Tax evasion part of corporate culture

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Most people would think that countries like Spain, Greece and Portugal would rank among the very top of countries for tax evasion schemes. But even though the US has a relative low tax rate the country tops the list of places where tax evasion seems to be part of corporate culture.

So how big a problem is tax evasion? Take a look at the table below from Tax Justice Network, a London-based watchdog that fights against tax havens and for more transparency.

America’s “black” or “shadow economy,” represents 8.6% of GDP, while the percentage is by far the smallest of any of the countries on the list it does represent a significant monetary post and represent roughly the GDP of Denmark the 32 biggest economy in the world according to the IMF.

How does the companies in the US manage to avoid tax? Well, one suggestion is that companies like Google, Apple and Amazon manage to cut their tax bill by one third through a series of moves that involves countries in Europe and in the Carrabin, a system is also used by big European companies to transfer funds to tax havens. My friend Sarah Wenger has created the infograph titled “The master of Tax Evasion” that explains how the system works.

Masters of Tax Evasion
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Dead Greeks keeps the living financially afloat

There seem to be no end to the amazing stories coming out of the bankrupts Greece. Now the story is that the largest pension fund, state-owned Social Security Foundation (IKA) has during the past decade paid 7-8 billion Euro in pensions to Greeks who are dead. Atleast that is the number that the company director, Rovertos Spyropoulos gave to the Greek newspaper Kathimerini.

Most of the huge load of retirement billions has been withdrawn by relatives of the deceased, while a smaller part is that pension payments are still in a bank account, which for one reason or another are not made up in dealing with the deceased estate.

This trend underlines strongly the widespread fraud and sloppiness with public funds, which seems to pervade Greece on several levels. While pensions fund is a big issue it is a relative small issue compared to the inadequate tax-system, which is in place were there is a widespread lack of control and transparency.

This is not the first time that problems with pension payments to deceased citizens fills the headlines in the Greek media. In August, the state owned pension fund announced that it had halted payments to 1,473 people over 90 years, which on closer inspection turned out to be deceased.

“We will demand all the money paid back all the way down to the last euro,” says Rovertos Spyropoulos according to the Greek newspapers.

The socialist party PASOK Greek government has previously called for an investigation of pensions, when it emerged that in total there were registered about 9,000 beneficiaries Greeks over 100 years. If this figure were correct, it would mean that Greece have the absolutely largest share of residents over 100 years in the world. By a census in 2001 there were less than 1,700 Greeks over 100 years.

It would seem tat there is no end to the suffering that the Greek people have to endure. But on a positive side if one could call the pension fraud a positive thing in any context is that people and not least the government is starting to realize that it is time to clean up. Freeriding on other peoples work is no longer a possibility and the chance that perpetrators will get caught in the end is increasing as the level of investigations deepens.

Will this mean that Greece is off the hook when it comes to bankruptcy. This is only treating the symptoms of a much deeper and cultural set of inappropriate norms that the Greek society have adopted over the years.

What is the difference between the crisis of 2011 and the one in 2008?

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We have another crisis looming here in 2011. The Greek economy is on the verge of collapse and many of the countries in southern Europe are in deep structural difficulties and we just do not have the options available that we had in 2008. But there are some key characteristics, which might help us pull through.

One might be that a lot of the stronger economies have pulled their resources and have made huge budget cuts. Here explained by Christine Lagarde director of the IMF.

The Euro and None-Euro members who won?

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Should we keep the Euro or let it die a slow and painful death?

These days I think we should count our selves (the Danes) as lucky. In the financial turmoil in Europe we get to have the best of two world. We are linked very closely to a very big currency that is ‘still’ recognised as one of the worlds most powerful and second we do not have to participate and contribute when things starts to go down hill.

In a interview with Jean-Claude Trichet the European Central Bank all these benefits became very clear.  When asked about if the Euro was at the brink of an abyss

“But let me sum up some of my present observations. First, we have a credible single currency, which over the last 12 years has kept its value in terms of price stability in a remarkable way in comparison with the previous national currencies in the last 50 years. The solidity of the currency itself is not disputed and our fellow citizens all over Europe are calling on us to continue preserving price stability. Second, the euro area, taken as a whole, is in a better position from a fiscal standpoint than other economies. In 2011, the public finance deficit of the euro area should be around 4.5% of GDP, while in the United States or Japan it will be about 10% of GDP. But we had a very serious weakness in terms of economic and fiscal governance inside the euro area, which has been revealed by the global crisis.”

While these figures might be true and one have to remember that the deficit in Denmark was 2.9% well under the rest of the Euro countries and on top of that have a historical low unemployment rate. In Sweden who has made the choice to have their currency flow compared to the Euro actually had no budget deficit and a relative high growth rate. While it is at the expense of a high unemployment rate it does show that these is still some merit to having a independent economic policy.

One of the big issues we keep coming back to is the structural problems in Italy, Spain and Greece. In Italy the criticism from the ECB have sparked a uproar as it is seen as meddling in the country’s internal affairs.

