Juggling Economic Eggs

I had been mulling another essay on some additional thoughts on how to stimulate economic growth, something about which I opined earlier.  An essay on LinkedIn, 4 Economic Reforms to Ignite American Startups by the CEO and Founder of Raw Athletics, Stephen Steinberg, spurred me out of the gate.  He has some ideas, but let me propose some ideas of my own – one matching his but going a little further –on how to grow the American economy.

(Disclaimer: I am not an economist or policy expert.  I am offering my opinions – but have thought things through to what I believe are logical conclusions.  If you differ, let’s hear from you in the comments.)

Seeing the Light

Steinberg’s first point is simple, and I agree wholeheartedly: end crony capitalism.

Consider the going-extinct incandescent light bulb.  This bulb has been in existence for over a century, and works just fine.  Competing technologies such as compact fluorescents and LEDs are now on the market… while these are more efficient, they are more expensive to produce – and far more costly on-the-shelf (never mind the mercury issues of CFLs as well as possible retina damage from both CFLs and LEDs).  They are far more profitable.  But people like inexpensive products that work just fine so, as I understand it, the major players in these new technologies lobbied for energy efficiency standards for bulbs to be imposed by law.  Thus the old, reliable, and perfectly fine Edison light bulb was made obsolete – not by competition, but by legislative diktat.  This brings to mind the perfect quote:

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.  —  P. J. O’Rourke

In parallel with that, the debacles of Solyndra among myriad others, getting enormous loans from the government only to go belly up, show the folly of governmental intervention in the market attempting to choose winners.  Government should not be in the business world betting; they’re playing with other peoples’ money – money that is taken through taxation, not given for investments.  If a product or service has merit, and can show potential profit and growth, someone will fund it.  (One could also cynically opine that such loans – to any industry, not just this instance – are ways for both parties to funnel taxpayer money to companies and individuals who, in turn, will launder some of those funds back into campaign coffers.)

But let me go further.  End “special” deductions.  It’s said that General Electric made billions in profits, and paid precisely zero in federal taxes because of all the credits, incentives, etc., that are out there for “green energy”, etc.  End them.  End them all.  Revenue in – expenses out = profits.  Which get taxed at one simple rate.  (Some time ago I remember reading – and I don’t have the reference, sorry – that many “green energy” sites really make money only through all the tax incentives and credits that are given; these incentives and credits fade over time, so a game of “musical green energy sites” is played with being sold every few years to reset these government incentives.)

Lower Corporate Taxes

In that previous essay referenced in the first paragraph, I highlighted why lower taxes spur entrepreneurship.  The same applies to companies.  Companies with higher potential profits from new ventures will attempt more new ventures.

But there is an additional benefit of global competition.  Companies are in business to make a profit; a profit after taxes, not before.  By lowering corporate taxes – which, in point of fact, are actually eventually paid by individuals through the prices of the goods and services bought – we can reverse the trend of companies seeking to migrate to tax havens offshore.  As an example, Burger King is in talks with Canada’s Tim Horton (side note: best cream of mushroom soup I’ve ever had!).  Per Forbes:

Canada’s corporate tax rate in Ontario of 26.5% (the federal rate of 15% plus Ontario’s provincial corporate tax rate of 11.5%) is considerably favorable to the American corporate tax rate of 35% thanks in large part to the conservative Canadian government led by Stephen Harper. The Harper government lowered the federal tax rate to 15% in 2012 down originally from 28% since it took office in 2006.

In fact, a recent KPMG Report, Focus on Tax, ranked Canada number as the #1 country with the most business-friendly tax structure among developed countries when adding up a wide range of tax costs to businesses from statutory labor costs to harmonized sales tax. When comparing developed countries to what companies pay in the U.S.; Canada came in at 53.6%, the U.K. came in at 66.6%, and the Netherlands at 74.5% of the U.S. corporate tax burden.

Interestingly, PriceWaterhouseCooper’s study of taxes across 189 economies worldwide shows that the US came in 64th on a relative ease of paying taxes.

I propose a 10% flat tax on corporate profits (individual taxes too).  No deductions, no nothing.  I’m not alone in this line of thought, as another online article posts (emphasis added):

The issue here is the insanity of our current corporate tax structure, which is both more burdensome and more Byzantine than most other Western nations. Some of that can be chalked up to cronyism, as large corporations lobby for special carve-outs and benefits to the disadvantage of others, especially smaller and more entrepreneurial competitors. The rest of it comes from the political impulses of both parties to treat the tax code for both corporations and individuals as a platform for social innovation rather than a rational way to fund government.

And:

Change the tax codes for both individuals and corporations to a flat-rate system that has no deductions or loopholes. Better yet, change the individual tax system to flat-rate and eliminate the corporate tax system altogether. That would encourage corporations to return to the US and base their hiring here…

I’m not sure about eliminating the corporate tax entirely, though I can see eliminating the federal corporate tax but keep local taxes in place because companies use local services, roads, etc.  But… 10%.  If it’s good enough for tithing, it should be good enough for the government.

