The Megacity III

This is Part III of an article about how world cities—such as Seattle—are more closely tied financially to other world cities such as Shenzhen, China, than they are to neighboring Spokane or Tacoma.

SeattleSeattle, Washington

By EMILY BADGER  Dec. 24, 2017 for The New York Times

Inventing ‘New Stuff’ Before Anyone Can Catch Up

People in Rust Belt towns where Google has no office still use the search giant. Facebook and Twitter still require physical assets in server farms. Uber, a quintessential Bay Area company that is both global and digital, operates in about 250 American cities.

But these kinds of ties aren’t truly spreading the Bay Area’s prosperity. Server farms don’t create mass middle-class employment. Using Google isn’t the same as having a hand in engineering it.

Yes, Uber’s innovation eventually reaches smaller cities in Texas and Ohio. “But the economic benefits of it are at Uber headquarters,” said Michael Storper, an economic geographer at U.C.L.A. “The people who got rich off of it are not going to be in the small area. They’re going to be where it’s invented.”

To put it more harshly, when global cities need other communities today, Ms. Sassen said, it’s often to extract value out of them. New York bankers need Middle America’s mortgages to construct securities. San Francisco start-ups need idle cars everywhere to amass billion-dollar valuations. Online retail giants need cheap land for their warehouses.

The rest of the country may receive the innovations that flow out of global cities, and the benefits to consumers are real. “But by the time that’s done, the cities have already invented something new and made themselves richer again,” Mr. Storper said. “Before anywhere else can catch up, San Francisco has already leapt ahead again with new stuff they’ve invented.”

The advantages bestowed by the global economy keep compounding from there. Research by Filipe Campante at Harvard and David Yanagizawa-Drott at the University of Zurich finds that when two cities are linked by direct flights across the globe, business links between them increase as well, such that places with more connections grow more economically. Those economic benefits, though, don’t appear to touch places more than 100 miles beyond the airport.

Shenzhen-650x260Shenzhen, China

“The Torontos, Ottawas and Waterloos in countries like Canada and the U.S., they will link with Shenzhen in China, they will link with Munich and Stockholm in Europe,” Mr. Bathelt said. “And other places will be kind of left out.”

Greg Spencer, another researcher at the University of Toronto, has analyzed the global footprints of the world’s 500 largest firms in advanced industries like machinery, digital services and life sciences — mapping their headquarters, regional offices, manufacturing plants, warehouses, retail stores.

In the international network that emerges, global cities stand out. Other places connect to the global economy by going through them.

“I keep coming back to the idea that a lot of this is about power,” Mr. Spencer said. He means relative power — which places are gaining or losing it as the geography of the economy shifts, too. “Not only are they losing their power,” he said of the places left out, “but they’re losing their connection to the power centers as well.”

That dynamic also leaves smaller places at the mercy of global cities, where decisions are made about which plants to close or where to create new jobs. And so Tulsa, Buffalo and Tucson turn to Seattle as supplicants for a windfall of Amazon jobs. None of them have what Amazon really wants, though: an international airport with daily direct flights to Seattle, the Bay Area, New York and Washington.

Emily Badger writes about cities and urban policy for The Upshot from the San Francisco bureau. [The Upshot provides news, analysis and graphics about politics, policy and everyday life for the NY Times.] She’s particularly interested in housing, transportation and inequality — and how they’re all connected. She joined the Times in 2016 from The Washington Post. @emilymbadger

This concludes this three-part article.


The Megacity II

This is Part II of an extraordinary article about a new phenomenon, the megacity, that has closer ties to other world cities than to the smaller cities that surround it. Consequently, it quickly surpasses them in skills and profits. 

nyc-2New York City 

By EMILY BADGER Dec. 24, 2017 for The New York Times

The Rise of Global Cities

For much of the 20th century, wages in poorer parts of the country were rising faster than wages in richer places. Their differences were narrowing, a product of migration between the two and gains from manufacturing that helped lift up regions that were once deeply poor. Then around 1980, according to work by the Princeton researcher Elisa Giannone, that convergence began to stall. Cities full of highly educated workers like Boston, San Francisco and New York began to pull away. And that pattern, Ms. Giannone finds, has been driven entirely by what’s happening with high-skilled workers: When they cluster together in these places, their wages rise even more. That widens inequality both within wealthy cities and between wealthy regions and poorer ones.

“Big changes have been happening over the last 30 years,” Ms. Giannone said. “Now we’re actually seeing the impact of them.”

Those changes have come from multiple directions — from globalization, from computerization, from the shift in the United States away from manufacturing toward a knowledge and service economy. These trends have buffeted many smaller cities and nonurban areas. The uncomfortable political truth is that they’ve also benefited places like San Francisco and New York.

“The economic base has shifted in a way that highly favors cities — and big cities — because it’s now based on knowledge, on idea exchange, on agglomeration,” said Mark Muro, the policy director of the Metropolitan Policy Program at the Brookings Institution.

Boston, Massachusetts

Programmers benefit from having more programmers nearby, in ways different than when  assembly line workers gather together. The forces of agglomeration, which big cities enable, are strongest in the kind of knowledge work that has become central to the economy.

For all of the talk of how globalization has cost America manufacturing jobs, it has created American jobs, too — but the high-paying ones have tended to go to such cities.

