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Congress and the Bush Administration have raised taxes on a group of high-earning Americans: expatriates. Cris Prystay and Tom Herman report in the Wall Street Journal.
A new tax law that ratchets up costs for many Americans working overseas could change company hiring practices in certain countries -- and is causing some employees to consider coming back home.The increased taxes are hitting hardest at American expatriates working in places where housing costs are high and local taxes are relatively low, such as Russia, Hong Kong and Singapore. The higher costs can fall on employers, some of which guarantee that their workers don't pay more in taxes than they would if they were living in the U.S. But many Americans living abroad aren't offered such guarantees, known as tax equalization, and must shoulder the increases on their own. The law, part of a broader tax bill signed in May by President Bush, is retroactive to Jan. 1. . .
Among those most affected by the change are Americans earning relatively high salaries. Under the old law, Americans working abroad could exclude as much as $80,000 of their foreign-earned compensation, plus certain foreign housing costs, when they filed their U.S. taxes The new law increased the $80,000 limit slightly to $82,400 for this year, but income above that level now is subject to much higher tax rates. For many, the most significant change is that the new law greatly reduces the maximum amount of housing costs that workers abroad may exclude or deduct. Under the new law, there's a cap of $11,536 for 2006, although the Treasury Department has the authority to change this for places with especially high costs. In Hong Kong, it isn't unusual for an employee earning $200,000 in salary to pay as much as $50,000 in annual rent. Before the change, Americans typically could exclude or deduct the vast majority of these housing expenses. . . .
Peak International Ltd., a supplier of packaging for high-tech products, recently dismissed one American employee because of the new tax law and expects soon to decide the fate of two others, says President Dean Personne. Peak also must decide what to do with three additional Americans that work at its Hong Kong headquarters, including Mr. Personne himself.
"One option is to go back to the U.S. and just travel back and forth. But I don't think we can do that. You can't run a company that way," Mr. Personne says. To keep the three Hong Kong-based staff where they are will cost Peak an extra $120,000 a year, he says. "We're a relatively small company
Other companies say they can't reduce the number of Americans they employ abroad, and will have to swallow the extra cost. "Wall Street is still the most important market, and we need to employ people [in Asia] who have Wall Street experience," says a spokesman in the region for a U.S. investment bank. He says the bank may consider putting more of its new hires on local terms -- which means they won't get tax-equalization benefits and will have to foot any extra charges themselves. "But when it comes to hiring the right person, you do what it takes to get them," he says.
Posted by dan at 05:49 PM
When a Saudi prince tells you you're being extravagant with money, it's gotta hurt. David Wighton reports in the Financial Times.
The pressure on Chuck Prince to improve Citigroup's performance increased sharply yesterday after Prince Alwaleed bin Talal, the company's biggest shareholder, declared that costs were out of control and investors' patience was wearing thin.The Saudi prince, who has been increasingly critical of Citigroup's performance, called for "draconian" measures to curb expenses. "I'm a shareholder in alliance with Citigroup. I'm patient but enough is enough," he said.
The prince's comments, in an interview with Reuters, came a day after the world's biggest financial services group disappointed Wall Street expectations with an 8 per cent rise in quarterly earnings per share.
The shares, which have performed poorly since Mr Prince became chief executive in 2003, fell 2.5 per cent after the figures were released, reducing the value of the prince's 4.3 per cent stake by almost $250m (£137m).
Some analysts expressed concern about the 16 per cent rise in expenses compared with a 10 per cent rise in revenue, a mismatch highlighted by the prince.
"The results are positive but they are not able to get the costs under control," he said. "We have to take draconian measures to control the costs."
Posted by dan at 05:43 PM
Wal-Mart's efforts to be a more efficient consumer of energy should be taken seriously. Jonathan Birchall reports in the Financial Times.
Now Wal-Mart, the retailer that operates one of the largest trucking fleets in the US, is backing the development of a new generation of fuel-efficient hybrid truck engines, in a move that could accelerate the adoption of the technology across the industry.The retailer is working with Environmental Defense, a not-for-profit environmental group, to apply the technology used by passenger cars such as the Toyota Prius to the ubiquitous tractor unit that pulls the majority of US road freight.
The project is part of a broad push by the retailer to embrace the cause of environmental and social sustainability, as it battles a broad range of US critics on issues ranging from low wages and healthcare to its impact on urban sprawl.
Lee Scott, Wal-Mart's chief executive, set out ambitious environmental targets for the retailer last year, which included improving the efficiency of Wal-Mart's fleet of more than 7,000 trucks by 25 per cent by 2008, and doubling it by 2015.
Currently, the company's fleet averages 6.5 mpg - better than the industry average.
