Wednesday, August 31, 2011

Corporate Welfare America

David Kocieniewski published an article in today's New York Times entitled "Where Pay for Chiefs Outstrips U.S. Taxes," reporting on a study that found many of the highest paid chief executives lead corporations with the lowest tax burden, despite bumper profits. Now, the issue here is not principally the widening income gap between rich and middle class. Putting aside whether a corporate CEO or any employee of a firm is worth $18m/year (which by the way translates to $8,653.85 per hour for a standard year of 2080... hell, let's give them the benefit of the doubt, they work hard, let's say 80 hours per week... well then, it's only $4,326.92/hour!), the notable finding is that current United States policy is "rewarding tax avoidance rather than innovation."
“We have no evidence that C.E.O.’s are fashioning, with their executive leadership, more effective and efficient enterprises,” the study concluded. “On the other hand, ample evidence suggests that C.E.O.’s and their corporations are expending considerably more energy on avoiding taxes than perhaps ever before — at a time when the federal government desperately needs more revenue to maintain basic services for the American people.”
That's something for the policy wonks in Washington to consider as they move ahead with tax reform and deficit reduction plans.

Friday, August 26, 2011

How Not to Create Jobs

If the brinksmanship of the past few months is any indication, the last thing on politicians’ minds is actually clearing the decks for innovative entrepreneurs to create new businesses, jobs and commerce. With more than 112,000 small employers in Wisconsin accounting for more than 52% of private sector jobs and a whopping 97.9% of all state employers, you’d think our voice would be louder and clearer.

Yet efforts to support small business creation and job growth are too often silenced in the din of politics. The remarkable fact is that most state and federal plans intended to create jobs are woefully misdirected—biased toward producing profits for middlemen and investors rather than efficiently creating new businesses and jobs. Let me explain: if a contract goes to a start-up or small company, the entire amount can be spent to create jobs and innovations; If the funds rather go to supplement investment in companies, investors reasonably enough expect to skim off a profit, leaving a reduced portion of funds to support jobs and innovations.

In March of this year, U.S. Senator Mary Landrieu introduced a bill (S.493), years in the making and culminating from a herculean effort to address the concerns of multiple constituencies. The bill enjoyed bipartisan support with eight co-sponsors: three Republicans and five Democrats. It was blessed by small business organizations, federal agencies, and investor outfits as an acceptable compromise. S.493 had one simple objective: to extend the SBIR and STTR programs which direct a small percentage of federal R&D spending toward small businesses and partnerships with universities.

The costs are negligible: the nonpartisan Congressional Budget Office estimates administering the program at a mere $30m/year, to award more than $2B in contracts and grants to America’s small businesses. In effect it is budget neutral: They are not separate line items, only a percentage of whatever funds are budgeted to federal agencies.

The program has been around since 1982, has founded or expanded some 28,000 businesses, many of which became major employers like Qualcomm with 17,500 employees. America’s small businesses account for nearly 40% of patents issued, but receive a mere 4% of the federal R&D funding. For every $400k of taxpayer money, small businesses produce one patent. Universities in contrast require nearly $15m of federal subsidies for every patent issued. In terms of efficient use of funds, small businesses produce results!

Unfortunately, before a full vote in the Senate, at least 150 mostly unrelated amendments were proposed to S.493. In May Senate Majority Leader Harry Reid tabled it. The leadership of the House Small Business Committee is supporting instead H.R. 1425, a bill that would radically change SBIR/STTR for the worse. The House version as it stands would in effect destroy these programs, shifting the focus from seeding innovative job-creating research into a scheme to subsidize Wall Street hedge funds, private equity, and venture capital, concentrating our bets in a few mostly mature companies that have already been identified by investors as potential cash cows. Here are a few of the changes that are proposed:
  • Current law requires a short-term, low-budget Phase I for all awardees to prove the feasibility of an innovation before a large outlay of taxpayer funds; H.R. 1425 does away with this requirement, allowing untested ideas to receive $1m or more right from the start, reducing the number of new ideas that get tested.

  • Currently, SBIR/STTR contracts and grants are reserved for American small businesses, owned and controlled by individuals, permitting 100% of the funds to go directly to the company for jobs, benefits, and research; H.R. 1425 does away with the small business requirements, transforming the programs into subsidies for hedge funds, private equity, and venture capital.

  • Companies with fewer than 500 employees employ about 40% of the nation’s scientists and engineers, but receive only 4% of federal funding; H.R. 1425 would further distort this situation, removing the opportunity for great ideas to be taken to market.
Why on earth would we dilute a program that has created hundreds of thousands of Main Street jobs to subsidize the profits of Wall Street money managers? Why would we radically alter a cost-effective, proven job creator? A vote on H.R. 1425 is expected September 12. The House leadership must support a better bill. At the very least, they should accept the compromises already achieved in S.493. A better bill means a stronger economy for us all.