Ms. Sassen argues that a global economy has created new kinds of needs for companies: accountants specializing in Asian tax law, lawyers expert in European Union regulation, marketers who understand Latin America. Global cities must connect to other global cities to tap these resources, which have become more valuable to them than lumber and steel.

Inventors in these global cities are also increasingly connecting to one another. Using the addresses of patent co-inventors, Mr. Mudambi [Ram Mudambi, a professor in the Fox School of Business at Temple University] has traced a steep rise starting in the early 1990s of global connections from a few American metro areas, which are today among the most prosperous in the country.

Many American companies still create physical things, in addition to inventing digital products and ideas. But globalization has changed who benefits from their business, too, enabling firms to separate intellectual work from routine work and scatter those roles across the globe. The knowledge work has tended to stay in the United States. The routine work is what was historically performed in the hinterland. And that in large part is the work that has gone overseas.

“The hinterland for Silicon Valley is Shenzhen,” said Timothy Sturgeon, a senior researcher at the M.I.T. Industrial Performance Center.

Emily Badger writes about cities and urban policy for The Upshot from the San Francisco bureau. [The Upshot provides news, analysis and graphics about politics, policy and everyday life for the NY Times.] She’s particularly interested in housing, transportation and inequality — and how they’re all connected. She joined the Times in 2016 from The Washington Post. @emilymbadger

To be continued

The Megacity I

A new blow to inequality, totally unsuspected by us, appeared in Sunday’s New York Times— the megacity. Because of the nature of the new electronic wealth and industry that is not dependent on being fed parts and components from smaller cities around the country as in the past but does all its manufacturing abroad, our megacities—San Francisco, New York, Los Angeles, Chicago, et al—have a closer relationship with other  world cities—London, Tokyo, Beijing—and only depend on our smaller cities as markets for their products. As a consequence these megacities absorb the lion’s share of the talent and money that formerly were more evenly distributed throughout the country.

This alarming development is described in three segments. Here is Part I:

By EMILY BADGER  Dec. 24, 2017 for The New York Times

SAN FRANCISCO — Well before anyone thought of this place as the center of the tech economy, the Bay Area built ships. And it did so with the help of many parts of the country.

Douglas fir trees logged in the Pacific Northwest were turned into lumber schooners here. Steel from the East, brought in by railroad, became merchant vessels. During World War II, workers assembled battleships with parts from across the country: steam turbines from Schenectady, N.Y. and Lester, Pa.; gear winches from Tacoma, Wash.; radio equipment from Newark; compasses from Detroit; generators from Milwaukee.

Most of these links that tied the Bay Area’s prosperity to a web of places far from here have faded. Westinghouse closed the Pennsylvania plant. General Electric downsized in Schenectady. The Milwaukee manufacturer dissolved. The old Bethlehem Shipbuilding yard in San Francisco will soon be redeveloped. And its former parent company, the Bethlehem Steel Corporation in Bethlehem, Pa., went bankrupt in 2001.

The companies that now drive the Bay Area’s soaring wealth — and that represent part of the American economy that’s booming — don’t need these communities in the same way. Google’s digital products don’t have a physical supply chain. Facebook doesn’t have dispersed manufacturers. Apple, which does make tangible things, now primarily makes them overseas.

A changing economy has been good to the region, and to a number of other predominantly coastal metros like New York, Boston and Seattle. But economists and geographers are now questioning what the nature of their success means for the rest of the country. What happens to America’s manufacturing heartland when Silicon Valley turns to China? Where do former mill and mining towns fit in when big cities shift to digital work? How does upstate New York benefit when New York City increases business with Tokyo?

The answers have social and political implications at a time when broad swaths of the country feel alienated from and resentful of “elite” cities that appear from a distance to have gone unscathed by the forces hollowing out smaller communities. To the extent that many Americans believe they’re disconnected from the prosperity in these major metros — even as they use the apps and services created there — perhaps they’re right.

“These types of urban economies need other major urban economies more than they need the standardized production economies of other cities in their country,” said Saskia Sassen, a sociologist at Columbia who has long studied the global cities that occupy interdependent nodes in the world economy. New York, in other words, needs London. But what about Bethlehem, Pa.?

Bethlehem, Pennsylvania

Such a picture, Ms. Sassen said, “breaks a past pattern where a range of smaller, more provincial cities actually fed the rise of the major cities.” Now major cities are feeding one another, and doing so across the globe.

Ram Mudambi, a professor in the Fox School of Business at Temple University, offers an even more unnerving hypothesis, in two parts: The more globally connected a city, the more prosperous it is. And as such cities gain global ties, they may be shedding local ones to the “hinterland” communities that have lost their roles in the modern economy or lost their jobs to other countries.

Chicago Panorama Skyline

Chicago, Illinois

Richard Longworth, a distinguished fellow with the Chicago Council on Global Affairs, fears that exactly this is happening in Chicago. The metropolitan area long sat at the center of a network of economic links crisscrossing the Midwest. They connected Chicago to Wisconsin mill towns that sent their lumber there, Iowa farmers who supplied the city’s meatpackers, Michigan ice houses that emerged along the railroads transporting that meat to New York.

“These links have been broken,” Mr. Longworth said. Of course, some remain. And antipathy toward prosperous big cities is not a new theme in history. “But this is different: This is deeper,” Mr. Longworth said. “It is also, as far as we can see, permanent, simply because the economy that supported the earlier relationships has gone away and shows no sign of coming back.”