Next year, the retailer will start introducing more fuel- efficient conventional trucks that feature aerodynamic side-skirts on its 53ft trailers, better tyres and auxiliary power units to reduce engine idling.
The improvements are expected to improve fuel efficiency by no more than 13 per cent, with the retailer turning to hybrid power to provide further gains.
Prototype and limited production hybrid engines have been developed for a range of commercial vehicles, including delivery and garbage trucks. But heavy duty 18-wheelers have been seen as less suited to the technology.
Industry observers say Wal-Mart is likely to work with Eaton, a manufacturer of power and drive trains for commercial trucks.
The company announced last month it had developed a prototype heavy duty truck that it says has improved fuel efficiency by 5-7 per cent.
Eaton has said it is working with truck and engine makers and "select fleets to field prototypes for field evaluation".
Heavy duty trucks accounted for around 18 per cent of US greenhouse gas emissions in 2003, according to the Environmental Protection Agency.
Posted by dan at 05:41 PM
Augsten Goolsbee with a good "Economic Scene" column in the New York Times on the economic fallout of wars.
Posted by dan at 05:38 PM
Hal Scott (of Harvard Law) and George Dallas (of Standard & Poor's) write about the end of American dominance in capital markets in the Financial Times.
Money graph:
What we are witnessing is the latest chapter in the evolution of the euromarkets. In the past, US banks moved to London to escape onerous banking regulation and the eurobond market was created in part to avoid US taxes. Now exchanges are moving abroad in part to avoid the US capital market's regulatory regime. Europe should not be threatened. It is the US that should be concerned. Once a market moves abroad it is difficult to get it back.
It's a good piece, but I don't fully buy their argument that it's all due to regulation. As more and more capital starts to reside in places like Russia and China, it makes sense that it will start to trade in places closer to Russia and China--like London and Hong Kong. Brooks Adams (brother of the great Henry Adams) noted a long time ago that, over the course of hundreds of years, capital was slowly migrating westward. It looks like that migration is continuing.
Posted by dan at 05:31 PM
My latest in Slate, on a market-based measure of geopolitical risk.
Posted by dan at 05:29 PM
All those numbskulls out there who still think there was nothing whatsoever wrong, improper, illegal, unethical about options backdating should check out this news. Former Brocade CEO Greg Reyes, whose options-related activities were documented in an excellent Wall Street Journal article today, has been indicted.
Posted by dan at 05:24 PM
When it comes to President Bush's economic team, it's hard to think of any person who left the administration with a better reputation better than he or she had upon entering. The reason? Being part of this administration means being a party to the clownshow fiscal policy and to all manner of other issues. Case in point: Energy Secretary Samuel Bodman. Before he entered the administration, he was known as a highly-successful executive who rose to become Chief Executive Officer of Cabot Corp., a Fortune 500 company.
Now, after this performance in Iraq, people are more likely to think of him as a reality-denying buffoon.
I can't wait to see how Henry Paulson handles this stuff.
Posted by dan at 05:55 PM
From an article by Michael Abramowitz and Chuck Babington in yesterday's Washington Post.
"By working closely with Congress -- and by threatening vetoes when they were called for -- discretionary spending has been kept in check and there hasn't been a need to veto a spending bill," said Scott Milburn, a spokesman for the Office of Management and Budget.But some fiscal conservatives complained that the absence of presidential vetoes reflects a lack of interest by Bush in challenging Congress to reduce costs in large spending bills that are outside the regular budget process -- such as highway, energy and agriculture bills that were full of expensive projects. As long as Bush was receiving support for his big agenda items such as tax cuts and the Iraq war, he went along with the bills, they said.
He just decided not to spend the political capital in fighting Congress on spending, and Congress basically agreed to go along with his biggest priorities," said Pat Toomey, president of the Club for Growth. "That's gotten us to the point where spending has gotten out of control."
It's amazing to me that two reporters could print that quote from Milburn, even with the two paragraphs that follow. Why? To say that discretionary spending has been kept in check in the Bush years is, lets see, how should I put this, an appalling lie! Just check out this chart from Cato.
Posted by dan at 11:10 AM
Today, Brad DeLong once again (rightly) spanks Felix Gillette of Columbia Journalism Review's business news blog, the Audit, for his inane June 21 post pooh-poohing the options backdating scandal.
But, Brad, it's worse than that. On July 6, Gillette magisterially returned to the subject, critiquing and criticizing an article by the great Adam Lashinsky of Fortune.
Considering the judgment shown in his postings on the matter, Gillette has an awful lot of nerve criticizing the news judgment of the reporters and editors (especially those at the Wall Street Journal) who have blown this story open. See, with every passing day, evidence mounts that, yes, Mr. Gillette, this is a real scandal. Check out Stephanie Saul's article in yesterday's New York Times, which reports that some 30 percent of companies engaged in backdating, and that the U.S. Attorney in San Francisco has set up a task force to investigate backdating. And check out the latest rumblings from the SEC, or the news from Broadcom that it will have to restate earnings by $750 million due to problems with accounting for its options.
