Archive for October, 2010

Corporations versus People: Does our politics have to be that way?

October 30, 2010

If you were to listen to some of the political discourse in this country especially coming from the left, you cannot be faulted for thinking that corporations must be these evil, conniving, heartless, soulless machines that are trying to corrupt the entire political process and thwart the will of the people. If you were to listen to the right, they make it sound as if the government shouldnt exist and corporations should be free to do anything they want. I think reality is somewhere in the middle.

What people often seem to forget is that Corporations themselves are primarily collections of people, who exist as an entity because some other set of people, their customers, find what they do to be valuable and worth paying for. They are typically owned by yet another set of people, namely shareholders. Its amazing that all these people co-operate and get anything done actually. But, it is primarily because there is a lot of focus on incentives and aligning those incentives. 

In essence, Corporations are organizations with a clear objective and motivation, to maximize the rewards for people associated with it. Now, you may say that the owners benefit more than employees, and among employees, senior management benefits more than regular employees, etc., but, all that is part of the incentive structure. If everyone were paid the same and did the same thing, that would be called Khmer-Rouge style communism. 🙂

Now, I know the right has been calling Obama a ‘tax-and-spend socialist’. I dont know how they can do that with a straight face, when the previous republican regime presided over the greatest increase in our deficit in any 8 years in our country;s history.  However, even after all the hoopla about large government spending as part of the stimulus, the fact remains that any job growth happening in the economy right now is in the private sector. Not the public sector. To that extent, the stimulus spending is meeting some of its objectives. Which is why you see the Republicans who opposed the stimulus bill, now line up to get the money because they now think it creates jobs.

On the flip side, when republicans propose what seems to be a reasonable argument about lowering tax on repatriation of foreign profits of corporations, the knee-jerk reaction amongst my friends who identify themselves as democrats seems to be, why should corporations pay fewer taxes, when the common man pays his share? My counter to that is that this tax on repatriation of foreign taxes is a more subtle beast.

Recently, John Chambers and Safra Catz wrote a piece in WSJ (http://online.wsj.com/article/SB10001424052748704469004575533880328930598.html)   that I thought was very enlightened.

Their main point is that large US Corporations such as Cisco, Oracle, Google, Microsoft, etc., have about a trillion dollars of profits that are held overseas. If they could repatriate some of that money and invest in their future, that would create a lot of jobs for the economy. Think of it as a private-sector funded stimulus  bill of the same order of magnitude as, if not bigger than, the government funded stimulus. Yes, we spent the stimulus money and created a few jobs, but we had to borrow money to spend on the stimulus. To me, if we had allowed the companies to create more jobs, we may have avoided increasing our national debt. Honestly, I think we should have tried some ideas like this first prior to borrowing money and spending.

The argument seems to be that the reason why foreign profits of large multi-nationals are not coming back is because they get taxed at 40%. Today these multinationals avoid paying a penny in taxes by keeping the money abroad. In fact, they go to great lengths to not pay taxes, especially on foreign income (See recent Washington Post article: http://www.washingtonpost.com/wp-dyn/content/article/2010/10/28/AR2010102807139.html). Let me repeat, the government cannot get a penny in taxes from these corporations today on these foreign profits. However, the argument goes, if you reduce the tax on foreign profits, you will encourage repatriation of profits and, counter-intuitively,  actually collect some tax.

Keep in mind that it is corporations, big and small, that create jobs. And creating jobs is the best way to get out of a slump. Today, I would argue that the big corporations are probably creating more jobs abroad than here, not only because the labor rates are lower elsewhere, but also because it is too expensive for them to bring money back into this country. Now, rather than complaining about ‘outsourcing’ of jobs, we should make it easier for these companies to add jobs here. I am willing to bet that China encourages foreign companies to invest by providing significant tax breaks. So, if you had a million dollars of foreign profits, and bringing it into the US would immediately make it 600K, but if you invested in China, that 1 million is say 980K, you have 50% more to invest in China than in the US. As it is, the differential in the labor rates means that you can hire more than 2 people in China for the cost of 1 person in the US to do the same thing effectively, but the argument I am making is that from an investment perspective, because of the tax rate differential, the ratio is more like 3 to 1, making the case for investing abroad much more compelling. So, the government’s tax policy is encouraging US companies to keep the money abroad and hire abroad over and above the cheap labor argument. It is almost as if we just seem to be hell-bent on a system where we innovate, make money abroad, but cannot bring the money back for reinvestment. It is almost crazy. At least, that seems to be the argument. And I have to say, it seems pretty tight.

Other countries like Germany have gotten out of the recession without spending a lot on stimulus (See http://www.economist.com/blogs/freeexchange/2010/08/europes_economies), and you know what is the tax on repatriating foreign income for German companies? <5%. Co-incidence? I think not. But, I will have to let some Nobel Prize winning economist to weigh in on that. 🙂

I seriously hope that the next Congress takes a serious look at this issue and encourage American companies to repatriate profits that they earn abroad so that they can create more jobs at home. At least level the playing field from a tax perspective so that the ingenuity of the American workforce can overcome the labor rate differential. In essence, Corporations should be viewed as the primary mechanism to provide jobs to people, and they should be encouraged to play that role in society. Note, I am not suggesting that we should have a complete laissez-faire attitude as far as corporations are concerned. On the contrary, what I am suggesting that we treat corporations, large and small, as the the primary vehicles through which we can reach full employment. Encourage them to employ people, here, because corporations cant exist without people, and people need corporations for jobs. Its a symbiotic relationship, not an antagonistic one.

Time to restore some sanity in our political discourse I say…

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