CEOs Salivate Over Trump's Tax-Cut Plans, Vague as They May Be
- Published on 27 April 2017
Nothing gets Corporate America going like a tax-cut proposal.
Chief executive officers are keeping their fingers crossed that the skeletal details offered up by President Donald Trump’s administration Wednesday will turn into a concrete proposal to slash the corporate tax rate to 15 percent from the current 35 percent. That would free them up to invest and fuel economic expansion, they said in interviews and conference calls this week.
“If you listen to the framework of tax reform, I find that incredibly encouraging for companies like ours,” Rick Gonzalez, CEO of drugmaker AbbVie Inc., said on an earnings call Thursday. The proposed tax changes “would put us in position that would be far more competitive.”
Skeptics argue that companies would only pass along tax savings to investors, boosting special dividends and buybacks. The one-page list of principles that Trump’s administration released Wednesday cited the elimination of “tax breaks for special interests,” signaling that some companies might have to give up subsidies they currently receive. But for now, the nation’s business chieftains are rooting for the Republican president.
“We can be a cheerleader from the sidelines,” said Stephen Holmes, chief executive officer of hotel operator Wyndham Worldwide Corp., said Wednesday on a call with investors. “Lower taxes means better cash flow, more opportunity to invest.”
Read more: Trump’s tax plan faces major obstacle -- its cost
The White House is embarking on the arduous task of turning its one-page outline into legislation on a matter that has already divided Congress and large U.S. companies. Before the White House weighed in, a detailed plan backed by House Speaker Paul Ryan had drawn the ire of retailers and other industries because of a border-adjustment provision that would tax imports but not exports, leading many members of Congress to raise doubts about it.
U.S. Treasury Secretary Steve Mnuchin, who unveiled the White House’s guidelines on Wednesday with National Economic Council Director Gary Cohn, was vague on details. That’s made it difficult for companies to plan. Should they get more aggressive on investments and merger opportunities, certain that tax reform will materialize eventually? Or should Trump’s early legislative stumbles, such as a failed dismantling of the Affordable Care Act, give them pause about how much they can bank on major changes to the tax code?
“We continue to believe that something does get done this year, but the timing and the magnitude of it are anybody’s guess,” Randall Stephenson, CEO of AT&T Inc., said Tuesday in a call with investors. “But achieving competitive corporate tax rates -- this is probably the biggest catalyst available for our public policy makers if they want to increase capital investment and job creation.”
For some executives, a simplified tax code would present some tradeoffs. Waste Management Inc. noted that subsidies for fuel and low-income housing could go away, affecting its tax strategy. “But we’ll be happy to give up the fuel tax credit for a term for a rate reduction in corporate tax rates,” CEO James Fish said on a call.
The White House has pitched Trump’s wish list as a way to boost capital spending to create jobs and boost the economy. But one aspect may do more to help shareholders than workers. The administration reiterated its plan Wednesday for a one-time tax reduction for U.S. companies to repatriate cash from their foreign subsidiaries.
Though Mnuchin didn’t specify a rate for overseas funds brought home, the president said on the campaign trail that he wanted a cut to 10 percent from the current corporate income-tax rate of 35 percent. More than $2 trillion in offshore profits is held overseas by U.S. companies.
A rate cut could be a boon for tech companies like Apple Inc. and Microsoft Corp., and industrial behemoths such as General Electric Co. Their investors would do quite well, too, if history is any lesson. In 2004, a similar move led to an overseas influx of cash that was mostly returned to shareholders, not spent on building factories and creating jobs. While discussing repatriation Thursday, Gonzalez of AbbVie cited the company’s commitment to increasing its dividends.
“The vast majority of that cash was spent in the form of share buybacks, which are good for stocks in the short run,” said Gina Martin Adams, chief equity analyst for Bloomberg Intelligence. More than likely, “companies will give it back to shareholders.”
Such a boost to shareholder returns could help prolong the run-up in U.S. stocks since Trump was elected in November. The so-called “Trump bump” has seen the Standard & Poor’s 500 Index surge 12 percent since then.
