Readers Report
The Bottom Line on Tax Shelters
Although neither as obvious nor as substantial as the implications of different ways of accounting for options, "The corporate tax game" (Special Report, Mar. 31) can have an insidious impact on the quality of reported profits. As more earnings are purposely derived offshore, earnings are deemed to be permanently invested, and accordingly, no domestic income taxes are accrued. If these funds are never to be repatriated, how is the shareholder to gain access to them? If not returned to shareholders, what is their economic value?
Compounding the complexity of this valuation issue is the resulting "over-investment" of this retained cash. There are only limited investment opportunities for corporations in aggregate. Therefore, investment must necessarily produce poor returns for markets to clear. It takes several years for companies to account fully for the inevitable misallocations, casting doubt on reported earnings and, perhaps, driving up required risk premiums in the interim.
I am reminded that nothing has advanced the art of good fiction quite as much as the tax code.
Robert F. Boyd
Baltimore
"The corporate tax game" and "The rise of the Wall Street tax machine" are the most compelling arguments for a flat tax that I have ever read. A real flat tax for corporations and individuals and the elimination of any nefarious loopholes and deductions would put all these hotshot accountants, banks, and lawyers out of business.
Clark McClain
Tucson
Going after accountants and attorneys for practicing accounting and law makes about as much sense as damming the Potomac with your sport-utility vehicle. Senator Charles Grassley's (R-Iowa) declaration to hunt them down is the typically pathetic response of a bureaucrat trying to redirect blame instead of recognizing the root of the problem: taxing the bottom line instead of the top line.
Quantifying the bottom line, or net income, for individuals and business entities is infinitely subjective, which works to the advantage of politicians because they determine what your bottom line is!
Nick Sampair
St. Paul, Minn.
Your report ignores the economic analysis that says companies don't pay taxes, but merely collect them. Corporate income taxes are levied by the government on particular groups of individuals but are collected on its behalf by corporations. Far better that the government collect the taxes openly and honestly. Abolish the (misnamed) corporate income tax, and either raise general tax rates or replace it with a consumption tax. Of course, abolishing the corporate income tax would reduce Congress' ability to extract campaign contributions from companies by granting them favors in the form of loopholes. Let's face it: The corporate income tax is the source of much that verges on political corruption.
Michael J. Clowes
Huntington, N.Y.
Editor's note: The writer is editorial director of Pensions & Investments and InvestmentNews.
I would like to see a 15% simplified flat tax and a 3% national sales tax (a cap on the states of a 5% sales tax would make a sales tax total of 8% on all goods and services). Then we could get some money from tax cheats.
Phil Morris
Fountain Hills, Ariz.
How dare BusinessWeek imply in its "Make the corporate tax code fair" (Editorials, Mar. 31) that Marriott International Inc. hotel chain should not own coal-scrubbing machines? Did you forget that in a democratic economy, any company can own anything it wants to own, provided it is legal? BusinessWeek should attack the legislators who write the Internal Revenue Service code rather than honest companies who use the code for their advantage.
Robert E. Savage
Fort Myers, Fla.
Ford: On Track to Meet Its Goals
"Can Ford pull out of its skid?" (The Corporation, Mar. 31) presented readers with a one-sided look at Ford Motor Co.'s performance. Ford is 15 months into its five-year revitalization plan, and so far, the company has made substantial progress to improve its business. U.S. market share improved each quarter in 2002, and in both months so far this year. We met or exceeded our profit targets and analysts' estimates each quarter last year. In 2002, we exceeded our cost-cutting target of $2 billion.
We delivered on our goal to introduce 20 new or freshened cars and trucks last year in North America, and we have launched 32 of the 45 new vehicles we promised to deliver in Europe in the five years leading up to 2005. Ford Credit has diversified its sources of funding, so that it does not rely on just one type of debt. Cash on hand has increased to $25 billion.
Warranty costs are down. Last year, safety recalls declined by more than 40%, and the number of units affected were down 45%. We improved 12% -- more than the industry average -- in last year's J.D. Power & Associates' Initial Quality Study. Revenue per unit was up in 2002, despite heavy marketing costs from incentives. Our financial results improved by $4.5 billion in 2002, compared with 2001.
We are making progress, and we're on track to deliver our short-term business objectives for 2003 and our long-term goals that we laid out for mid-decade in our revitalization plan. In this, the company's centennial year, our employees' focus remains on delivering quality cars and trucks to our customers, just as we have done for the past 100 years.
James G. Vella
Vice-President for Public Affairs
Ford Motor Co.
Dearborn, Mich.
"Spinning" Is a Bribe, Pure and Simple
In the matter of Credit Suisse First Boston's Frank P. Quattrone: How hard is it to understand the impropriety of "spinning"? ("Frank's life in the rough," (Finance, Mar. 31). If your purchasing manager received a new car from a supplier, he would be fired. He might, of course, reply that he would have bought from that supplier anyway, but we wouldn't even deem this an interesting argument. However, if a CEO earns a quick $100,000 from a "spinning" transaction, we seem confused about whether or not anything wrong has occurred.
Just to be clear, the spinning transaction is not one in which the CEO has an investment risk; the investment banker sets it up on the bank's books, places hot issue shares in it, and sells the shares for the account of the CEO. The CEO never has anything to do with the transaction other than collecting the money. It's a bribe.
The defense of Frank Quattrone by Sandy Robertson is self-serving; this was one of Sandy's notorious practices when he was in the investment banking business. "Aha!" you say, everyone does it. Yes, that's true. Boeing Co. and Lockheed Martin Corp. salesmen used to bribe purchasers of their airplanes, and we created the Foreign Corrupt Practices Act to stop it. Perhaps the more important message here has escaped us all. The failure to prevent these bribes of CEOs may be more a consequence of the lack of effective boards of directors. The reason the bribed purchasing manager gets fired is that he has a boss who won't tolerate this behavior. Without an effective board of directors, the CEO reports to no one.
John B. Goodrich
Portola Valley, Calif.
Quattrone's situation, a West Coast operation independent of New York supervision, appears very similar to that of Michael Milken and Drexel Burnham Lambert years ago. And Allen Wheat is comparable to Fred Joseph.
History repeats because lessons are not learned.
David N. Schaaf
Professor of Economics
Bay College
Escanaba, Mich.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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