Economic growth has all the earmarks of a Ponzi scheme. The detailed workings vary from place to place and change over time, but certain basic features of the scheme are noteworthy. Each succeeding generation pays into the scheme by undergoing a protracted period of costly education and training. When certified as skilled workers, the rising generation begins to receive ‘interest’ on its ‘investment’ in the form of wages derived from a job, and at the same time continues to contribute to the scheme.
Across the nation, cities and states are watching Detroit's largest-ever municipal bankruptcy filing with great trepidation. Years of underfunded retirement promises to public sector workers, which helped lay Detroit low, could plunge them into a similar and terrifying financial hole. Thanks to a patchwork of accounting practices and rosy investment assumptions, it's not even clear just how big a financial hole many states and cities have dug for themselves.
Transfer pricing is an accounting practice employed by multinational companies to minimize their global tax obligation (see discussion of this topic in Virtual Organization). A company can book profits in low tax countries and claim expenses in high tax countries. Suppose, for example, a car manufacturer has plants in the US and Mexico and that the US tax rate is higher than that of Mexico. The US plant could buy some components from its sister plant in Mexico, paying a price (set by accountants at headquarters) above its own cost of production. This ploy would have the effect of reducing profits in the US (a high tax venue) and raising them in Mexico (a low tax venue) without changing the overall revenue of the company. The benefit is a lower tax bill. Thus, the company gets the best of both tax worlds with a simple accounting trick.
This practice is not new. Barnet and Muller documented it in Global Reach, nearly forty years ago. The current financial crisis is responsible for renewed interest in transfer pricing, because governments are desperately seeking to increase tax revenues. The New York Times reports that “the charity Christian Aid, which is concerned with the effect [of transfer pricing] on developing countries, estimated that governments lose $160 billion a year when companies working across borders misapply the rules” (NYT, Jan. 4, 2010). According to Bloomberg news “Transfer pricing lets companies such as Forest, Oracle Corp., Eli Lilly & Co. and Pfizer Inc., legally avoid some income taxes by converting sales in one country to profits in another — on paper only, and often in places where they have few employees or actual sales” (bloomberg.com, May 13, 2010).
Since posting the piece on "Debt Farming" I have come across a New York Times article reporting on one person's effort to take on the debt farmers. Steven Katz, an accountant in suburban Tuscon, Arizona, having been burned himself, advises others on how to deal with debt collectors. Like the character Howard Beale in the 1976 movie "Network", Mr. Katz…