Repatriation “could be a nice benefit,” said Marshall Front, who oversees $800 million as chief investment officer at Front Barnett Associates in Chicago. On the other hand, investors could overestimate how much companies actually would give back, he said. “The danger is that people could carried away with the impact.”
There’s another tantalizing benefit for companies with large operations overseas. A lower tax rate offers an opportunity to get a competitive edge against foreign competitors that have to pay more to their own governments.
“Doesn’t matter what industry you’re in,” said Boeing Co. Chief Financial Officer Greg Smith on a conference call Wednesday. “If you’re a global company, it’s going to allow you to compete on a global platform. And so we’re supportive of that.”
The Long, Rough Ride Ahead for 'Made in America'
- Published on 17 April 2017
Mini motorcycle and go-kart maker Monster Moto made a big bet on U.S. manufacturing by moving assembly to this Louisiana town in 2016 from China.
But it will be a long ride before it can stamp its products "Made in USA."
The loss of nearly one out four U.S. factories in the last two decades means parts for its bike frames and engines must be purchased in China, where the manufacturing supply chain moved years ago.
"There's just no way to source parts in America right now," said Monster Moto Chief Executive Alex Keechle during a tour of the company's assembly plant. "But by planting the flag here, we believe suppliers will follow."
Monster Moto's experience is an example of the obstacles American companies face as they, along with President Donald Trump, try to rebuild American manufacturing. U.S. automakers and their suppliers, for example, have already invested billions in plants abroad and would face an expensive and time-consuming transition to buy thousands of American-made parts if President Trump’s proposed “border tax” on imported goods were to become law.
When companies reshore assembly to U.S. soil – in Monster Moto’s case that took two years to find a location and negotiate support from local and state officials – they are betting their demand will create a local supply chain that currently does not exist.
For now, finding U.S.-based suppliers "remains one of the top challenges across our supplier base," said Cindi Marsiglio, Wal-Mart Stores Inc’s <WMT.N> vice president for U.S. manufacturing and sourcing. Wal-Mart partnered with Monster Moto and several other U.S. companies in a drive to increase spending on American-made goods by $250 billion by 2023 in response to consumer demand for American-made goods.
Their experience has shown Americans’ patriotic shopping habits have limits, namely when it comes to price.
Take Monster Moto's bikes, which sell for between $249 to $749. Keechle, the CEO, says he can’t raise those prices for fear his price sensitive prospective customers will turn to less expensive rivals made in China.
"Consumers won't give you a free pass just because you put 'Made in USA' on the box," Keechle says. "You have to remain price competitive."
Keeping a sharp eye on labor costs in their factory is one thing these U.S. manufactures can control. They see replacing primarily lower-skilled workers on the assembly line with robots on American factory floors as the only way to produce here in a financially viable, cost-competitive way. It’s a trend that runs against the narrative candidate Donald Trump used to win the U.S. Presidency.
Since taking office, Trump has continued promises to resurrect U.S. manufacturing's bygone glory days and bring back millions of jobs. On March 31, Trump directed his administration to clamp down on countries that abuse trade rules in a bid to end to the "theft of American prosperity."
But it's more complicated on the ground for companies like Monster Moto.
"It's almost as if people think you can just unplug manufacturing in one part of the world and plug it in to the U.S. and everything’s going to be fine," said David Abney, Chief Executive Officer of package delivery company United Parcel Service Inc <UPS>, which helped Monster Moto reconfigure its supply chain to bring its Chinese-made parts to Ruston.
"It's not something that happens overnight," he said. A White House official said that the Trump administration’s efforts to encourage manufacturers to reshore production will be focused on cutting regulations and programs to provide new skills to manufacturing workers.
“We recognize that the manufacturing jobs that come back to America might not all look like the ones that left,” a White House official said, “and we are taking steps to ensure that the American workforce is ready for that.”
MAKING ROBOTS GREAT AGAIN
In Monster Moto's cavernous warehouse in Ruston, boxes of imported parts that are delivered at one end then become bikes on a short but industrious assembly line of a few dozen workers.
