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July 10th 2006

In This Issue

Economic Notes:

This Weeks Leads


 

Scorecard

Why U.S. Companies Shouldn't Whine About Taxes

To hear some people talk, the United States is the scourge of the Fortune 500. Despite all the tax cuts that President Bush and Congress have passed in the last five years, business groups and their supporters in Washington complain that the United States imposes higher tax rates on corporate profits than almost any other industrialized country.

"Foreign-based competitor companies operate under tax rules that are often more favorable than our own," warned R. Glenn Hubbard, a former economic adviser to President Bush and now dean of the Columbia Business School, at a House hearing two weeks ago. "Current law can result in circumstances that harm the competitiveness of U.S. companies."

Around Washington, the rumblings are growing for "reform" of corporate taxes to improve the global competitiveness of American companies.

Henry M. Paulson Jr., the incoming Treasury secretary, declared at his confirmation hearing that he wanted to increase "competitiveness" in the tax code.

Can it be true that the United States, where bare-knuckled capitalism is a romantic ideal and being nouveau riche is a badge of honor, is harder on big corporations than "old Europe" welfare states like Germany, France and Sweden?

Don't believe it. There are plenty of problems with the corporate tax code — rococo complexity, perverse incentives, antique ideas — but overly high taxes is not one of them.

By most measures, the corporate tax burden is lower in the United States than it is in the European Union or in Japan or most other industrialized countries.

The political danger, at least from a fiscal standpoint, is that arguments for corporate tax reform will be hijacked to justify another round of corporate tax cuts. That was what happened with the corporate tax overhaul of 2004, which became a grab bag of tax breaks to almost every corner of business, at a net cost of $60 billion over 10 years.

Those who see the American corporate tax as oppressive point to a striking fact: the standard corporate tax rate of 35 percent is now higher than that of most other industrialized countries. The average top rate is 25.8 percent in the European Union, where most nations have cut rates to attract investment.

But official tax rates are not the same as actual tax burdens. What American companies lose in high tax rates they more than make up in higher tax breaks.

One indicator of the true tax burden is corporate tax revenue as a share of gross domestic product. According to the Organization for Economic Cooperation and Development, a research organization based in Paris and financed by governments of industrialized nations, corporate taxes in 2003 were 2.1 percent of G.D.P. in the United States, 3.2 percent in the European Union and 4.3 percent in industrialized countries in Asia.

Though comparisons of true tax rates are treacherous, the evidence suggests that the United States more than makes up for high statutory rates with generous tax breaks. Robert S. McIntyre, director of Citizens for Tax Justice, has calculated that the average corporation paid taxes of about 18 percent in 2004.

The European Commission, using a more theoretical approach, calculated that the average effective tax rate in 15 Western European nations has hovered between 20 and 22 percent since 1998. When the 10 new Central European members of the European Union are included, the average corporate tax bite was 17.7 percent.

"There is good reason to believe that the corporate tax burden in the United States could be less than the rest of the world because the rest of the world has been broadening their tax bases while we have been cutting ours," said Martin A. Sullivan, an analyst at the journal Tax Notes.

To be sure, many experts contend that the American tax code does impose some competitive disadvantages. One big complaint is that the United States is one of the very few countries that taxes corporate profits worldwide. Almost all other nations use "territorial" systems, taxing only profits inside their borders.

The difference is significant. Thyssen-Krupp, the German steel conglomerate, owes no German taxes on profits from its operations in Brazil, China or Poland. And European value-added tax on domestic sales does not apply to exports to the United States. United States Steel, by contrast, potentially owes American taxes on profits from its subsidiary in Slovakia and must also charge value-added taxes on exports sold in Germany.

In practice, the disadvantage is smaller than it appears. For one thing, American companies receive tax credits for taxes paid in other countries. More important, American companies have proved extremely adept at shifting profits into low-tax countries like Ireland and then deferring the American taxes on those profits by keeping them outside the United States.

Under current federal law, companies can postpone taxes on foreign profits until those profits return to the United States. By some estimates, American multinationals had accumulated more than $400 billion in profits outside the country.

Last year, Congress rewarded that behavior. First, it widened companies' ability to claim tax credits against their foreign taxes, at a cost to the Treasury of almost $40 billion over 10 years. Second, it gave companies a one-time chance to repatriate their vast hoard of overseas profits at a tax rate of only 5.25 percent — a bonanza for many pharmaceutical and electronics businesses.

"The current U.S. rules, while complex, represent the best of all worlds for multinational taxpayers," declared Stephen E. Shay, a former international tax counsel to the Treasury Department, at a hearing last month of a House Ways and Means subcommittee.

Many analysts agree that today's rules are a mess: they do not raise much revenue from foreign profits, they encourage companies to invest outside the United States, they encourage profit-shifting schemes and they probably put some American companies at a competitive disadvantage.

