UNCLE SAM FLEXES HIS MUSCLES

I have reported that the major result of the "Financial Crisis of 2008" is that Uncle Sam has acquired a major stake in the private sector - banks, insurance, mortgages, and autos for starters. Many cry "socialism" and I guess there is a case to be made here. However, since Uncle Sam already has a budget equal to 20% of the GNP and debt of some $11 trillion it is already the 800lb gorilla in the economy. I have also noted that this new stream of government revenue will lessen the need to raise taxes to cover rising expenditures and I welcome it.

There is the concern that Uncle Sam will use his stake in the private sector to further political objectives. I postulate that he will act as any other investor, try to maximize his return, with an added objective, to promote general economic progress. But we already have a case of using his stake to further political aims. The US Senate is looking at the overseas operations of the banks and companies receiving Federal funds under the rubric of "tax havens." The assumption is that, if a company has an operation in certain countries, it is doing so to avoid paying US taxes.

This happens to be an area in which I have considerable experience. During my career in the Foreign Service and subsequently in international business I have come across a wide range of tax issues involving business that transcends national borders. For example, it is common practice for exporters manufacturing in what we call a "cost center" to send its exports through a third country or "profit center" en route to the customer in a second country. You guessed it, the "profit center" is a country with low taxes. Of course the "profit center" may be called a "distribution center."

While taxes may be the reason to funnel international transactions via a low tax country, there are other reasons. Business law may favor doing this as well. Most countries allow "temporary imports" which means a product may be imported and reexported without having to pay import duties. This is the back bone of the widespread practice of adding value to a product in a country to make it eligible for lower tariffs in another country. An example here would be bringing components from one country to another to be assembled into a product going to still another country. The country doing the assembly would have an agreement for lower or no tariffs in the recipient country. I have personally structured such an arrangement for a company.

Another example would be operating in a country that is part of a duty free consortium, e.g. the European Union. General Motors and Ford manufacture their cars for the European market in Europe and thereby avoid the high tariffs imposed on autos coming from non-EU countries.
You get the drift, the global economy is firmly rooted in the concept of companies operating in several countries for various reasons.

The Senate's attempt to examine the overseas operations of US companies receiving Federal funds is an example of the type of political baggage that comes with taking the "king's coin." As Uncle Sam gets deeper into his new role of being the major investor in "Corporate USA" we will no doubt see more politically motivated attempts to alter the course of "globalization." What next, exploring the "outsourcing" practices of companies receiving Fed funds? You betcha.