FedEx Thou Doth Protest Too Much

fedexboxA cranky op-ed by a FedEx executive in today’s Tennessean calls the paper out for its “deeply flawed and erroneous report insinuating that FedEx is less than a full-rate taxpayer.” FedEx VP Michael Fryt is responding to a recent Tennessean story about the DC-based Citizens for Tax Justice’s analysis of Fortune 500 companies that paid no federal income taxes during at least one year since 2008. FedEx made the list twice, for having “paid” federal income taxes at a rate below 0 percent in both 2009 and 2011. As The Tennessean further reported, FedEx paid an effective federal income taxrate of 4.21 percent over the five year period of the study.

Blasting the CTJ report as “compiled by a heavily biased, partisan advocacy group,” Fryt asserts that FedEx “is a full-rate taxpayer and that we pay all the taxes owed to local, state, federal and foreign governments.” Declaring that “the effective income tax rate for FedEx has been no lower than 35 percent in each of the past 20 years,” Fryt calls the analysis misleading because it takes accelerated depreciation into account (as well it should), and he criticizes The Tennessean for printing the story “without contacting us.”

What Fryt and FedEx are doing here is blaming the messenger (two of them, actually) and responding with their own conveniently misleading version of events. But the careful reader will note that something Fryt and FedEx are not doing is denying the empirical truth of the CTJ’s findings.

How is it, you may ask, that the CTJ report can show FedEx paid less than 0 percent (meaning, received a rebate) in federal income taxes in two separate years while a FedEx executive insists that “the effective income tax rate for FedEx has been no lower than 35 percent in each of the past 20 years.”? Both statements can’t be true, right? Someone must be fibbing here?

Not necessarily. The key here probably lies in Fryt’s careful wording, “the effective income tax rate for Fedex…” Note the absence of the word “federal” between “effective” and “income.” Corporations pay not just U.S. federal taxes on income, but also state as well as foreign income taxes. That same CTJ analysis reporting FedEx’s effective rate of 4.2 percent in U.S. federal income taxes between 2008 and 2012 found that the company paid a much higher rate (57.7 percent) to foreign governments on its overseas pretax income. My assumption is that FedEx is counting all forms of income tax (that omission of the word federal is presumably no accident), and in so doing hopes to lead readers to believe that the zero tax years and astoundingly low effective average federal tax rate revealed by CTJ and reported by the Tennessean are factually inaccurate. But if you read Fryt’s op-ed carefully you’ll notice that he never actually repudiates the accuracy of CTJ numbers. Why? Because he can’t.

As mentioned above, Fryt and FedEx righteously assert that the firm pays all taxes owed to all governments. This is a classically defective straw-man argument; nobody claims otherwise, and neither the CTJ analysis nor the Tennessean story intimated that FedEx isn’t meeting its obligations under the law. As far as I’m concerned FedEx is a great American company, one that treats its people well and plays by the rules. A key aim of the CTJ analysis is to show the extent to which copious loopholes and tax breaks legally enable corporations to minimize their income tax obligations.

Fryt concludes his op-ed with familiar corporate whining that U.S. corporate income tax rates are among the highest in the world, creating a tax system that “is seriously flawed and hurts U.S. economic growth and competitiveness.” He’s right that statutory corporate tax rates in the U.S. are among the world’s highest, but it’s also the case that the actual rate large profitable corporations pay is typically less than half the statutory rate.

Fryt and FedEx may not like hearing these realities when they are foisted upon them (accurately) by a “heavily biased, partisan advocacy group.” Ok, then, how about that leftist commie Warren Buffett: “It is a myth that American corporations are paying 35 percent or anything like it…corporate taxes are not strangling American competitiveness.”

A version of this post appears on the Nashville Scene‘s Pith in the Wind blog.


Labor Rights and Wrongs

workersrightsAn op-ed in this morning’s Tennessean by my friend and Vanderbilt colleague Dan Cornfield calls elected officials in Tennessee to account for their vocal opposition to unionization at Volkswagen’s Chattanooga plant. Cornfield is alluding, presumably, to comments from the likes of Gov. Bill Haslam, who responded back in March to reports of UAW involvement at VW that “I would hate for anything to happen that would hurt the productivity of the plant or to deter investment in Chattanooga.” And to Sen. Bob Corker, who in September said that allowing the UAW into VW’s Tennessee plant would make the company a “laughingstock in the business world.”