Emily Badger writes about cities and urban policy for The Upshot from the San Francisco bureau. She’s particularly interested in housing, transportation and inequality — and how they’re all connected. She joined the Times in 2016 from The Washington Post. @emilymbadger

To be continued


The Expense-Account Racket

Another shocking exposé, this one from The Wall Street Journal, of Wall Street culture. They think of themselves as a “meritocracy” but behave more like an 18th century French aristocracy of the “let them eat cake” variety.


By ANDY KESSLER  Dec. 3, 2017 for The Wall Street Journal

It was almost a rite of passage. Soon after I started on Wall Street in the 1980s, sales folks from the trading floor invited me to dinner. We met at one of those fancy New York steakhouses where French wines flow like tap water. I felt part of a new fun group.

Until, that is, the bill came. Everyone looked at me and another new guy. “You know about the tradition, right?” I recall the senior salesman asking. “Last one in, pays.” At 26, I wasn’t sure my credit-card limit would be high enough. I sheepishly asked how to expense the enormous bill. Simple, I was told: Mark it down as a couple of cab rides a week. Oh, and welcome to Wall Street.

This story came to mind last month after Navnoor Kang, a manager at New York’s state pension fund, pleaded guilty to fraud. He had been bribed to direct bond business to the trading firms Sterne Agee and FTN Financial. This included vacations, drugs and prostitutes. I kept thinking: How the heck did the salespeople at these firms write off all this stuff on their expense accounts?

Wall Street was supposed to have been cleaned up by now. In 2006 the investment-banking firm Jefferies paid nearly $10 million in fines after lavishing gifts on Fidelity traders. These included “a booze-fueled bachelor party replete with strippers and dwarves,” according to the New York Post.

Two years later the Securities and Exchange Commission charged Fidelity for “improperly accepting more than $1.6 million in travel, entertainment, and other gifts paid for by outside brokers courting [its] massive trading business.” The perks included “premium sports tickets to events including Wimbledon, the Super Bowl, and the Ryder Cup golf tournament.” Fidelity cleaned house.

Who hasn’t fudged expenses? At one point companies could lower their taxes by deducting 100% of entertainment expenditures as legitimate business costs. Partly to cut back on those infamous three-martini lunches, Congress changed the law starting in 1987 to allow only an 80% deduction. In 1994 the government lowered it to 50%, where it stands today. I can’t think of any good reason why it isn’t zero.

Think about it: If you have to ply your clients with gifts or meals to get them to do business with your firm, then your product probably isn’t worth its price. Why should taxpayers subsidize your company for producing lame products or you for being a lousy salesman?

When the new Yankee Stadium opened in 2009, the 1,800 premium seats in the sections around home plate—as much as $2,500 a game at first—were nicknamed the Goldman Sachs seats. This was during the financial crisis, and the optics of opulent bankers sipping champagne near the on-deck circle became too much. One Goldman partner told me at the time that if any of the firm’s employees were seen in those seats, with or without clients, they would be fired on the spot.

Houston Mayor Sylvester Turner told the Houston Chronicle that this year’s Super Bowl LI brought $350 million into the city’s economy—in one weekend, and you know virtually all of it was expensed. Thank you, taxpayers. Vic Macchio, who runs a corporate dining network called Dinova, has estimated the “business dining spend in the U.S. to be $60+ billion annually.” I’ll bet that’s low.


All this presents an opportunity. Why not zero out the tax deduction for business entertainment? Same for “sponsorships” and other client giveaways. That’s, by my calculations, tens of billions lost every year in exchange for unproductive schmoozing and bribes to buy bad products. Restaurants and bars will complain. So what? It would remove another distortion from the tax code.

And some personal advice: A lot of people cheat on their expense accounts, but don’t do it. I can go on about moral responsibility but will instead note that software can make audits easy. Modern code could have quickly found my months of illusionary taxi rides.

I’ll also remind you of Mark Hurd, Hewlett-Packard’s ex-CEO. In 2010 he was accused of sexual harassment by an outside contractor, an actress named Jodie Fisher. HP ’s board found that Mr. Hurd didn’t violate the company’s sexual-harassment policy, but he got axed anyway—for $20,000 of irregularities with his expense accounts.


The Three Richest Men in the World


Read what this blog is all about. These two men, Collins and Hoxie, who wrote the column are experts in economic inequality.

By CHUCK COLLINS and JOSH HOXIE  Nov. 15, 2017 for The Los Angeles Times

It can be hard to grasp just how much money is concentrated in just a few hands in our lopsided economy today. But here’s a start: The richest three people in the United States — Jeff Bezos, Bill Gates and Warren Buffett — together have more wealth than the entire bottom half of the country combined.

To put an even finer point on it: That’s three people versus about 100 million people.

To really comprehend just how insane the wealth concentration has become, consider Bezos, the head of Amazon. Worth about $90 billion, he recently was declared the richest man in the world. In October alone, his wealth jumped by $10 billion — or about $4 million per second.

Given his massive wealth, one might imagine that his company has enough to pay its warehouse workers a minimum of $15 an hour. But apparently it doesn’t. Amazon pays some of its workers as little as $12.84 an hour.

 That’s pretty much the trend we’re seeing play out over and over across the U.S. economy— wealth funneling to a tiny group at the top while everyone else scrambles for crumbs.