A solitary, long-bearded worker by the name of Billy Mahaffey fires up the bikes to test their engine and brakes before a small group of workers puts them in boxes declaring: "Assembled in the USA."
Helped by that label, Monster Moto has experienced a recent boom in demand from major customers that include Wal-Mart. The company expects to double production to 80,000 units and increase its assembly workers - who make $13 to $15 an hour - to 100 from around 40 in 2017.
The most likely components Monster Moto could produce in America first are black, welded-metal frames for bikes and go-karts, but they would have to automate production because human welders would be too expensive.
"We can't just blow up our cost structure," said Monster Moto President Rick Sukkar. "The only way to make it work in America is with robotics."
The same principle applies for much larger manufacturers, such as automotive supplier Delphi Automotive PLC’s <DLPH.N>. Chief Financial Officer Joe Massaro told analysts in February that 90 percent of the company’s hourly workforce is in “best-cost countries.”
When asked about shifting production to the United States from Mexico, Massaro said depending on what happens to trade rules “it would have to be much more of the sort of the automated type manufacturing operations just given… the labor differential there.”
That trend is already showing up in data compiled by Economic Policy Institute, a Washington-based think-tank. According to senior economist Rob Scott, not only did America lose 85,000 factories, or 23.5 percent of the total, from 1997 to 2014, but the average number of workers in a U.S. factory declined 14 percent to 44 in 2014 from 1997. According to Scott, much of the decline in workers was due to automation. "We're going to see more automation in this country because it makes good sense economically for every company," said Hal Sirkin, a managing director at the Boston Consulting Group. "You can spend a lot of time bemoaning it, but that's not going to change."
Manufacturers say automated production requires fewer, but more skilled workers such as robot programmers and operators. The National Association of Manufacturers (NAM) estimates because of the "skills gap" there are 350,000 unfilled manufacturing jobs today in a sector that employs over 12 million people.
In Ruston, Mayor Ronny Walker bet on Monster Moto by guaranteeing the company's lease because he wants to diversify the city's economy, and envisions suppliers setting up alongside Monster Moto's assembly plant.
"Could it take a long time to bring manufacturing back here? Sure," he says. "But you have to start somewhere."
How Detroit Deadbeats Taught Tax Collectors That Threats Really Work
- Published on 13 April 2017
Almost half of the city’s taxpayers have been ignoring the local income tax.
For a while there, Detroit’s income tax might as well have been optional.
About 400,000 people—residents and anyone working inside the city limits—are required to file a tax return to Detroit. Almost half of them weren’t doing so. Perhaps that explains, in part, why the city filed for bankruptcy four years ago.
Detroit “sent out thousands of letters to people,” said Debra Pospiech, the city’s deputy treasurer for tax. “People just threw them out.”
Getting people to pay taxes is a problem everywhere, of course, but Detroit had a particularly hard time going after scofflaws because budget cuts decimated its ability to enforce the law. Even the people who paid up created logistical havoc for beleaguered city bureaucrats. In Detroit, the only way to file taxes was on paper. An irritation for taxpayers turned into a nightmare for city workers, who spent hours typing data into computer systems.
Detroit’s tax trouble became the basis of an economic experiment last year. The city decided to send out more than 7,000 mailings to deadbeat tax filers, people whose 2014 tax returns were already a year late. The city suspected each delinquent owed at least $350. Taxpayers were randomly selected to receive one of six different letters, each with a different message in a black box on the mailing.
One message appealed to residents’ civic pride, as the city tried to bounce back from its bankruptcy: “Detroit’s rising is at hand. The collection of taxes is essential to our success.”
Another simply made clear that the city’s tax collectors had detailed information on the deadbeats: “Our records indicate you had a federal income of $X for tax year 2014.” Detroit residents owe 2.4 percent of their incomes to the city, after a $600 exemption. Nonresidents who work in Detroit pay a rate of 1.2 percent.
And one message made a bold declaration: “Failure to file a tax return is a misdemeanor punishable by a fine of $500 and 90 days in jail.”
