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Tax analyst sees press failure as partly to blame for looming economic crisis

COMMENTARY | August 11, 2006

Martin Lobel, citing a Senate subcommittee report, notes a $40 billion to $70 billion evasion of taxes by the very wealthy. He anticipates a reduction in consumer spending and impaired bank lending.

By Martin Lobel

Economic reform seems to come only after a crisis. One reason for the delay is that the press just doesn’t report on the causes of crises before they occur. Without such reporting, inertia and the interests of the powerful, who have a vested economic interest in the status quo, make it impossible to enact reform in time.

We’re in such a situation right now. A crisis is looming but you can’t tell it from almost all news media reports on the economy.

Everyone agrees that transparency and rules to insure a level playing field are essential to a free market. Without them investors don’t have the confidence to invest. Yet, the press has essentially ignored the evidence produced by the Senate Permanent Investigations Subcommittee that our stock and commodities markets are not transparent or level playing fields and represent a real threat to our economy.

The estimates in the Subcommittee's report – and they are only estimates because of the secrecy enjoyed by these offshore entities – are that individuals have over $1.6 trillion in offshore accounts, including hedge funds which represent over half of the trades on the NYSE. Because most of these are located in tax havens, between $40 and $70 billion a year in individual taxes are evaded. At least $20 of the price of a barrel of oil is due to speculation by hedge funds that don't report their purchases because they discovered a loophole in the reporting laws put there at Enron's request.

Although the official economic statistics appear to show a pretty healthy economy, a closer examination shows that the increasing public unease about our economy is more than justified. Almost the entire growth in GDP over the last 30 years has gone to the top 1 percent of the population. In the last six or so years, the middle class has lost ground. Our savings rate is now negative. There is a limit to how many spouses can go to work or hours that can be worked.

Our economy has been sustained by consumer spending, much of which comes from refinancing middle-income housing, but that has come to a stop because the Federal Reserve Bank has had to raise interest rates. If those rates continue to increase to enable us to fund the increasing federal deficit, many of those mortgages, especially the more exotic ones that enabled people to buy houses they couldn’t otherwise afford, are likely to be higher than the value of the houses that secure them. In addition to the cut in consumer spending, this will impair bank lending because of the decline in the value of their mortgage backed securities which are part of their capital base.

Domestic businesses which have to compete against the multinational corporations are at a significant disadvantage because the multinationals are able to use transfer pricing to avoid U.S. taxes which the domestic companies are forced to pay. Some level playing field! This kind of tax planning weakens our entire economy. If the Subcommittee is right about the extent of tax evasion using phony offshore tax shelters is correct, the amount of tax avoidance by multinational corporations is far more extensive. For example, by occupying a desk in a solicitor’s office in Ireland, Microsoft was able to avoid over $300 million in taxes.

More and more hedge funds are apparently using increasingly exotic derivatives in an attempt to exceed the industry’s average profit. This is becoming increasingly difficult to do because of the flood of money into hedge funds seeking above average rates of return so these hedge funds are taking increasingly risky bets which is skewing the risk/reward ratio beyond any prudent level. Indeed, the situation has gotten so crazed that buried in the pension “reform” bill pending before the Senate is a provision allowing these hedge funds to accept more pension money. Yet, is there any doubt that, if one or more of these hedge funds started to collapse, Wall Street and the pension funds would be on Washington’s doorstep looking for a bailout?

The Subcommittee had done a great job of uncovering these problems, but where is the press? Doesn’t the press have an obligation to alert their readers to the problems?

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