On the other end of the spectrum from Bezos, tens of millions of families are trying desperately to make their paychecks last through the week. One in 5 households has zero or negative wealth today, meaning they have as much debt as they do assets. (That’s why the three-versus-160 million figure is so stark: Many people have nothing.)

Having no savings or wealth means having no cushion to fall back on when you’re hit with the unexpected — an illness or medical emergency that results in large hospital bills, say, or the loss of a job. With no buffer, even a broken-down car can wreak financial havoc on a family, turning a stable situation into quicksand. We see this domino effect play out all the time, as our social media feeds are filled with crowdfunding requests by people who need help covering basic life expenses.

Not surprisingly, these zero-wealth households are disproportionately African American or Latino, a result of our country’s long history of discrimination. Three in 10 black households are underwater. Nearly the same proportion of Latino households are too.

The problem is getting worse, not better. Today, the poorest member of the Forbes 400 has $2 billion. This represents a tenfold jump from when the magazine first started its list in 1982. And that’s after adjusting for inflation.

In fact, with a combined wealth of $2.68 trillion, the billionaires of the Forbes 400 have more wealth than the entire GDP of the United Kingdom, the world’s fifth wealthiest country. This marks yet another tenfold increase from the 1980s.

The rest of the country has not shared in the economic gains of the past three decades. In 1983, the first year the Federal Reserve started collecting consistent data, the median family had $83,000 in today’s terms. That number has now fallen to $80,000.

In other words, while today’s 400 richest Americans are 10 times richer than 1983’s richest Americans, the median family is worse off than the median family 34 years ago.

The few at the top of the ladder have captured a massive share of the nation’s wealth, and they’re quickly translating that wealth into political power — pushing for more tax cuts for themselves, to be shepherded through the legislative process by politicians who are indebted to them for their campaign contributions. This is a moral disgrace.

We urgently need to close, not expand, our wealth divide. And we need to start by saying no to more tax cuts for the wealthy and growing economic opportunities for everyone else. Enough is enough.

Chuck Collins and Josh Hoxie are co-authors of a new report, Billionaire Bonanza 2017: The Forbes 400 and the Rest of Us.” They co-edit the web site at the Institute for Policy Studies.


Guess Who Benefits from Collusion with Russia—and How?

The Paradise Papers again reveal how corrupt some of our business community is—in this case in  its dealings with Russia—particularly that portion of it closest to the present administration.

And yet to many observers on America’s political left, questions about Russia’s interference in last year’s election are a frustrating distraction.

Katrina vanden Heuvel

Some believe that Russian meddling is, at best, irrelevant to the needs of working-class Americans, whom Democrats should focus on: Katrina vanden Heuvel, the editor of The Nation, has chastised Democrats, saying, “Focusing on Trump’s ties to Russia alone will not win the crucial 2018 midterm elections, nor will it win meaningful victories on issues like health care, climate change, and inequality that affect all of our lives.”

Others say that the investigation is an overhyped, “neo-McCarthyist” conspiracy theory. The journalist Masha Gessen, for example, wrote in The New York Review of Books that it was “distracting from real, documentable, and documented issues” and at the same time “promoting a xenophobic conspiracy theory in the cause of removing a xenophobic conspiracy theorist from office.”

Noam Chomsky

Noam Chomsky has said that Russian interference in the election is “not a major issue” and that Americans’ obsession with it is making our country “a laughingstock,” especially considering the United States’ reputation for meddling in other countries’ politics. Moreover, many who oppose American hawkishness feel that the Russia scandal helps keep tensions alive with an old Cold War enemy.

For supporters of Bernie Sanders’s presidential campaign, “Russia” can seem like Hillary Clinton’s convenient excuse for her failings as a candidate. In the words of Glenn Greenwald, Russian interference “explains otherwise-confounding developments, provides certainty to a complex world, and alleviates numerous factions of responsibility.”

But as the investigation led by Robert Mueller closes in on more Trump associates like Paul Manafort and Michael Flynn, it seems clear that the Russia story is only going to get bigger. Rather than downplay or deny it, the left should embrace it. Mr. Trump’s Russia ties illustrate the dangers of inequality and elite corruption — and point to the need for radical solutions.

The release this month of millions of leaked documents known as the Paradise Papers establishes what leftists have argued for years: The United States-led push for free trade and a globalized economy has resulted in vast, unaccountable flows of untaxed offshore wealth. The policies of the post-Cold War Washington consensus have enriched the 1 percent and offered new ways to shelter and launder money across borders.

                                                                                                                      Wilbur Ross & Vladimir Putin

A transnational oligarchy has arisen, with secretive business partnerships tying, for instance, Wilbur Ross, Mr. Trump’s commerce secretary, to the family of President Vladimir Putin of Russia. Far from undermining left-wing arguments, discussing these arrangements perfectly demonstrates the failings of contemporary capitalism.

Paul Manafort

Mr. Manafort’s indictment is a case study in international corruption. For years, the indictment says, he operated as an unregistered lobbyist for authoritarian governments, a popular racket in Washington. To avoid taxes, according to the indictment, he set up offshore bank accounts and laundered money through real estate and luxury goods — a common practice that enriches plutocrats while exacerbating housing crises in cities like New York and London by pumping billions of dollars of looted wealth into a tight real estate market.