It turned out that the threat worked best. More than 10 percent of taxpayers responded to the letter mentioning a fine and jail time, more than three times the response rate of a basic control letter.
Ben Meiselman, a graduate student at the University of Michigan’s economics department, took a desk in the city tax office to run the experiment. He wrote the messages included in the mailings to reflect behavioral economics research. “I find that a single sentence, strategically placed in mailings to attract attention, can have an economically meaningful impact on tax filing behavior,” Meiselman wrote in a working paper that will eventually become a chapter in his doctoral dissertation.
Giving details of a taxpayer’s income boosted the response rate by 63 percent. But a letter that combined a threat with income information was less effective than a threat by itself. “Keeping it simple seems to be the key,” Pospiech said. Appeals to civic pride fell flat, with a response rate just 0.8 percentage points higher than that of a basic letter.
Detroit still has a long way to go, even if it manages to apply the results of the experiment and triple the response rate from tax delinquents. About 6 percent of U.S. taxpayers break the law by not filing with the Internal Revenue Service each year, according to research by economic consultant Brian Erard. In Detroit, Meiselman estimated, 46 percent of taxpayers hadn’t submitted their 2014 returns by the due date in the following year—and things were getting worse.
Detroit’s next step was to back up threats with action. No matter what letters from the city suggest, taxpayers could maintain a sense of impunity. The city hadn’t undertaken an audit or tax investigation in more than a decade. The city tax office, which once had a staff of about 70, was down to fewer than three dozen employees who spent all their time processing paper returns.
The department recently reorganized—last year the state of Michigan took over collecting and processing Detroit’s current-year returns—to free up city employees to collect unpaid taxes. Detroit also allowed taxpayers to file electronically for the first time, and 77 percent of filers took advantage. The city has sent out 15,000 letters since July 2016 and has collected $5.3 million through letters, audits, and investigations. Some of the amounts collected are significant, particularly for those who have dodged taxes for years. In one case, a taxpayer agreed to pay $400,000.
Detroit also started filing misdemeanor charges and lawsuits in small claims court to get its tax money. Officials noticed that only one in five residents in several high-end apartments buildings had filed income taxes. The city persuaded a judge to issue an order requiring landlords to turn over tenant information.
So far the more aggressive approach seems to be working. The number of residents filing returns more than doubled last year 1 from the previous year. Filing by nonresidents rose 37 percent. It’s too early to tell how seriously taxpayers are taking their filing obligations this year. City returns from 2016 are due, along with state and federal returns, by April 18.
City officials are optimistic. In the past, “people knew we weren’t coming after them,” Pospiech said. “Now we are following up on those threats.”
Wells Fargo clawing back millions more from former execs in accounts scandal
- Published on 10 April 2017
Wells Fargo said Monday it is clawing back tens of millions in additional compensation from top former executives after an internal investigation of the bank's unauthorized accounts scandal found that the ex-leaders acted too slowly to investigate allegations of "improper and unethical behavior" in retail sales practices.
The clawbacks are among the highlights of an 110-page report that said aggressive sales practices in the community banking division of Wells Fargo for years distorted "culture and management performance" and "created pressure on employees to sell unwanted or unneeded products to customers, and, in some cases, to open unauthorized accounts."
Produced by independent board members of the bank, along with outside legal investigator, the report blasted Wells Fargo executives for failing to properly investigate the activity, cultivating an atmosphere of unrealistic expectations and hiding information about the extent of the crisis that ultimately led to millions of dollars in fines, plus lawsuits and additional investigations.
Wells Fargo board Chairman Stephen Sanger also acknowledged in a Monday conference call with reporters that board members "could have pushed more forcefully to change leadership at the community bank."
"I think we have taken full responsibility to ensure that changes were made to make sure this never happens again," said Sanger.
"We accept the board's findings as a critical part of our journey to rebuild trust," Wells Fargo CEO Tim Sloan added in a formal statement.
