🎙️ Taxes of the Caribbean

Nvidia didn’t see its shadow, meaning we’ll have three more months of a bull market!

Kidding, but Nvidia did strike again, as AI-related computing demand is off the charts 💥

💭 The company crushed sky-high estimates in its highly-anticipated second-quarter earnings report, jumping 8% and adding to what was already a 228% rally in 2023.

— Matthew, Shawn & Weronika

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• Will the Caribbean still be a tax haven?

• How the minimum wage became an afterthought

• The latest return-to-office battles

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🏝️ Caribbean Tax Havens Aren’t So Safe Anymore? (The Economist)

Yes, the Caribbean is an ideal vacation destination flex on Instagram, but it’s also a great place to dodge taxes and launder money. At least, it has been historically.

For decades, the British Virgin Islands has carved out its name in international finance by selling shell companies to foreigners that only exist on paper. This has sometimes funded over two-thirds of the government’s budget for this island of just 33,000 people.

• As The Economist puts it, “Almost every rock in the Caribbean has, at one point or another, sought to build an offshore sector of some flavor.”
  

• The Bahamas did so first, earning around 10-15% of its GDP from financial services, particularly private banking.

To be clear, these offshore hubs offer many useful and legitimate services, but no shortage of money launderers and tax avoiders have infamously exploited them.

One thing in common: The three Caribbean destinations most dependent on their offshore endeavors are all self-governing British territories — the Cayman Islands, the British Virgin Islands, and Bermuda (in the North Atlantic.)

• The Tax Justice Network, a British NGO, finds that the Caribbean and Bermuda drive about 20% of the $472 billion governments lose annually in tax evasion schemes.

Why it matters:

Two changes may flip this upside down:

• After Britain began publishing a public database identifying company owners explicitly in 2016, it wants to extend that rule to its overseas territories. Making public corporate records, previously only available to the police and other government authorities, may make it easier to detect tax fraud.
  

• Secondly, a global corporate-tax deal from 2021, including 130 countries, aims to block legal tax loopholes that allow international companies to declare their profits in havens with low or no taxes rather than in the markets where they generated those earnings.

The tax deal seeks to enforce a global 15% minimum tax on corporate earnings, regardless of where those profits are booked, whether in offshore centers like the Caribbean or not.

What’s next: A few uncertainties remain, namely whether the U.S. will uphold the minimum corporate tax limit deal. If not, the worldwide initiative would be hugely constrained.

• Still, some islands like the Bahamas and Bermuda are planning their response, including tax raises for large foreign firms. If multinationals will have to pay higher taxes anyway, why not cash in, too?

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💵 The Minimum Wage Becomes an Afterthought (NYT)

Amid the debate around back-to-office plans (more below), inflation, interest rates, and a strong labor market, the minimum wage floor of $7.25 has gone overlooked.

That’s especially true because most teenagers earn twice that during their summer jobs, and there are still many open jobs nationwide.

More supply and demand dynamics: Yes, the federal minimum wage is $7.25, but many business owners have been incentivized to pay their workers closer to $15 or $20 an hour because unemployment has remained so low.

In other words, few people are willing to work for $7.25 anymore when most service jobs pay more — sometimes double or even triple.

• The hot labor market of the past two years has driven pay increases in service work, retail, hospitality, and other low-wage industries. By many measures, it’s also made the federal minimum wage meaningless.

• The New York Times reports that only about 68,000 earned the federal minimum wage through July this year, or less than one of every 1,000 hourly workers. Walmart, once known for low wages, pays workers at least $14 an hour, even in places where it’s legally allowed to pay half that.

Rising wages in service industries are another byproduct of a hot labor market — more job openings exist than people willing to work.

Workers have counted on higher wages amid the rising cost of living, from groceries to rent to car payments. In inflation-adjusted terms, the minimum wage is worth less than at any time since 1949.

Why it matters:

While President Biden tried to pass a minimum wage increase in 2020, his first year in office, there has been relatively little talk of it since.

• Congress hasn’t voted to raise the minimum wage since 2007, and it has remained at $7.25 since 2009 — a 14-year stretch that stands as the longest period without an increase since the minimum was set in 1938 on the heels of the Great Depression.
  

• But states and cities have their own minimum wage laws, many of which are now $15/hour. Now, some fast-food chains like Wendy’s promise starting wages of $17 or $18 an hour.

The bottom line: The hot job market has naturally elevated minimum wages nationally. And, much of the talk about the minimum wage has been replaced by business owners’ biggest challenge today: retaining workers.

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🍕 All 142 Domino’s stores in Russia are closing

💼 Banking Giant Cracks Down on Employees Not in Office (Bloomberg)

While many have embraced the new norm of flexible work-from-home reality, the banking industry is bucking the trend.

No WFH: Goldman Sachs, an advocate for returning to the office, assumes a stricter approach toward employees who resist.

And the financial powerhouse is launching an initiative to ensure its five-day office work policy is followed.

Although employees responsible for doing the deals to generate revenue have largely returned to full-time in-office work, senior managers are becoming increasingly frustrated with the reluctance of staff in other departments to work in person.

Across the industry: Goldman Sachs isn’t the only bank pushing its employees to return. Citigroup and JPMorgan have monitored attendance and encouraged managers to uphold their three-day-a-week guidelines for most employees.

• Citigroup staff were notified that not adhering to attendance policies could lead to consequences, potentially impacting their compensation.
  

• In April, JPMorgan informed employees that managing directors are anticipated to commute to the office every workday.

There are more examples of employers forcing employees to follow, sometimes strict, policies — some Amazon employees were asked to relocate states, causing many of them to quit their jobs.

Why it matters:

As of early August, work attendance remained below half of the pre-Covid levels in ten of the largest business districts in the U.S.

Clear out your desk: Businesses are reducing office space due to adopting hybrid workplace policies and cost-cutting measures.

• 61% of U.S. companies permit their employees to work remotely either partially or entirely during the week, marking an increase from 51% at the start of the year.

• The percentage of companies mandating full-time in-office work has decreased from 49% to 39% since the start of the year.

This trend is expected to persist as newer companies adopt flexible work practices more readily than the more established, traditional firms.

In other words, many U.S. businesses have made lasting adjustments to work attendance expectations in response to the pandemic. Some even use hybrid work as a recruiting tool to attract talent.

Against the grain: Yet, the tension across corporate America is real, as some large companies grapple with enforcing stricter policies.

• Firms like Goldman Sachs, JPMorgan, and Citigroup are fighting a battle to bring workers back into the office, especially with labor shortages abound, leaving workers with stronger negotiating power and more options to switch jobs.

See you next time!

That's it for today on We Study Markets!

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