While Mr. Manafort crossed lines (he has confessed to making false statements and material omissions) and now faces legal consequences, his long career typifies the amorality, opulence and lack of accountability that successive American governments have enabled.

Many establishment Democrats and Republicans in the self-proclaimed “resistance” to Mr. Trump say they are deeply concerned about the Russia scandal, but they have largely failed to consider its full implications.

To “Never Trump” conservatives, the main takeaways are that the United States needs to step up its confrontation with Russia in Ukraine, Syria and elsewhere, and that the Obama administration was insufficiently tough on Mr. Putin. Many Democrats, meanwhile, argue that Russian interference means that Mr. Trump’s presidency is illegitimate and that Mrs. Clinton is not to blame for her loss.

But Russian meddling in American politics is, in fact, the product of a long series of bipartisan policy failures. Democrats and Republicans alike supported trade policies that facilitated the rise of plundered fortunes in countries like Russia and China. For instance, in the 1990s, both the Bush and Clinton administrations encouraged the aggressive privatization of the Russian economy, which resulted in collapsing living standards, a new class of robber barons and a backlash against liberal democracy that Mr. Putin exploits to this day.

Vladimir Putin

Left-wing critics of American foreign policy correctly point out that Russia is a convenient punching bag for hawkish pundits and politicians. But the most powerful counterweights to these hawks aren’t exactly progressive champions either: American corporations have lobbied against recognizing Mr. Putin’s human rights abuses and have sought to exploit Russia’s natural resources. Energy companies like Exxon Mobil, whose former chief executive, Rex Tillerson, now serves as secretary of state, have partnered with Russia and have sought waivers from international sanctions to drill for oil in Russia. A new Cold War would be dangerous, but so would a warmer United States-Russia relationship that enriches oil company executives in both countries.

Rex Tillerson

As a rising generation of leftists increasingly asserts itself within the Democratic Party — and may, eventually, have the opportunity to shape foreign policy — it must articulate a new approach to Russia consistent with its core values. This approach should be driven neither by the interests of the national security state nor by the energy sector. Instead, it should aim to block Russia’s kleptocratic elite from safeguarding its assets in the United States, to clean up the influence of foreign lobbying on Washington and to shut down tax havens for billionaires everywhere. The investigation into the Trump campaign’s Russia ties provides an opportunity to focus on these issues.

Bernie Sanders

“Inequality, corruption, oligarchy and authoritarianism are inseparable,” Mr. Sanders said in a recent address. “Around the world we have witnessed the rise of demagogues who once in power use their positions to loot the state of its resources. These kleptocrats, like Putin in Russia, use divisiveness and abuse as a tool for enriching themselves and those loyal to them.” For Americans who broadly share Mr. Sanders’s views, this should be the real lesson of the Russia scandal.



How Corporations and the Wealthy Avoid Taxes (and How to Stop Them) I

For those of you who read us carefully there is an element of deja vu in today’s column. But this wholesale disregard for the poor of this country by the rich—this avoidance by our high tech companies of paying the debt they owe the country that nurtured them—is a disgrace that deserves to be repeatedly pointed out, as this article from The New York Times does.

 What you will read in this column is based on information only recently obtained. These documents have a spellbinding history. According to an account from the New Yorker magazine: “the 13.4 million files—1.4 terabytes of data—that were leaked last year to [Bastian] Obermayer [a reporter for the German newspaper Süddeutsche Zeitun] and his colleague Frederik Obermaier . . . have come to be known as the Paradise Papers. In coördination with the International Consortium of Investigative Journalists, three hundred and eighty-one journalists in sixty-seven countries had worked with the leaked information, much of which originated at the Bermuda law firm Appleby, to report stories on how wealthy individuals and companies use offshore accounts to make their fortunes untraceable and unreachable.”

The article is presented in two parts.

By GABRIEL ZUCMAN   Nov. 10, 2017 for The New York Times


The United States loses, according to my estimates, close to $70 billion a year in tax revenue due to the shifting of corporate profits to tax havens. That’s close to 20 percent of the corporate tax revenue that is collected each year. This is legal.

Meanwhile, an estimated $8.7 trillion, 11.5 percent of the entire world’s G.D.P., is held offshore by ultrawealthy households in a handful of tax shelters, and most of it isn’t being reported to the relevant tax authorities. This is… not so legal.

These figures represent a huge loss of resources that, if collected, could be used to cut taxes on the rest of us, or spent on social programs to help people in our societies.

How do they do it?

For an example, look no further than your search bar. In 2003, a year before it went public, Google (now a multinational conglomerate known as Alphabet) began a series of moves that would allow it to obtain favorable tax treatment in the future.

See where this is going? In 2015, $15.5 billion in profits made their way to Google Ireland Holdings in Bermuda even though Google employs only a handful of people there. It’s as if each inhabitant of the island nation had made the company $240,000.

The corporate tax rate there is zero


In doing this, Google didn’t break the law. Corporations like Google are simply shifting profits to places where corporate taxes are low. It’s not just Internet companies with valuable intellectual property that do this. A car manufacturer, for instance, might shift profits by manipulating export and import prices – exporting car components from America to Ireland at artificially low prices, and importing them back at prices that are artificially high.