Sloan succeeded former CEO John Stumpf who resigned in October amid the scandal fallout. Stumpf will lose an additional $28 million in compensation beyond the $41 million and 2016 bonus he previously agreed to forgo, the report said.
The report also said the bank has canceled $47.3 million in additional stock options owed to Carrie Tolstedt, who previously headed the community banking division where the scandal erupted. Tolstedt, who previously lost $19 million in compensation, resigned in June.
The report's findings compound the San Francisco-based bank's crisis ahead of an April 25 annual meeting, where board members will stand for reelection. Stockholder advisory group Institutional Shareholder Services last week recommended that Wells Fargo shareholders vote against re-election for 12 of the company's 15 directors. Wells Fargo, which is scheduled to report quarterly earnings on Thursday, last week rejected the ISS recommendation.
Contact information for Stumpf and Tolstedt was not immediately available Monday.
However, Stumpf "took responsibility" for the improperly aggressive practices, and was "totally cooperative" with investigators, said Stuart Baskin, a Shearman & Sterling law firm partner involved in the bank's internal investigation.
Tolstedt declined to be interviewed for the investigation on the advice of legal counsel, Baskin said.
In all, Wells Fargo has acknowledged it may have opened up to 2.1 million accounts without customers' permission, along with unwanted credit cards and other financial products. The sales resulted from community bank managers pressing lower level bank employees to meet aggressive cross-selling targets that for years had made Wells Fargo the envy of the banking industry as the sales boosted the bank's bottom line.
But the sales practices also triggered numerous complaints from employees. Spurred by a December 2013 report on the practices by the Los Angeles Times, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Los Angeles City Attorney's office hit Wells Fargo with $185 million in fines and penalties last year.
At that time, Wells Fargo acknowledged that an estimated 5,300 employees had been fired as the magnitude of the sales excesses emerged. Many bank workers complained that they had been victimized for acceding to their bosses' sales demands.
The bank also moved to take action, launching its internal probe even as lawsuits mounted and new investigations by the Department of Justice and the Securities and Exchange Commission got under way.
In addition to clawing back compensation from Stumpf and Tolstedt, the bank on Feb. 28 reduced compensation for eight current executives by $32 million, including eliminating 2016 bonuses and halving 2014 performance payouts. Although the internal report found that Sloan's "direct involvement with sales practice issues was limited," his 2016 bonus and 2014 performance share payouts were reduced as part of the compensation cuts.
Additionally, Wells Fargo in January overhauled its compensation plan to remove financial incentives for aggressive sales of financial products to customers. Four present or former senior managers were fired the following month for their alleged involvement in the scandal. On Monday, Sanger said no additional firings or compensation clawbacks are planned.
As part of the investigation, Shearman & Sterling conducted 100 interviews with current and past workers, reviewed more than 35 million documents and coordinated with FTI Consulting to conduct forensic analysis of the bank's digital archives.
Wells has previously acknowledged that aggressive sales incentives and pressure prompted many frontline bank employees to open fake accounts to meet their goals. The report focused on that issue at length, blaming senior executives for tolerating "low-quality accounts" and failing to terminate the people responsible for them.
The internal report singled out Tolstedt for allegedly having been "insular and defensive" and having "effectively challenged and resisted scrutiny from within and outside" her community banking division.
The report also said Stumpf of downplaying problems and failing to investigate the allegedly unethical activity when the possibility of problems came to his attention. "Stumpf's long-standing working relationship with Tolstedt influenced his judgment," leading him to stand by her even though "he was aware that many doubted that she remained the right person" to continue leading the division involved in the scandal, the report concluded.
When an internal investigation launched after the Los Angeles Times report revealed that about 1% of Wells Fargo employees were fired annually for sales integrity violations, Stumpf and Tolstedt "received the figure positively," according to the bank's internal probe.
"Stumpf was by nature an optimistic executive who refused to believe that the sales model was seriously impaired," the report said. "His reaction invariably was that a few bad employees were causing issues, but that the overwhelming majority of employees were behaving properly. He was too late and too slow to call for inspection of or critical challenge to the basic business model."