The challenge is to change the system without cutting taxes yet again. Michael J. Graetz, a professor at Yale Law School and a proponent of radical tax overhaul, told lawmakers last month that the top corporate tax rate ought to be cut from 35 percent to as little as 15 percent.

But Mr. Graetz said Congress would have to make up for the lost revenue. "It is not possible to achieve this kind of corporate rate reduction without a major restructuring of our domestic tax system," he said.

President Bush called for exactly such a revenue- neutral restructuring during his re-election campaign. But any overhaul would provoke intense battles between potential winners and losers. With Republicans terrified about losing control of Congress in the midterm elections this year, Mr. Bush has postponed making any proposals until at least next year.

Source:New York Times, Organization for Economic Co-operation and Development, 2006


Leadership Lessons from Survivors: 'Climbing on the Mountain's Schedule, Not Ours'

At Wharton's 10th annual leadership conference on June 13, the theme of "Leading with Resilience: Coming Back from Challenge and Adversity" brought together speakers who had faced hardships in a number of different areas. Perhaps none of the speakers, however, had experienced as much physical danger as David Breashears, filmmaker and mountaineer, who recounted how he and his team survived one of the deadliest accidents in the history of Mt. Everest.

"So where does a mountaineer and filmmaker fit into this conference?" Breashears asked. "Resilience, excellence, determination, conviction, resolve" -- words that are often used to describe a successful team anywhere, whether on Wall Street or on a cliff. "The mountain has been my workplace," said Breashears, adding that his high-altitude pursuits have taught him a few things about planning and leadership.

The Best-laid Plans

Climbing the world's highest mountain under normal circumstances requires months, sometimes years, of preparation. In May 1996, Breashears and his team faced a special challenge: making an IMAX film about their journey. Carrying and maintaining hundreds of pounds of filming equipment meant that planning was even more meticulous than usual. "We went to that mountain with a great plan, an elegant plan," said Breashears. For one, it was flexible. "A good plan makes you nimble, not stuck. Ours gave us options ... wiggle room."

By rehearsing extensive "what if" scenarios long before they got to the mountain, the team was ready for the unexpected. So when a freak storm hit the day they were to approach the summit, Breashears' team turned back while other teams kept climbing. With the summit just within reach, the temptation to go on was enormous, Breashears recalled, especially since the team had already spent weeks on the mountain, passing through all four base camps and acclimatizing their lungs to the thin air. Yet, as Breashears noted, "We had to climb on the mountain's schedule, not ours," an acknowledgment that probably saved his life.

As Breashears' team went back down, they passed several other teams on their way up. By nightfall, eight people had perished, including Rob Hall, a world-renowned climber and friend of Breashears. Hall was leading a group of individuals who had paid him a substantial fee to lead them to the top. Jon Krakauer, a writer and outdoorsman who was on Hall's team, would eventually write the best- selling book Into Thin Air, chronicling in heartbreaking detail what had gone wrong.

Among the tragedies of that day was one event that many later described as a miracle. The storm that had hit as Hall's ill-fated team made its ascent caused many of the climbers to become separated. One small group was in desperate trouble: They had lost their way in the blinding snow and had run out of oxygen. In an attempt to save their own lives, they made the difficult decision to leave behind one of their team members, Beck Weathers, a doctor from Texas. By all accounts, Weathers was already close to death. He had no pulse and appeared to be frozen in the ground.

The next morning, however, as Breashears and his team helped with the rescue efforts for those teams still on the mountain, word came on the walkie- talkie that "the dead guy is alive." Weathers had spent the night in sub-zero temperatures fully exposed to the elements. The next morning, as the sun hit the mountain, he awoke from a hypothermic coma and, despite snow blindness and severe frostbite on his hands and feet, managed to stumble into camp. He was eventually flown off the mountain in a helicopter rescue that had its own share of danger and drama.

Having reached the summit of Mt. Everest five times, Breashears knows what he wants in a team. Surprisingly, he's not necessarily looking for the best climbers. "I look for talented people who believe in their craft, not those who are looking for praise," he said. "The most important quality is selflessness. I knew that no matter what, no one would leave me behind," he joked.

Sharing a common goal and vision is critical, and no one's ego can take precedence. "People who say 'me first' can be dangerous on Everest." Indeed, in Breashears' experience, the teams that operate best have a higher objective than themselves. Humility makes a great leader. "The kind of leader I want wakes up and asks, 'What did I do wrong yesterday, and how can I fix it today?' Your team doesn't need to like you, but they have to trust and respect you," he said. "A leader who puts his interests first is a highly demoralizing force."