According to the latest available figures, 63 percent of all the profits made outside of the United States by American multinationals are now reported in six low- or zero-tax countries: the Netherlands, Bermuda, Luxembourg, Ireland, Singapore and Switzerland. These countries, but above all the shareholders of these corporations, benefit while others lose.

My colleagues Thomas Torslov and Ludvig Wier and I combined the data published by tax havens all over the world to estimate the scale of these losses. The $70 billion a year in revenue that the United States is deprived of is nearly equal to all of America’s spending on food stamps. The European Union suffers similar losses.

poverty-ratejpg-58b9ed545227c90d_large    Lining up for food stamps in America today

So what can be done?

Thankfully, Ireland has announced it will close the “double Irish” loophole that Google used, and arrangements that take advantage of that loophole must be terminated by 2020. But similar strategies will be used as long as we let companies choose the location of their profits.

Just look at what Apple did in 2014 — it’s one of the most spectacular revelations from the newly released Paradise Papers. After learning Irish authorities were going to close loopholes it had used, Apple asked a Bermuda-based law firm, Appleby, to design a similar tax shelter on the English Channel island of Jersey, which typically does not tax corporate income. Appleby duly obliged, and Jersey became the new home of the (previously Irish) companies Apple Sales International and Apple Operations International.

A potential fix would be to allocate the taxable profits made by multinationals proportionally to the amount of sales they make in each country.

Say Google’s parent company Alphabet makes $100 billion in profits globally, and 50 percent of its sales in the United States (a relatively similar scenario to the first quarter of this year, in which that figure was 48 percent). In that case, $50 billion would be taxable in the United States, irrespective of where Google’s intangible assets are or where its workers are employed. A system similar to this already governs state corporate taxes in America.

DEHl-5HW0AAWD1m     13 million children in the United States are undernourished today

Such a reform would quash artificial profit-shifting. Corporations may be able to shift around profits, assets, and subsidiaries, but they cannot move all their customers to Bermuda.

This system is not perfect, but it’s orders of magnitude better than both the laws that now govern the taxation of international profits and the tax package being proposed by congressional Republicans. Under the proposed plan some international profits would be taxed at 10 percent, but there are many likely exemptions.

One advantage of allocating taxable profits as I suggest is that this reform can be adopted unilaterally. There is no need for the United States (or any other nation that wants to cut down on tax avoidance) to obtain permission from anybody.

But we’d still face an equally daunting problem, the far more shadowy—and ultimately illegal—tax evasion of ultra wealthy individuals, many of them with net worths already bolstered by the proceeds of corporate tax avoidance.

This article is continued in a future blog.

 Gabriel Zucman is a professor of economics at the University of California, Berkeley and author of “The Hidden Wealth of Nations.”


Multinational Companies 3: The “Double Irish”

We conclude the three-part article describing how Apple and other multinational firms avoid paying a large part of their taxes.

But the plan to use Jersey faced a potential snag: In mid-2014, again under pressure from other governments, Irish ministers explored ending a tax shelter known as the “double Irish,” used by scores of companies, including the Appleby clients Allergan and Facebook, as well as Google, LinkedIn and other businesses.

The double Irish allows companies to collect profits through one subsidiary that employs people in Ireland, then route those profits to an Irish mailbox subsidiary that is a tax resident of an offshore haven like Bermuda, Grand Cayman or the Isle of Man.


25-73a6720b24181                Grand Cayman Isles                                                                                                                                         

10deb8a0df49b4ecdf1c27b9dbe7aa9f0a4494fa                         Isle of Man

Irish officials explored a ban on Irish companies claiming tax residency in tax havens. Executives at Allergan — which had used a double Irish for at least a decade, records show — tried to derail the rule change. Terilea Wielenga, then Allergan’s head of tax, was also international president of the Tax Executives Institute, a trade group. She argued to the Irish finance ministry in July 2014 that any such changes should occur slowly.

The campaign seemed to work. “For existing companies, there will be provision for a transition period until the end of 2020,” Mr. Noonan declared in October 2014. The gradual phase-in would apply not just to existing companies but to any new ones created by December of that year.

This gave Apple just enough time. By the end of the year, Jersey had become the new tax home of the Irish companies Apple Sales International and Apple Operations International.

But a third Apple subsidiary, Apple Operations Europe, became resident in Ireland.

Apple would not say why. But tax experts offer one possible reason. While media attention focused on Ireland’s crackdown on the double Irish, officials announced a new measure: The country expanded its tax deductions for companies that move rights to intellectual property — like patents and trademarks — into Ireland. If an Irish company spent $15 billion buying such rights, even from a fellow subsidiary, it could claim a $1 billion tax deduction each year for 15 years.

Apple declined to say whether it has availed itself of the new benefit.

But J. Richard Harvey, a Villanova law professor and former I.R.S. official who reviewed the Appleby documents, concluded that there was a strong possibility the company moved intellectual property into Ireland to take advantage of the generous tax rules. Based on Apple’s American securities filings, he estimated that the transfer was worth about $200 billion.

That would mean that any income that Apple now generates in Ireland could be partially offset by more than $13 billion in tax deductions each year for 15 years.

Apple’s hunt for a tax haven is a familiar tale, said Reuven Avi-Yonah, director of the international tax program at the University of Michigan Law School, who also reviewed the Appleby documents.

“This is how it usually works: You close one tax shelter, and something else opens up,” he said. “It just goes on endlessly.”


