As bargains go, President Barack Obama’s “grand bargain for middle-class jobs” seemed a sensible one. He suggested a one-time levy on the money big American corporations keep stashed overseas to fund investments in infrastructure, education and hi-tech manufacturing hubs. These are all things that will help spur job creation at a time when unemployment remains high.
In return, the US administration offered a push to lower the corporate tax rate – the reason US companies say they keep so much of their money overseas. Once various loopholes are eliminated, the rate would fall from 35 per cent to 28 per cent, and lower for manufacturers.
“I’m willing to simplify our tax code,” the President said in a speech, because in DC, simplification of corporate taxes has come to mean lowering corporate taxes.
Unsurprisingly, the idea was immediately shot down by the Republicans. They don’t like the idea of using the money raised with such a levy to fund new spending, nor do they favour tackling corporate taxes without at the same time addressing individual taxes.
So why did the President even suggest it, knowing the Republican position and the limited prospect of change therein? Probably because he knew it would make him look good. American businesses have around $2trn (£1.3trn) in earnings laid up overseas, while infrastructure at home is sorely in need of investment. He also knows that Republicans and Democrats in Washington are gearing up for a fresh budget battle over the autumn. So his speech – part of a series on economic issues – was probably just laying the groundwork for coming negotiations.
Despite the disagreements, everyone seems to agree that corporate taxes need to come down to stop American companies from gaming the tax system and to encourage them to bring back some of the money they routinely stash abroad to avoid US taxes. It’s a nice fantasy. Why? Because the only way big companies will pay even 28 per cent is if politicians manage to close every loophole in every part of the tax code – without creating other, new ways for companies to cut their tax bill.
Otherwise, even though President Obama talked about giving companies an incentive to pay taxes on their overseas cash, there is, in fact, little incentive for big business to pay up. According to the Government Accountability Office, while big US corporations officially face a high corporate tax rate of 35 per cent, their average effective federal tax rate is less than 13 per cent. As an aside, the contribution of corporate income taxes to federal government funding in 2012 was around $240bn – a lot lower than the $1.1trn that came from individual income taxes.
Are the Republicans and Democrats about to strike a deal that will force big firms to pay higher taxes – because that is what lowering the corporate tax rate to 28 per cent while closing the various loopholes will amount to? Given the money that corporations and individual business folk spend on political campaigns and lobbying, I’m doubtful.
Battle for Dell turns against activist investor
It was already looking shaky for Carl Icahn and his plan to torpedo Michael Dell’s proposal to take private the computer maker he founded in 1984. To recap briefly, Dell has been struggling to deal with the precipitous decline in the demand for PCs, and Mr Dell wants to take control of it with the help of the investment firm Silver Lake, so that he can restructure it quietly without having to answer to Wall Street investors every quarter.
Mr Icahn, one of Wall Street’s best-known activist investors, stepped in shortly after the go-private deal was tabled, arguing that it didn’t give shareholders enough value. He went on to put up an alternative offer that he said was better aligned with the interests of shareholders.
For a while, Mr Icahn appeared to have the upper hand. He had the support of Southeastern Asset Management and T Rowe Price, both big enough investors for Mr Dell to up his offer twice. But this month Mr Dell persuaded the board to delay a shareholder meeting and change the way shareholder opinion about the deal is polled. The board agreed to defer the meeting till September and changed the rules so that abstentions would no longer count against Mr Dell and Silver Lake.
Mr Icahn went to court. But it was becoming clear that he was on increasingly weak ground after the voting rules were changed. As if to highlight the way the pendulum has swung in favour of Mr Dell, it has now emerged that T Rowe Price has cut its stake in Dell. Sources familiar with the matter told Reuters this week that the asset management firm had trimmed its interest in Dell to 2.8 per cent from 4 per cent, hardly a vote of confidence in Mr Icahn’s efforts to get the better of Mr Dell.
The news will only hamper the activist investor’s efforts to convince shareholders that his plan is the better one. The backing of T Rowe Price didn’t just give Mr Icahn additional votes in his battle against Mr Dell; it gave him credibility, for the asset manager does not have a reputation for activism. When it said that Mr Dell’s original offer wasn’t good enough, everyone listened. Now, it seems to be saying something very different. For Mr Icahn, whose stake-buying in the past has been so effective in steering the direction of Time Warner and Yahoo, this may be one battle he won’t win.