried-special-faraway-coffee. I’m out of my element, and gladly accept the suggestion. All I know is that I’m drinking something from Hawaii and it’ll be brewed on an $11,000 machine. It’s supposed to be good.

When I look up at the menu board above the employee, I gasp at the price: $3.95 for a tall (12oz) cup. At more than $4 per cup after taxes, the Kona Perry coffee is the most expensive coffee choice by far. A normal cup of coffee at Starbucks is half the price — about $2.

I’m was reeling at the exorbitant price. I thought, “How can someone spend $4 for a cup of coffee?” It’s then that I realize something stupidly simple. The economy is more divided than ever. Perhaps this an oversimplification, but the middle class is quickly disappearing. The popular buzzword is income inequality. Starbucks’s response is a new, atmospheric price structure that caters to the wealthy.

After a couple minutes, the barista says, “Sam, your tall Kona Perry coffee, brewed on the Clover machine, is ready.” I gingerly pick up the coffee and realize they’ve purposely advertised my status/drink to everyone in the building. While smart marketing, I’m frankly embarrassed by the complexity of my order. I feel like apologizing to those around me. “Sorry, it was free, I assure you I didn’t just pay more than $4 for black coffee!”

I take my first sip, and immediately notice how smooth it is. It tastes wonderful. For a moment, I imagine $4 being totally worth the expense (despite being more than my lunch on most days). I take another sip, and smile. I take another sip and realize how nice it is to pretend I’m wealthy for a day. This is the good life — for a moment.

As the drink disappears, it occurs to me that I don’t know how this compares to the lower priced Starbucks coffee. I’m not sure if I’m tasting class or actual quality. Is my mind playing a trick on me? Is the quality all psychological? Whatever the reality, I can’t afford this regularly. It’s a nice treat/aside from the everyday option. I see this as a growing business model for most industries (from airlines to restaurants to hotels). Unfortunately, as the economy becomes more polar and divided, so do consumables. Starbucks Reserve coffees are just a consequence of this income inequality.

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