Harper: Panama Papers Will Have Little Effect On World Economy

Apr 7, 2016

In this week’s Economic Report, Dr. Rick Harper discusses the Panama Papers scandal and tax inversion,the rise in service sector jobs and why economic growth isn’t benefiting everyone in our area.

The Panama Papers scandal, in which a leak revealed that many world leaders are storing their wealth in secret offshore accounts to avoid taxes, was big news this week, but what does it mean for the world economy? In Harper’s view, not much in the short term.

“I don’t imagine there’s going to be much direct fallout,” Harper said. “This is really about description of the way people live their economic lives.”

Harper said that while many international accounts were found, the number was low for U.S. interests.

“People caught up in the release, sitting here today, they have identified 200 or so Americans caught up in the Panama Papers” he said. “And some of those were perfectly legitimate normal reasons.”

But among those 200, there were those with questionable motivations.

“There are, of course, a few Wall Street influentials, wrongdoers, who have been caught up in this as well,” Harper said. “It’s been used as a place to store great wealth out of the view of tax authorities.”

This practice is more prevalent abroad, Harper said, because U.S. tax law is generally lenient about letting people set up corporations and place assets in them.

“This is much less so in other places,” Harper said. “We’ve already seen Iceland’s prime minister had to resign, and of course, there are allegations all around – everyone from David Cameron in the U.K. and his late father’s business dealings to Vladimir Putin and the potential for billions of dollars there.”

The concept of tax inversion, moving a company’s headquarters to another country to avoid U.S. taxes, is a real phenomenon, however.

“U.S. corporate tax rates are not particularly low and competitive,” Harper said. “If you’re a company with worldwide operations and you have a choice about where to keep your headquarters and report your income so as to maximize return for your shareholders, you might well like to locate in a low-tax jurisdiction.”

Harper said that we’ve seen a trend of U.S. companies merging with or being acquired by foreign businesses in low-tax jurisdictions.

“By doing so, the company is much better able to shield its income from the reach of the tax collector,” he said. “That poses problems for U.S. corporate competitiveness and also U.S. tax transparency and to run a business well and a society well.”

Harper also discussed the most recent Institute for Supply Chain Management index, which showed that U.S. service sector is growing. That’s good news for the economy, he said.

“The Institute for Supply Chain Management index came out with 54.5 for non-manufacturing, that is the services sector,” Harper said. “Anything above 50 forecasts growth; anything below 50 forecasts shrinkage and so, 54.5 was above economists’ expectations, so that was good news.”

Locally, the trend of growth is outpacing the national average.

“Employment growth in services has been quite strong,” Harper said. “Year over year, we just got the February 2016 employment change from February 2015, and that was 3.3 percent growth, which is just exceptionally good for Pensacola.”

Harper said the report also shows other good news for the area.

Credit University of West Florida

“Goods-producing sectors also grew in February, an uptick from their performance in late 2015,” he said. “Goods-producing industries actually increased employment in the Pensacola metro area by 3.8 percent relative to February of 2015.”

A Harper also weighed in on a new article by Haas Center Director Zach Jenkins that says that the economic recovery may not be benefiting everyone in our area.

“The Economic Innovation Group looked at about 26,000 ZIP codes across the U.S. and came out with a color-coded map with distressed communities versus communities that were performing well,” Harper said. “Zach Jenkins and the Haas Center team went through and narrowed that down to the 91 ZIP codes from Tallahassee on west and looked at the ones that were performing well versus the ones that were distressed and found, perhaps not surprisingly, given that 2010-2013 was right during the tine that the oil spill affected us most profoundly, that Northwest Florida communities generally performed worse than the nation and worse than the rest of the state of Florida.”

The Haas Center teamed also looked at disparity within ZIP codes.

“Inequality was relatively high in Northwest Florida,” Harper said. “The highest performing ZIP codes were in the Pensacola area – Pensacola Beach and Perdido Key. Traditionally, the ZIP codes 32501 and 32505 in Pensacola, west of I-110 and south of I-10, are some of our most economically distressed census tracts with the highest minority populations. And so, the results are fairly predictable, but the 2010-2013 data do add new insight though.”

Dr. Rick Harper serves as associate vice president for research and economic opportunity at the University of West Florida and oversees the University’s Center for Research and Economic Opportunity. He can be reached at rharper@uwf.com. CREO staff writer Mike Ensley contributed to this report. He can be reached at kensley@uwf.edu.

This article is part of a collaboration between WUWF and the UWF Center for Research and Economic Opportunity.