And for some truly righteous bile directed at abusers of options backdaters, see Barry Ritholtz.
Gillette notes at the close of his piece that "the bigger this scandal gets, the smaller it seems." I'd rephrase that: the bigger this scandal gets, the smaller The Audit seems.
(Ed. note: maybe he's angling for a job on the WSJ edit page?)
Posted by dan at 02:46 PM
My latest "Economic View" column in the New York Times. Get it while it is free!
Posted by dan at 01:24 PM
My latest in Slate, on Burberry's efforts to escape British chavs and appeal to the U.S. heartland.
Posted by dan at 01:22 PM
SEC Commissioner Paul Atkins made a fool out of himself last week by arguing that he saw nothing illegal or problematic about options backdating. Now it looks like federal prosecutors may make a fool out of him, too. James Bandler and Kara Scannel report in the Wall Street Journal:
Federal prosecutors have warned the former chief executive of Brocade Communications Systems Inc. that he could face criminal charges related to stock options timing practices at the storage-networking firm, according to a person familiar with the situation.If criminal charges are filed, they would be the first related to the options-backdating scandal, in which federal investigators are probing scores of companies.
Gregory Reyes, the former CEO of Brocade, San Jose, Calif., has also received formal notification from the Securities and Exchange Commission that he could face civil charges, according to this person. Mr. Reyes received the notice last year or early this year.
Other people familiar with the situation said the Securities and Exchange Commission is expected to file civil charges in the Brocade matter but wouldn't say whether it was against the firm or individuals. Yesterday, SEC Chairman Christopher Cox said he expected the agency would bring its first options-timing case "very soon" although he didn't identify any company or individuals.
Could it be that Atkins is poised to leave the SEC and is angling for some white-collar defense work?
Posted by dan at 01:18 PM
Danny Hakim has a funny piece in the New York Times about General Electric CEO Jeffrey Immelt bouncing a $2,000 to William Weld's failed New York gubernatorial campaign.
GE shareholders probably shouldn't worry too much that their CEO wrote a check drawn on a closed account. After all, Immelt probably has a dozen or more accounts. They should, however, worry about his political savvy. What, precisely, was Immelt trying to achieve by holding a fundraiser for Weld's doomed candidacy at GE's headquarters? A spokesman for GE said that the company held the fundraiser at its Connecticut headquarters for Weld because "we do business in New York State." OK. But wouldn't it have made sense to hold a fundraiser for the guy who is actually going to be running the state come next year rather than a guy who couldn't even get his name on the ballot?
Posted by dan at 01:12 PM
A World Cup loser: Dutch consumer electronics company Philips. Ian Bickerton reports in the Financial Times:
Europe's largest consumer electronics business could be heading for a loss in the third quarter, analysts warned yesterday, despite the fact that Philips, the Dutch technology company that operates the unit, said it would exceed its group-wide sales goal this year.Sales from the division - which accounts for 30 per cent of Philips' revenues - rose 17 per cent as consumers swapped old-style TVs for flat-screen models. But the operating margin slipped from 2.7 per cent to 1.8 per cent as earnings slid from €62m ($78m) to €45m
The industry had over-estimated demand for flat-screens during the football World Cup and was now slashing prices to offload excess inventory, said Pierre-Jean Sivignon, Philips' chief financial officer.
And a World Cup winner: McDonald's, which had a very nice quarter fueled in part by European business and World Cup promotions.
Posted by dan at 01:08 PM
Really, we need more -- not less -- irony from our journalists. Mary Milliken of Reuters (via Yahoo!) reports on a day labor center in Laguna Beach, Ca.
Even those who oppose illegal immigrants turn to the center for their business -- a sign that the road to resolving the illegal immigrant problem will be tortuous."I don't think these people should be here because they are illegal, they are breaking the law," Jeff Hillman said as he picked up a day laborer to dig a hole for $12 an hour, almost twice California's minimum wage.
The chosen laborer, Marcos Jimenez from Mexico, heard Hillman's opinion and jumped out of his truck with a slam of the door.
"If he doesn't want to give work to an illegal immigrant, why doesn't he go hire a white guy, an American citizen, someone who speaks English better?" Jimenez said in Spanish.
Hillman, who does construction in Laguna Beach, admitted to the contradiction, but said: "The competition is doing it and I need to stay competitive. They do it, so I do it once in a while too."
No other laborer at the center agreed to work for him that day.
Posted by dan at 01:05 PM