[P2P-F] Fwd: ZNet Commentary: Jack Rasmus: The New Global Finance Capital Elite

[Michel Bauwens]

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From: ZCommunications <no-reply at zcomm.org>
Date: Thu, Aug 14, 2014 at 7:57 PM
Subject: ZNet Commentary: Jack Rasmus: The New Global Finance Capital Elite
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Jack Rasmus: The New Global Finance Capital EliteZ Communications Daily
Commentary

A practice and loophole that emerged around 2008, US corporate tax
‘inversions’—the latest version in a long list of US transnational
corporation tax scams—have taken off in 2014. A tax inversion is set in
motion when a US based corporation buys another company offshore and then
manipulates the tax codes of both countries to extract the greatest net tax
reduction. The United Kingdom, Ireland, Switzerland and others are favorite
locales for ‘inversions’ of late.  And US corporations and industries at
the forefront of this new wave are typically pharmaceutical, technology,
cable tv, entertainment, medical equipment, finance, and related retail
companies—with many others waiting in the wings as well.

Briefly, here’s how it works: After purchasing an offshore company, the US
company then designates its global headquarters as located in the new
country of its purchase. With its headquarters now outside the US, the
company can now transfer profits made in the USA, via various
‘intra-company price transfer’ tricks, to the foreign based headquarters
and country where effective tax rates are lower and where various US tax
code offshore loopholes are available to US transnational corporations.
The US purchasing company can also transfer its offshore debt from the
purchased company to its US operations in turn. The higher debt and
resulting higher interest payments on that debt are deductible from US
corporate taxes, according to US tax law. The ‘inversion’ deal thus
provides a double tax cut advantage to the US corporation. But that’s only
the beginning.

The gains to be realized are not only from US tax code manipulation by the
purchasing non-financial corporation. Shadow bankers and their financial
speculators (i.e. hedge funds, private equity firms, investment banks,
insurance companies, etc.) are also big beneficiaries of the Merger &
Acquisition process at the heart of what appears on the surface, in the
case of the tax inversion, as ‘just’ another transnational US corporate tax
scam.

Lower taxes for the US corporation from the inversion means more retained
corporate cash on hand, and the prospect of more future earnings as well,
all of which in turn drives up the company’s stock price. That makes the
company even more attractive to investors like hedge funds and equity
firms, which buy up big blocks of both the purchasing and purchased
companies’ stock. Banks and shadow bankers that jump into the process at
the outset, buying up company stock in the process, also provide original
funding for the company’s purchase. Others jump into the stock as the
acquisition deal proceeds. Once concluded, early and latecomers both then
reap a nice capital gain from the eventual stock price appreciation that
almost always follows the deal.

So the profits gained are not just from tax reduction for the US purchasing
company, but are financial and related to asset price speculation
associated with the ‘tax inversion’ process and acquisition itself.

The practice of inversions gained public attention earlier this year with
the US drug giant, Pfizer, attempting to purchase the UK drug firm,
Astrazeneca. Pfizer offered more than $69 billion to purchase Astrazeneca,
but was rebuffed by the latter’s shareholders, who wanted even more.

The key role of hedge funds and shadow bankers in the Pfizer-Astrazeneca
deal was clearly evident from the start, since Pfizer did not put up the
lion’s share of its $69 billion offer for Astrazeneca from its own retained
cash. The big block of financing was to come from its hedge funds and other
shadow banker partners and outside investors.

In many cases hedge funds (aka Vulture Funds) and other shadow bankers are
the initiators and instigators behind the acquisition. They are at the
forefront, prodding US corporation managements to ‘invert’.  A good example
is the recent case of Walgreen, the US drug retailer.  Its major investor,
the hedge fund, Jana Partners LLC, pushed hard for Walgreen to move its
headquarters to Switzerland or the UK. This kind of pressure from funds
like Jana Partners makes it difficult for corporate CEOs to resist, since
the hedge fund can always turn to the company’s stockholders and have them
put pressure on the management to do the deal, if they don’t want to deal
with a stockholder ‘revolt’ and want to keep their corporate jobs.  Major
stockholders see the opportunity for significant capital gains from stock
appreciation in tax inversion deals, and together with the Hedge Funds
demand that management undertake the corporate purchase and headquarters
relocation.

In other words, while it appears that corporations gain at the public
taxpayer expense through corporate tax reduction—which they clearly do—even
greater gains come from financial speculation that benefit investors, big
shareholders, and senior management of the purchasing company as well.

In the Walgreen case, last week it was announced that Walgreen was backing
off the purchase—for now. The timing was not right, apparently, coming just
before a midterm election in the US for a company dependent on US
government subsidies to its customers with which to buy its drugs. But the
hesitation by Walgreen is probably temporary, to resume after the November
elections when the ‘tax inversion’ loophole gets addressed in comprehensive
US corporate tax revision legislation that US corporations have been
demanding of the Obama administration and Congress for several years now.