U.S. Companies Hold Trillions of Dollars of Profits Offshore                                                   

The top 20 S&P 500 companies by earnings parked overseas:

Apple $236 billion. . . Pfizer  $178 billion. . . Microsoft $146 billion . . . General Electric $82 billion . . . Google $78 billion . . . IBM $71 billion . . . Merck $71 billion . . . Johnson & Johnson $66 billion . . . Cisco Systems $66 billion . . . Exxon Mobil $54 billion . . . Oracle $54 billion . . . Procter & Gamble $49 billion . . . Citigroup $47 billion . . . Intel $46 billion . . . Chevron $46 billion . . . PepsiCo $45 billion . . . Hewlett Packard Enterprise $41 billion . . . HP $41 billion . . .  JPMorgan Chase & Co. $38 billion . . . Gilead Sciences $38 billion

Simon Bowers is a reporter for the International Consortium of Investigative Journalists


Multinational Firms 2: Seeking “The Holy Grail”

We continue this three-part article on how Apple and other multinational companies manage to keep the bulk of their profits out of the United States.

Since the mid-1990s, multinationals based in the United States have increasingly shifted profits into offshore tax havens. Indeed, a tiny handful of jurisdictions — mostly Bermuda, Ireland, Luxembourg and the Netherlands — now account for 63 percent of all profits that American multinational companies claim to earn overseas, according to an analysis by Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley. Those destinations hold far less than 1 percent of the world’s population.

Criticism of such profit shifting was largely ignored until government finances around the globe came under pressure in the years following the 2008 financial crisis, when the practice led to government inquiries, tax inspector raids, media scrutiny and promises of reform.

In May 2013, the Senate’s investigative subcommittee released a 142-page report on Apple’s tax avoidance, finding that the company was attributing billions of dollars in profits each year to three Irish subsidiaries that declared “tax residency” nowhere in the world.

Under Irish law, if a company can convince Irish tax authorities that it is “managed and controlled” abroad, it can largely escape Irish income tax. By seeming to run its Irish subsidiaries from its world headquarters in California, Apple ensured that Irish tax residency was avoided.

At the same time, American law dictated that the subsidiaries were only tax residents in the United States if incorporated there. The federal government permits taxes on any income generated by foreign units to be deferred indefinitely, as long as the company says those profits stay offshore.

“Apple has sought the holy grail of tax avoidance: offshore corporations that it argues are not, for tax purposes, resident anywhere in any nation,” then-Senator Carl Levin, Democrat of Michigan, who was the subcommittee chairman, said at the 2013 hearing.

Ireland’s finance minister at the time, Michael Noonan, at first defended his country’s policies: “I do not want to be the whipping boy for some misunderstanding in a hearing in the U.S. Congress.” Ireland had long pursued business-friendly tax policies, which helped lure jobs to the country, primarily for technology and pharmaceutical companies. Apple now has about 6,000 employees in Ireland, including customer service and administrative jobs.

Apple’s offices in Cork, Ireland. The company is being pursued for $14.5 billion in back taxes after European regulators ruled that its old tax structure amounted to illegal state aid from the Irish government. Credit Andrew Testa for The New York Times

But by October 2013, in response to growing international pressure, Mr. Noonan announced that Irish companies would have to declare tax residency somewhere in the world.

At that time, Apple had accumulated $111 billion in offshore cash, mostly in its Irish subsidiaries. Billions of dollars in new profits poured into them each year. Yet they paid almost no corporate income tax.

Company officials wanted to keep it that way. So Apple sought alternatives to the tax arrangement Ireland would soon shut down. And the officials wanted to be quiet about it.

“For those of you who are not aware Apple [managers] are extremely sensitive concerning publicity,” wrote Cameron Adderley, global head of Appleby’s corporate department, in a March 20, 2014 email to other senior partners. “They also expect the work that is being done for them only to be discussed amongst personnel who need to know.”

In building Apple’s new tax shelter, Appleby served as something of a general contractor. A key architect was Baker McKenzie, a huge law firm based in Chicago. The firm has a reputation for devising creative offshore structures for multinationals and defending them to tax regulators. It has also fought international proposals for tax avoidance crackdowns.

Baker McKenzie wanted to use a local Appleby office to maintain an offshore arrangement for Apple. For Appleby, Mr. Adderley said, this assignment was “a tremendous opportunity for us to shine on a global basis with Baker McKenzie.”

Baker McKenzie’s San Francisco office emailed a 14-item questionnaire in March 2014 to Appleby’s offices in Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man and Jersey.

“Confirm that an Irish company can conduct management activities (such as board meetings, signing of important contracts) without being subject to taxation in your jurisdiction,” the document requested. Baker McKenzie also asked for assurances that the local political climate would remain friendly: “Are there any developments suggesting that the law may change in an unfavourable way in the foreseeable future?”

(A Baker McKenzie spokesman said, “As a matter of general policy, we do not comment on confidential client matters.”)

Apple decided that its new offshore tax structure should use Appleby’s office in Jersey, which is one of the Channel Islands and has strong links to the British banking system. Jersey makes its own laws and is not subject to most European Union legislation, making it a popular tax haven.