“The view of the Governing Council was that the market turmoil at the beginning of the month required a message to be sent to the Italian government. We were seeing a progressive weakening of investor confidence and we felt it would be useful to share with the Italian authorities our thoughts on the most appropriate measures to help restore market confidence.” Jean-Claude Trichet replied.

Markets these days seem to be all about the lack of or the abundance of confidence and short-term investors are fleeing around the field as soon as somebody yells wolf. It is good to see that some of the institutional investors have kept their cool and have shown that they can remain loyal to their long-term strategies. However, there is no doubt that there are some structural unhealthy elements within the states in the EU and Euro counties but these are not unmanageable. They are difficult and will require a lot of political will and sacrifice in all of the countries but the issues are known even to the general population that have to pay the price of their governments lack of constant care in relation to the issues at hand.

All of the governments who said yes to the Euro knew that some of them had issues, which would not go away over night. Some of them did not even get close to meeting the targets for acceptance. But some of the politicians were so keen on getting the show on the rad that they forgot to do their due diligence and take a deep breath before committing themselves to a road that was very difficult to get of again.

Among the countries that did not put their economies in the hand of Italian, Spanish, Irish and Greek and Kosovo politicians were the Scandinavians and the British. While the UK governments have serious issues with unemployment and a banking sector in ruins it is nothing compared to the issues they would have had to face if they had to feed the poorly governed Euro countries. The Danes said no to the Euro not because their politicians said that they should but because they were sceptical about putting all their eggs in one basket together with countries that dwarfed their own economy. While the Swedes had the opportunity to enter the Euro when they joined the EU they said thanks but no thanks mainly due to the lessons learned through the 90’ties were they experienced a major economic crisis and had to let their kronor flow freely, something that they would not be allowed to if they adopted or linked their currency to close to the Euro.

In conclusion it look like that the countries outside the Euro will be better of having their independence but still able to take collective action through the EU. I do not see any reason why any country that is outside the Euro would join now or anytime in the near future. Joining would be like committing economic hara-kiri.. very noble and honourable but not very sane.

Can we really take another hit – Global Financial crisis 2.0

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What is the difference between the state of the world in 2008 and how we are doing here in 2011. Well if one look at the global assets they fell by 16 trillion USD in 2008 according to McKinsey lead by the US, Japan and China who almost lost 10 trillion USD just the between the three (that is 10,000,000,000,000 USD).

If you look at another key indicator for economic performance that both affect organisation and countries one could look at the total Equity compared to GDP. Out of 112 sampled countries in 2007-08 every single one lost value. With countries in the Eurozone as the worst places to be it is no wonder that everyone is looking here to find some kind of political will and comprehension of the enormity of the crisis that have hit their economies. All of the countries of Greece, Ireland, Austria, Russia, and Iceland lost more than 64% of their equity value in this period. One could argue that there was an unholy alliance between business and government policies in these countries, which contributed to their demise but the fact is that it happened and now we have to deal with the consequences.

In 2009-10 the markets did regain some of their momentum and there were signs that some of the structural issues which needed to be addressed did get at least some attention. But these things take time to work and even to this date no one really have a real overview of what went structural wrong in 2007-08. The economist are at the moment treating symptoms of the decease more than they are treating the sickness it self. Not because they did not want to prescribe a cure it is just so that the financial and economic instruments available to us do not have the affect that they used to. Neither Marx, Keynes, Hayek or any of their followers can prescribe a treatment that will cure the decease and put the world back on its tracks. While we might like whish that some really brainy economist comes up with an answers to the problems we face it is more likely that they will not.

So standing on the edge of economic collapse the last thing we need is another crisis but that is exactly what we are about to face.  And we are not ready at all to meet the challenge.

First of all the world do not have the financial strength that it had priori to crisis 1.0. Not least is the banking industry not ready to take another hit and it is more likely that we will see numerous bank and financial institutions disappear in the coming years. But worse is that people pensions will be affected on a scale we have not seen before. In several countries the government were able to help pensioners from loosing their life saving or at least they had some kind of package that meant they would be able to retire with some finds to live of. This option is no longer available because the governments do not have the money that they used to and if they want to help again they will have to borrow money at a much higher interest rate. Just look at the downgrade we have seen done by S&P and how they have create chock waves through the political systems in the US and Japan.

Second issue arise because the dynamics of the crisis have changed. Before we could put the blame on the financial institutions, on greed and even on numerous fraudsters who were exposed as there schemes no longer worked. Now the crisis exists as much in the realm of politics as it affects businesses ability to operate and evolve. In the first crisis it was easy to see what to do or at least what we believed we could do, things like bank reform, ethics guidelines, systems of control etc. but now the picture is much more blurred. We have had several rescue packages since 2008 that have been designed to help one industry or another, but while the money used in the first instance were relative easy to get hold of it is more likely that future funding will come as hard money. The funding can be either borrowed at high interest rates or be fund by cutting national budgets and or in combination with increased tax. This will certainly create political instability and governments will come under intense pressure as we have seen in places like Spain, Greece, Italy and lately Israel. The question is if governments will try the short-term “easy” way out and print money instead of dealing with the issues that almost certainly will cost them their political power.

The fact remains that the state of the world is not the same as in 2008 and that neither markets nor politicians are ready for another global financial crisis.