You Get What You Reward

There have always been people who attempt to ride stocks up and down (one person at a former employer was famous for day-trading when he was supposed to be working).  But these people trading short-term tend to be small fry traders.  Where the big issues come from is, IMHO, stock incentives and demand from large-scale shareholders for short-term growth preferentially.  There is a reward for pumping up the stock price, cashing out incentives, and then retiring to an easy life (or the next, similar gig).  Instead, simply pass a law that mandates that no stock incentives can be taken less than five years after the executive has left the company.  This will promote a long-term view, both in terms of company growth and in terms of new leadership hires.

Stabilize the Gravity

In the one of the best sci-fi books I’ve ever read, The Mote in God’s Eye, three alien ambassadors are talking amongst themselves during treaty negotiations with the humans.  One mentioned to another that their negotiations with the humans over, literally, their species’ survival was akin to “juggling priceless eggs in variable gravity.”

While I have an interest in history, I would be flattering myself if I labeled myself even an amateur historian.  But from what I’ve read about The Great Depression, one of the things that deepened and prolonged it was the incessant tweaking to the rules that both Hoover and Roosevelt kept making.  Changing things – literally from month to month especially under Roosevelt – business owners never knew what the tax / regulatory environment would be.  Thus, business owners hunkered down to sit on their cash… just like today.  (Yes, I know there were multiple factors; I’m focusing on one.)

Uncertainty, whether in taxes, environmental regulations, healthcare rules, among myriad other things, is creating an environment of variable gravity for companies.  Running a business and forecasting are hard enough; trying to plan ahead with the added uncertainty of a chaotic-and-shifting economic and regulatory landscape makes business decision-makers very conservative.

Light My Fire

An economy runs on energy.  We need cheap energy, and there’s a lot of it available – and available domestically.

Drill for oil.  Frack for gas.  Mine coal.  Build nuclear plants with abundant thorium.  (New England plug: build the “Northern Pass” to get hydroelectric power from Canada.)  Not only will the cheaper energy power our economy as well as leaving more money in the hands of consumers, but since it will be sourced from domestic or nearby sources, extracting, processing, and transporting it will create new jobs here.  And the “Holy Grail” will be a fusion reactor; I try to find out what’s going on with that once in a while and Polywell Fusion seems to be making some significant progress.

Side note: I am not attempting to disparage “green” energy sources like solar, wind, etc.  I do believe they have their place.  But their power-per-area density is quite low, and – at the present time – they do not have the potential to provide the volume of energy we need, with the 24/7 consistency required.  (And wind farms are really bird choppers, cutting up endangered species like a Cuisinart, while the news from one solar farm in California has it roasting – literally roasting – birds by the thousands… proving Thomas Sowell’s quote to the effect that there are no perfect solutions, only trade-offs.)

End H1-B Visas and Offshoring Tax Incentives

In the news just recently is Microsoft laying off a staggering 18,000 people.  Cisco just announced a 6,000 person layoff.  Since the crash in 2007 untold numbers of people have lost their jobs with the recovery being anemic at best; the labor force participation rate hasn’t been this low since the 1970’s.  Yet despite networking groups, e.g., WIND and Acton Networkers and New England Networking (and my own, currently only virtual, group Nashua After-Hours Networking with a LinkedIn group too) brimming with educated, skilled, talented, and accomplished people interested and ready to work, companies insist that the only way to meet their needs is to bring people in from overseas… when, realistically, plenty of people here could do the job with a class or two.

In parallel – and I freely confess I don’t understand the tax code well enough for specific suggestions – the tax code should be examined closely to understand how it creates any incentives to send jobs overseas.  I know the Reshoring Initiative is focused on developing a “sharpened pencil” approach to costing to convince companies to bring job back; doubtless they, or others, have similarly focused on what financial tax benefits companies reap from sending jobs overseas.

Public Shaming

Companies shun bad PR like vampires shun garlic.  The internet and social media exist; put them to use.  If a company offshores jobs, spread the word through Facebook, LinkedIn, Twitter, etc.  If possible, not only boycott them, but write to the heads of the companies – and include the Board of Directors on the list if possible – and tell them why you will avoid their products / services.

On the flip side, reward those who bring jobs back here.

(Side note: I am not against international trade; but as I noted here and here, there are other – non-economic – considerations that need to be factored into the seeming rush for a barrier-free world economy.)

Scratching the Surface

There are doubtless many who will agree with some thoughts here, and disagree with others.  I also recognize that I have only scratched the surface of what could be done.  But sighing and saying nothing can be done is not in my lexicon nor is it part of America’s DNA; so, in the words of the sage Lao Tzu:

The journey of a thousand miles begins with one step.

Let’s start steppin’… for America!

 

© David Hunt, PE