Corporate managers as well as hedge fund speculators benefit nicely from
tax inversions. They are typically offered a ‘sweet incentive’ by their
hedge fund investors and other big shareholders to do an inversion deal. So
it’s not just the possible threat of a stockholder revolt, instigated by
the company’s in house big fund investors, that incentivizes more corporate
managers to jump on the tax inversion bandwagon. Senior managers stand to
gain greatly as well from stock price appreciation in the wake of the
deals.  Often their personal income tax bill from selling their own
personal stock holdings after the company’s stock price rises from the deal
is covered by their companies. Their own personal capital gains from the
deals is often ‘grossed up’ by their company (i.e. paid for out of the
company’s earnings) as part of the deal.

So all levels of financial speculators benefit from these ‘inversion’
deals—shadow bank investors, hedge fund managers, big stockholders, and top
corporate managers with significant stock holdings and compensation—all
realize big capital gains from stock price manipulation that is at the core
of tax inversion deals. Again, it is not just about tax avoidance; it is
about stock price manipulation and huge capital gains. Long term the
benefits for the company may be from corporate tax reduction; but short
term the big speculative profits rip-off is from engineering stock
speculation and other forms of financial manipulation.

In the past year there has emerged a veritable ‘wave’ of corporate
inversion deals erupting.  And the potential loss to US corporate tax
revenue, should the trend continue, is considered significant by many
estimates.  The Obama administration this past summer raised the
possibility it may support legislation to curb the practice.  But the
political outlook of such before the midterm elections in November 2014 is
practically nil, so far as passage of legislation to check the trend is
concerned.  While bills have been introduced earlier this year by a few
liberal Senators, the Obama administration so far has been mostly just
talking about supporting such legislation, or offering proposals tweaking
the requirements for allowing inversions, not actually preventing them.
What’s going on politically in the administration and Congress is therefore
just ‘grandstanding’ to make it appear they are concerned. Nothing will
happen before the November midterm elections.

Political elements of both parties in the USA are eyeing the period after
the election, during which the US tax code and general corporate tax
revisions and cuts will be taken up.  An institutionalizing of rules
governing corporate tax inversions going forward will undoubtedly be part
of that comprehensive corporate tax revision. Tax inversions are not going
away; they have only just begun.

The ‘inversion’ trend is another example of the growing dominance of the
global finance capitalist elite, who are deeply entrenched in the USA and
UK in particular, but worldwide growing in terms of numbers and absolute
wealth as well.

This elite is deepening its control of nonfinancial companies and are
increasingly directing those companies increasingly toward profits growth
from financial manipulation as the primary corporate activity—in this case
‘inversions’ and corporate mergers and acquisitions activity.

Instead of making profits by making real things that require real
investment and the employ real people, the focus of global capitalism is
increasingly toward more financial asset investment—i.e. investment that
produces even quicker, more lucrative profits growth than old fashioned
‘real’ investment that makes things that creates jobs and income for people
to buy the things.

Global capitalism is growing progressively less interested in making things
for profit than it is in generating forms of money capital as profit. Those
engaged in financial asset investment (i.e. financial elite) are therefore
accruing an ever larger share of global income and wealth for themselves,
while those who were once participating in investment producing goods are
finding their share of income in steady relative decline.

Global shadow banks now control more than $70 trillion in investible
assets, according to such ‘radical’ sources as the *Financial Times* global
periodical. And very high net worth investors, about 200,000 individuals
worldwide with annual income flows of $30 million or more from existing
assets—i.e. the new global finance capital elite—now own close to half of
that $70 trillion in investible assets. And their assets are projected to
rise another $10 trillion by 2017.

Inversions’ and related M&A activity are but one example of a growing
emphasis of global capitalism on financial forms of speculative
‘investment’ in the 21st century. Inversions are but the latest example of
this global relative shift toward financial speculative investing.

The growing shift by non-financial corporations toward ‘portfolio’
investing; the growing trend toward speculating in M&A, derivatives, old
and new forms of bonds, dark pools of stocks, and other proliferating forms
of securitized financial securities; the explosive growth of shadow banking
institutions worldwide; the spread of liquid financial markets in which to
speculate; and the accelerating ranks and assets of very high net worth
investors worldwide—two third of whom are located in the US and Europe—are
all examples of the new trends in 21st century global capitalism as it
shifts toward greater reliance on financial profit making.

US politicians will not only fail to stop inversions, but following
the November 2014 midterm elections, watch for both wings of the US
Corporate Party in the USA to come together and legislate a new
comprehensive corporate tax cut.  Included in that new code will be new
terms governing future global corporate tax inversions—as well as a likely
major reduction in the official US corporate tax rate to 28% or less that
has been promised by both Obama and the Republicans for the past two years
but has been postponed until the coming November midterm elections.

*Jack Rasmus is the author of ‘Epic Recession: Prelude to Global
Depression’ (2010) and ‘Obama’s Economy: Recovery for the Few’(2012), by
Pluto Press, London, UK, and the forthcoming ‘Transitions to Global
Depression’(2015). He hosts the Alternative Visions radio show on the
Progressive Radio Network, and serves as the ‘Shadow’ Federal Reserve
Chair, in the Green Shadow Cabinet. His website is *
*www.kyklosproductions.com*
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He blogs at **jackrasmus.com*
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and tweets at @drjackrasmus.*

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-- 
*Please note an intrusion wiped out my inbox on February 8; I have no
record of previous communication, proposals, etc ..*

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