A naughty Swiss bank, with its numbered accounts and suitcases full of dollars, gets nabbed by the US justice system for helping Americans evade tax. It pleads guilty, says sorry, and pays a fine of $2.6bn (£1.5bn). Victory for the good guys, for once.
Except that it is not quite as simple as that. Credit Suisse has indeed paid a price for helping Americans evade tax, and did indeed deliver cash by hand to account-holders, among other transgressions. The US Department of Justice will indeed be pleased to have scored a win at last, albeit against a soft target.
No one in the US will have much sympathy for a Swiss bank that hides Americans’ money abroad, or for the people whose money it is. It seems also that Credit Suisse was unwise in its tactics. Unlike its larger Swiss competitor, UBS, it failed to do a deal quickly. In 2009, UBS, when faced with a similar challenge, handed over the names of 4,450 customers and paid a fine of “only” $780m.
There is, however, something deeper here, which is the way in which the US tax and legal authorities are engaged in a huge tussle with corporate America, of which this is quite a small part. If you add up all the fines and other payments that banks in the US – domestic and foreign – have had to pay since the financial crisis, the total is around $100bn. Foreign banks are quite a small part of this, around $15bn. There is a lot of unfinished business out there, and the final amount the banking community has to pay, including legal costs, could be another $100bn, maybe even more.
But the banks are, in the main, able to afford this because they are profitable – more profitable than they otherwise would be thanks to very easy money policies. For them, paying fines has come to be seen as an inevitable cost of doing business, rather in the way that some people regard parking fines as a cost of using a car in a city. They know that the authorities cannot afford to put them out of business. In this instance Credit Suisse has kept its banking licence in New York and has not been required to change senior staff. Its shares, by the way, rose by 3 per cent on the news of the deal.
Thus the US authorities are seen to be punishing the banks, and public opinion demands that they should do so. But they are careful not to push the banks too far. The economic recovery needs banks able to lend money to business and consumers alike. It looks on the surface as though this is about justice and in some measure it is. But it is also about power.
If that seems overly cynical, consider this. The US customers of Credit Suisse held about $10bn of deposits overseas. US companies have $1.95 trillion of deposits abroad. Indeed they added more than $200bn to those deposits last year. Of course there are many other foreign banks where Americans hold cash and some, maybe much, of that cash may not be disclosed to the US tax authorities. But it is small compared with the amount of cash held abroad, perfectly legally, by US companies.
The difference is partly that crucial one between legal tax avoidance and illegal tax evasion, which incidentally raises the issue of why some people take the risk of illegal evasion when there are so many opportunities for legal avoidance. But the difference is also about power. The US authorities can clamp down on citizens who cheat the taxman and on foreign banks that help them to do so. But they cannot do anything about the famous US corporations that use convoluted global tax planning to avoid US tax.
Some research by Bloomberg shows what a star-studded band these companies are. Top of the league for overseas cash is General Electric with $110bn, followed by Microsoft $76bn, Pfizer (yes, the one that wants/wanted AstraZeneca) $69bn, Merck $57bn and Apple $54bn.
All this is not only completely legal. It is a result of a US tax system that encourages companies to hold their money offshore, because if the cash comes back to the US it pays a 35 per cent corporation tax charge – a rate that looks increasingly out of line with the rest of the world. (We are coming down to a 20 per cent rate.)
So what is to be done? Congress can, if it wants to, change the law. But to do so would be to challenge the titans of corporate America, and that is tough for elected politicians. It took a long time, and the mother and father of all financial crises, for US public opinion to swing against the banks. The really interesting issue now is whether the mood is starting to swing against those overseas corporate cash balances, too.
What’s wrong with English wine? Not the contents of the bottle
It is English Wine Week: a source of welcome stories about a high-quality product. But what has it all got to do with economics? Three things.
The first is that we have a huge trade deficit in wine, which it would be helpful to try to narrow. We have become substantial wine drinkers but import nearly all of it. British wine-buyers are utterly open-minded. Go to a French supermarket and nearly all the wine on sale will be French. Italy and Spain are the same. Most American supermarkets are full of domestic wines, often of indifferent quality, with some other western hemisphere wines in there too. But here we have everything from everywhere. So as UK production ramps up, we will greet it with an open mind and if the price is right, buy it.
The second is that English wine is upmarket. We will always be high-cost producers, for there is no point in trying to compete with the industrial quantities of wine pumped out by southern Europe. So the trick will be to sell wine around the world, drink the best of it and sell the rest at huge profit – rather as we do with other top-end products.
The third is that marketing English wine as a luxury product is a huge challenge. We have not yet cracked this. Luxury cars, luxury clothes, luxury services, yes. Somehow we have to get the best English whites to occupy the same sort of space as the best Bordeaux reds. Champagne is probably the place to start. Trouble is, Dorking does not sound as posh as Épernay.Reuse content