Turns out we already have many of these laughingstocks, as Cornfield points out:

The public officials’ claims that unionization hinders Tennessee’s economic development are at best unmindful of the positive economic impact of these corporations. Many large, private Tennessee employers have union collective bargaining agreements with some or all of their employees, including Alstom Power, AT&T, Bridgestone, Carlex, CSX, FedEx, Ford Motor Co., General Motors, Kroger, Lear, Medical Action Industries, Norfolk Southern, St. Francis Hospital, Sharp Manufacturing, Southwest Airlines, Tyson Foods, UPS and Voith.

To Cornfield’s argument about “the positive economic impact of unionized corporations on the prestige and growth of the sate economy,” I would add that we’re talking about basic labor rights here. Haslam, Corker, and their fellow anti-union travelers seem to need reminding that collective bargaining is a fundamental human right codified in Article 23 of the Universal Declaration of Human Rights (which of course the U.S. helped draft and voted to adopt over half a century ago):

Everyone has the right to form and to join trade unions for the protection of his interests.

Elected officials who are ignorant of basic rights are far more likely to make the state a “laughingstock” than the exercise of those rights by working Tennesseans.

A version of this post appears on the Nashville Scene‘s Pith in the Wind blog.


NY Times Column Misconstrues Prisoner’s Dilemma

The business writer James B. Stewart’s Saturday New York Times column took a fascinating look at the situation facing a former hedge fund portfolio manager charged with insider trading who now must decide whether to cooperate with prosecutors. Stewart writes that the manager’s situation is akin to the classic game theory problem known as a prisoner’s dilemma (PD). To be sure, it’s a tricky dilemma that this fellow faces, and it resembles a PD, but unfortunately Stewart inaccurately describes the nature of a PD, and also confuses its meaning with imprecise language about “cooperation.”

The definition of a PD in the piece is incorrect. Stewart writes:

In the now-classic version, the police have arrested two suspects and are interrogating them in separate rooms. Each can either confess and implicate the other, or remain silent. If only one confesses, he goes free and the other gets a harsh sentence. If both confess, each gets a reduced sentence, but still goes to jail. If neither confesses, the government lacks the evidence needed to convict and both go free.

This misrepresents the canonical PD structure, which has a payoff for cooperating with the other suspect (staying silent) that needs to be less than (not equal to) the payoff for defecting (confessing) if other suspect cooperates (stays silent). To put it another way, the payoff for solo defection has to exceed the payoff for mutual cooperation. But in the Times piece Stewart describes the “classic version” as a situation where suspect goes free if both stay silent, and goes free if only he confesses. Those are equivalent outcomes – “goes free.”

In PD structure terms (this graphic from the Wikipedia entry on PD),

Canonical PD

T has to be greater than R. This is not a trivial problem. By having T=R (as Stewart suggests), any temptation to defect is removed – it never makes sense to defect. You could say it takes the D out of PD!

In addition to erroneously describing a classic PD, the piece is confusing because in the context involved – turning state’s evidence – Stewart understandably and repeatedly uses the word “cooperate” (as in: the guy will or won’t cooperate with prosecutors). But this leads to a problematic passage like this one:

Game theorists have demonstrated that the rational choice, or dominant strategy, is always to confess and implicate the other, even though the optimal outcome for both occurs if neither cooperates. That’s because, as Professor Picker explained, if one prisoner has confessed, the best the other can hope for is also to confess and get the moderate sentence rather than the harsher sentence reserved for those who don’t cooperate. If one prisoner doesn’t confess, the other can go free by implicating him. Although they collectively are better off if neither cooperates, their individual self-interest dictates cooperation.

The problem is that in the game theory/PD world, “cooperates” means stays silent (you cooperate with your fellow suspect; confession is defection). So when Stewart writes in the first sentence of this passage that “the optimal outcome for both occurs if neither cooperates,” he means cooperates with the prosecutor, not cooperates in the PD sense (stay silent). The last sentence in the passage sums it up correctly in terms of “cooperating” with the prosecutor, but wrongly in PD language – exactly the opposite is true in the cooperate/defect sense of PD.


CEOs to GOP: That Pig Won’t Fly

John Ingram, the CEO of La Vergne-based media conglomerate Ingram Content Group, is among a list of more than 80 chief executives of major U.S. firms pressuring Congress to address the nation’s fiscal problems with both tax increases and spending cuts. The CEOs’ joint letter summarizes their approach in three bullet points:

The plan should:

Reform Medicare and Medicaid, improve efficiency in the overall health care system and limit future cost growth;

Strengthen Social Security, so that it is solvent and will be there for future beneficiaries; and

Include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.