Source: The Wharton School of the University of Pennsylvania


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  • Economic Notes:
    • Employment Situation

    • Employment gains were well below consensus estimates in June; the economy created only 121,000 jobs on net. However, gains for May were revised higher by 17,000 to 92,000. The unemployment rate was unchanged at 4.6%. The weak gains in June suggest that the Fed may finally pause in its tightening regime

    • Chain Store Sales

    • Chain store sales grew 2.6% in June, down from 4.5% in May (upwardly revised), and 6.7% in April, according to the ICSC chain store index. Results were mixed across retailers with several discounters and those concentrated in the Northeast among the laggards. High gasoline prices, flooding and difficult comparisons were blamed for the weakness.

    • MBA Mortgage Applications Survey

    • Mortgage demand increased last week, with the market index rising 5.9% in the week ending June 30. Purchase applications increased 6.5% and refinance applications rose 5.0%.

    • Oil and Gas Inventories

    • Crude oil inventories fell by 2.4 million barrels for the week ending June 30, according to the Energy Information Administration, above expectations of a 1.9 million barrel draw. Gasoline inventories posted a surprise increase of 0.7 million barrels, against expectations of a draw of over 1 million barrels. Refinery utilization moderated some to 93.1% for the week. This report should have a bearish impact on prices.

    • Moody's Economy.com Risk of Inflation

    • The Moody’s Economy.com probability of recession edged up in June, to 17.5% from a downwardly revised 16.6% in April. The yield curve is flattening again, which is putting upward pressure on recession risks, but an improvement in consumer confidence and equity markets is helping temper recession risks. In all, not much has changed in the past month. The chance of the economy being in recession in six months remains relatively tame, but is rising.

    • Global Business Confidence

    • Business sentiment appears to be stabilizing after steadily declining from its near record high in early May. Confidence is now consistent with growth that is near the global economy’s potential. The weakest responses are to the survey’s broadest questions, including respondents’ overall assessment of current conditions and their expectations for growth six months hence. The strongest responses are to investment in equipment and software. Hiring also remains sturdy. Businesses are equally as optimistic in North and South America and Asia, and measurably less upbeat in Europe. High-tech, construction, and natural resource firms are the most positive. Non-auto manufacturers also remain optimistic. Vehicle manufacturers are very dour.

    • Factory Orders M-3
    • Factory orders rose 0.7% in May; consensus was expecting a smaller 0.1% gain. Durable goods orders were revised up to a 0.2% drop from a 0.3% drop previously reported. Nondurable goods orders rose 1.6% in May.

    • ISM Non-Mfg.Index

    • Business activity in the non-manufacturing sectors of the economy continues to decelerate, falling 3.1 points to 57%. This deceleration is stronger than the 59% that both Moody's Economy.com and the consensus forecast predicted.

  • This Weeks Leads
    • Manchu Wok
    • Manchu Wok, Inc. trades as Manchu Wok at 206 locations nationwide, internationally and in Canada. The Chinese restaurants occupy spaces of 500 sq.ft. in food courts. Growth opportunities are sought nationwide during the coming 18 months. Typical leases run 10 years. For more information, contact Bob Vrenjak, Manchu Wok, Inc., 85 Citizen Court, Unit #9, Markham, Ontario, CN L6G 1A8; Website: www.manchuwok.com.

    • Left Bank
    • Left Bank operates six locations throughout CA. The restaurants occupy spaces of 6,000 sq.ft. to 8,000 sq.ft. in malls and street fronts. Plans call for two openings throughout CA and NV during the coming 18 months, with representation by Townsend & Associates. Typical leases run 10 years. Preferred demographic include a population of 300,000 within 10 miles. For more information, contact Michael Townsend, Townsend & Associates, 5757 Wilshire Boulevard, Suite 300, Los Angeles, CA 90036; 310- 286-9945, Fax 323-904-6302; Email: michael@townsendassociates.com.

    • Cinema North
    • Cinema North Corp., a 14-unit chain operates locations throughout CT, MA, NY and VT. The movie theaters occupy spaces of 20,000 sq.ft. to 25,000 sq.ft. in malls and entertainment, power and strip centers. Plans call for two openings throughout CT, MA and NY during the coming 18 months. Typical leases run 15 to 20 years with options.For details, contact Gerald Couture, Cinema North Corp., 930 US Route 4, Rutland, VT 05702; Website: www.cinemanorth.com.

    • Consumer Pulse
    • Consumer Pulse, Inc. trades as Consumer Pulse at 13 locations throughout CA, CO, FL, IL, MD, MI, NC, OR, PA, VA and WI. The facilities, which offer marketing research services, occupy spaces of 1,500 sq.ft. in malls. Plans call for two to three openings throughout AL, AZ, CA, CO, FL, GA, MA, NC, OR, SC and TX during the coming 18 months. For more information, contact Richard Miller, Consumer Pulse, Inc., 725 South Adams Road, Suite 265, Birmingham, MI 48009; Web site: www.consumerpulse.com.

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