The Isle of Jersey

To be continued


Multinational Firms 1: How Apple Found a New Shelter for its Profits

A German newspaper has discovered how American firms, who have done all of their original exploratory work in the United States, relying on our government’s research and development and the technical savvy of our culture, have managed to shift enough of their work and intellectual properties abroad to avoid paying their debt to this country in the form of taxes. The extreme disloyalty to their country of origin exhibited by these so-called multinational corporations reveals itself in their lack of concern for its underclass. Their avoidance of making any contribution to this disadvantaged group makes thoughtful people wonder whether they deserve even to be called American.

 Read the three-part article below and form your own conclusions about Apple, Nike, Uber, Allergan, Facebook and others.

merlin_129599126_df6b5d6f-075b-4774-bd55-7353f9d84a97-master315Tim Cook was angry.

It was May 2013, and Mr. Cook, the chief executive of Apple, appeared before a United States Senate investigative subcommittee. After a lengthy inquiry, the committee found that the company had avoided tens of billions of dollars in taxes by shifting profits into Irish subsidiaries that the panel’s chairman called “ghost companies.”

“We pay all the taxes we owe, every single dollar,” Mr. Cook declared at the hearing. “We don’t depend on tax gimmicks,” he went on. “We don’t stash money on some Caribbean island.”

True enough. The island Apple would soon rely on was in the English Channel.

Five months after Mr. Cook’s testimony, Irish officials began to crack down on the tax structure Apple had exploited. So the iPhone maker went hunting for another place to park its profits, newly leaked records show. With help from law firms that specialize in offshore tax shelters, the company canvassed multiple jurisdictions before settling on the small island of Jersey, which typically does not tax corporate income.

Apple has accumulated more than $128 billion in profits offshore, and probably much more, that is untaxed by the United States and hardly touched by any other country. Nearly all of that was made over the past decade.

The previously undisclosed story of Apple’s search for a new tax haven and its use of Jersey is among the findings emerging from a cache of secret corporate records from Appleby, a Bermuda-based law firm that caters to businesses and the wealthy elite.

The records, shared by the International Consortium of Investigative Journalists with The New York Times and other media partners, were obtained by the German newspaper Süddeutsche Zeitung.

The documents reveal how big law firms help clients weave their way through the gaps between different countries’ tax rules. Appleby clients have transferred trademarks, patent rights and other valuable assets into offshore shell companies, avoiding billions of dollars in taxes. The rights to Nike’s Swoosh trademark, Uber’s taxi-hailing app, Allergan’s Botox patents and Facebook’s social media technology have all resided in shell companies that listed as their headquarters Appleby offices in Bermuda and Grand Cayman, the records show.

“U.S. multinational firms are the global grandmasters of tax avoidance schemes that deplete not just U.S. tax collection but the tax collection of most every large economy in the world,” said Edward D. Kleinbard, a former corporate tax adviser to such companies who is now a law professor at the University of Southern California.

Indeed, tax strategies like the ones used by Apple — as well as Amazon, Google, Starbucks and others — cost governments around the world as much as $240 billion a year in lost revenue, according to a 2015 estimate by the Organization for Economic Cooperation and Development.

The disclosures come on the heels of last week’s proposals by Republican lawmakers to provide several new tax benefits for multinational companies, including cutting the federal corporate income tax rate to 20 percent from 35 percent. President Trump has said that American businesses are getting a bad deal under current rules.

But the documents show how major American companies find creative ways to avoid paying anything close to 35 percent.

07Apple1-superJumboApple Park, the technology company’s new headquarters in Cupertino, Calif.                          Credit Peter Bittner for The New York Times 

Apple, for example, pays taxes at a small fraction of that rate on its offshore profits, according to calculations by The Times based on the company’s securities filings. Apple reports that nearly 70 percent of its worldwide profits are earned offshore.

An Apple spokesman, Josh Rosenstock, declined to answer most questions about the company’s tax strategy. He did say that Apple had told regulators — in the United States and Ireland and at the European Commission — about the reorganization of its Irish subsidiaries. “The changes we made did not reduce our tax payments in any country,” he said.

He added: “At Apple we follow the laws, and if the system changes we will comply. We strongly support efforts from the global community toward comprehensive international tax reform and a far simpler system.”

In prepared statements, Allergan, Facebook, Nike and Uber said they complied with tax regulations around the world.

Congressional Republicans are also seeking to impose a 10 percent tax on some of the profits that American businesses say are earned offshore — half the rate they are proposing for profits in the United States. The lawmakers have also proposed another break, permitting multinationals to bring home more than $2.6 trillion stowed offshore at sharply reduced tax rates. Both proposals, critics say, would only create additional incentives for businesses like Apple to shift more profits into island hideaways.

Appleby is a member of the global network of lawyers, accountants and bankers who set up or manage offshore companies and accounts for clients who want to avoid taxes or keep their finances a secret from authorities, business partners or even spouses. The firm did not respond to questions from The Times about its work for Apple or other companies.

Tax authorities have challenged several of the offshore structures maintained by Appleby and Estera, a spinoff of the law firm’s corporate services business. Nike won a fight over back taxes with the Internal Revenue Service a year ago; a similar dispute between the I.R.S. and Facebook is continuing.

European regulators are trying to force countries including Ireland, Belgium, Luxembourg and the Netherlands to collect back taxes from big companies that relied on offshore arrangements. Apple is being pursued for $14.5 billion in back taxes after European regulators ruled that its old tax structure amounted to illegal state aid from the Irish government.

To be continued