By pointing to the bipartisan Simpson-Bowles Commission as “an effective framework for such a plan,” the CEOs will make some Democrats unhappy given how far Simpson-Bowles goes in advocating potential cuts to cherished programs. And they will surely make many Republicans unhappy by admitting the obvious: that raising revenue is also essential.

As The Wall Street Journal reports, this approach is a noticeable departure from other business groups, which tend to sidestep the matter of raising taxes. Although the CEOs aren’t explicitly aiming the message in any particular political direction, what we have here is an impressive list of top executives from a variety of companies telling Mitt Romney and the Republican party that their approach to debt and deficit reduction eschewing any possibility of new revenue simply isn’t credible.

The CEO statement comes from and through the Campaign to Fix the Debt, a self-proclaimed non-partisan movement to “mobilize key communities — including leaders from business, government, and policy — and people all across America who want to see elected officials step up to solve our nation’s fiscal challenges.” The Campaign’s founders are Alan Simpson and Erskine Bowles (yes, that Simpson and that Bowles). Former Tennessee Gov. Phil Bredesen is a member of its steering committee.

A version of this post appears on the Nashville Scene‘s Pith in the Wind blog.


Vote for Romney … Or You’re Fired!

The Queen of Versailles is a grimly hilarious (or hilariously grim) documentary about timeshare magnate David Siegel and spousal unit Jackie, and their ill-fated effort to build the biggest house in America, a 90,000-square-foot monstrosity inspired by, yes, Versailles. Good flick. David Siegel is back in the news this week with an email to his hordes of employees telling them that they can expect to be canned if Barack Obama is re-elected. Excerpts from Siegel’s missive:

There is no question that the economy has changed for the worse and we have not seen any improvement over the past four years. In spite of all of the challenges we have faced, the good news is this: The economy doesn’t currently pose a threat to your job. What does threaten your job however, is another 4 years of the same Presidential administration….

Unfortunately, the costs of running a business have gotten out of control, and let me tell you why: We are being taxed to death and the government thinks we don’t pay enough. We pay state taxes, federal taxes, property taxes, sales and use taxes, payroll taxes, workers compensation taxes and unemployment taxes. I even have to hire an entire department to manage all these taxes. The question I have is this: Who is really stimulating the economy? Is it the Government that wants to take money from those who have earned it and give it to those who have not, or is it people like me who built a company out of his garage and directly employs over 7000 people and hosts over 3 million people per year with a great vacation?….

If any new taxes are levied on me, or my company, as our current President plans, I will have no choice but to reduce the size of this company. Rather than grow this company I will be forced to cut back. This means fewer jobs, less benefits and certainly less opportunity for everyone. So, when you make your decision to vote, ask yourself, which candidate understands the economics of business ownership and who doesn’t? Whose policies will endanger your job?

Read the entire email here. Siegel has every right to tell his employees whatever he wants about his political views or his sex life or his bowel movements. Hey, it’s a free country … especially when you own the email system.

But this notion that Barack Obama, a middle-of-the-road neo-liberal who sucks with vigor at the campaign finance teat of Wall Street and venture capital, and who wants to cut business taxes just like the Mittster, is some sort of enemy of the profiteering capitalist class is simply delusional. Yes, Mr. Siegel, Obama would, given his policy druthers, raise your marginal tax rate by a few percentage points. America’s heart bleeds for the devastating hardships this will bestow upon you and your empire.

A version of this post appears on the Nashville Scene‘s Pith in the Wind blog.


47gate: The Myth of Progressive Taxes

Much of the chatter about Mitt Romney’s now infamous half-the-country-can-go-fuck-itself video has focused on that 47 percent who in Romney’s words “are dependent upon government, who believe that they are victims…who pay no income tax.” It was this armchair analysis that inspired Romney to conclude in words that may someday grace the tombstone of his presidential bid: “my job is not to worry about those people.”

In the wake of this latest outbreak of Mittastatic cancer of the campaign voicebox much is being said about who actually comprises that 47 percent, and about Romney’s seemingly fundamental misunderstanding of the nature of tax obligation. This, in turn, predictably elicits the usual whining from the right about how wealthy taxpayers supposedly pay way more than their fair share of taxes.

At a time like this it’s worth reminding ourselves that our tax system isn’t really terribly progressive. A good way to judge is to look at the income people in particular brackets earn and compare it with the tax revenue that comes out of those same brackets. If lower income people pay a much smaller proportion of taxes compared to the proportion of income they earn, and if higher income people pay a much larger proportion of aggregate taxes than they earn, then we have a highly progressive system. So what does it actually look like?

The chart below, from The Atlantic based on data compiled by Citizens for Tax Justice, answers the question. Blue bars (income) are a bit bigger than red bars (taxes) at lower incomes, while red bars are slightly bigger than blue bars at higher incomes. In other words, very modest progressivity. Or as The Atlantic‘s economics writer Matthew O’Brien aptly puts it, “If this is Marxism, it’s very carefully disguised.”

Source: The Atlantic

A version of this post appears on the Nashville Scene‘s Pith in the Wind blog.


Defining the Middle Class

Arguments over what politicians mean when they say they want to help the “middle class” are almost as old as the existence of a middle class. And with both Mitt Romney and Barack Obama beating the middle class drum silly this political season, it was only a matter of time before a conversation about who is and isn’t in the middle class resurfaced.

And so it did with Mitt Romney’s exchange with George Stephanopolous on ABC Friday morning:

MITT ROMNEY: Let me tell you, George, the fundamentals of my tax policy are these. Number one, reduce tax burdens on middle-income people. So no one can say my plan is going to raise taxes on middle-income people, because principle number one is keep the burden down on middle-income taxpayers.

GEORGE STEPHANOPOULOS: Is $100,000 middle income?

MITT ROMNEY: No, middle income is $200,000 to $250,000 and less.

As the Wall Street Journal‘s What Percent Are You calculator reveals, $200K puts you in the 94th percentile of tax-filing households, and $250K puts you in the 96th percentile. So to the extent that Romney believes that being middle class in 21st century America means being in the top 4-6 percent, he’s going to deserve the ridicule he has manage once again to self-inflict. Of course, Romney did say $200-250K “or less,” so presumably he doesn’t put the middle class household wage floor at $200K. Even he’s not that dim.

To be fair, some will point out that Barack Obama’s pledge to avoid raising taxes on the middle class, coupled with policy proposals that preserve tax cuts for those earning less than $250K, means that Obama also defines the middle class all the way up into the mid 200Ks. I’m not aware that Obama has been clumsy enough to make that upper bound explicit as a definitional matter in the way that Romney just did. And of course, any definition of middle class tied to raw income levels or earning percentiles is flawed by its failure to factor in vast geographic differences in cost of living, not to mention variations in household size and other relevant factors. As we all know, a given level of income goes a whole lot further for a childless couple in Nashville than for a family of four in San Francisco.

So where should we locate the middle class in household income terms? A recent Wall Street Journal Marketwatch piece blandly asserted that the middle class is comprised of “the 50% of American households earning between $39,000 to $118,000.” Using the Journal‘s calculator, that range runs from the 46th to the 84th percentile of tax filing households … and seems rather arbitrary.

We know from recent Pew survey data how many self-regard as middle class: Just under half of adults call themselves middle class, only a few percent less than said the same thing four years ago, with reasonably similar percentages saying this across gender and race divides.

If being middle class is essentially a state of mind, then one way to define a middle class income is to ask people where they would peg the number. The Pew survey gave that a shot, asking respondents to say how much annual income a family of four would need to lead a middle-class lifestyle. The overall median response to this question was $70K – a number not far off from the actual median income for a four-person household based on Census Bureau numbers ($68.2K) and well below the definition of middle class amidst the rarified air on Planet Mitt.

An alternative approach is to think about the key elements of consumption one’s income makes possible, or easy, or not so easy. I kind of like the version of this approach put forward by some guy named Eric commenting on a blog post about the Romney remark at The Atlantic:

You should define class by the ability to pay for two new cars, a $1200 mortgage (arbitrary for this comment), private schools (especially if you live in a city), a $3,000 health insurance deductible, and organic/sustainably produced foods. Then assume that most people pay for cable and cell service. Anyone who doesn’t worry about these things is above middle class. Anyone who must make trade-offs among them is in the middle. Anyone who cannot pay for any of these is poor.

We can quarrel about the organic food part, but otherwise it makes quite a bit of sense to me.

A version of this post appears on the Nashville Scene‘s Pith in the Wind blog.


Follow

Get every new post delivered to your Inbox.