This article, written by American Business Conference president John Endean and published in the Wall Street Journal, demonstrates that there are more individual holders of “street shares” than normally supposed and outlines a proposal at the Securities and Exchange Commission to make it easier for these individual shareholders in corporate elections. The goal: an expansion of corporate democracy at a time when corporate elections are tackling difficult social and economic policy issues.
As expected, Congress passed a continuing resolution (CR) last week that will fund the government through December 11. This had to be done in the absence of legislation to fund fully the government in FY 2015, which begins on October 1. The December 11 expiration date means the funding issue will have to be revisited once more during the lame duck session, most likely with another continuing resolution that will keep the government open through early 2015.
The new CR also extends the operating authority of the Export-Import Bank through June 30 of next year. While not a full-fledged reauthorization of the Bank, the extension keeps the institution alive for now in the face of conservative objections that it represents little more than “crony capitalism” that uses taxpayer dollars to support the international sales of big companies through sweetheart financing guarantees.
Keeping the Export-Import Bank on life support underscores first, the inability of Washington to kill off agencies and, second, the terrible preference that Congress has shown in the last twenty years for temporary “fixes” that merely prolong debates rather than settle them.
Indeed the entire collapse of the budget process, which necessitates passage of continuing resolutions, is itself an illustration of the latter problem. Or think about so-called tax extenders, measures such as the tax credit for research and development, which are renewed on a regular basis rather than permanently placed in the tax code. There are 55 such provisions and they have been temporarily extended 19 times. Why?
Government’s preference for the temporary over the permanent of course can be explained in a number of ways. But surely one explanation is the lack of an economic strategy that allows policymakers to evaluate the worth of proposals or agencies in the context of a larger set of national goals.
The Export-Import Bank is an example. Whatever one thinks of it, it appears to be a “one-off” agency without any grounding in an overall trade policy because we do not have an overall trade policy that enjoys bipartisan support. Lacking a trade policy, we cannot measure the utility of the Export-Import Bank as part of that policy. And so the Bank is consigned to a kind of twilight existence, not quite dead and not quite alive, hostage to future fights over its temporary extension, battles that will benefit no one but the lobbyists who are paid to wage them.
The Brookings Institution has just published a working
paper of real importance on a profound change in cost/benefit analysis. Don’t be fooled by its innocuous, academic title: “Determining the Proper Scope of Climate
Change Benefits.” It is worth your attention.
While its authors, Ted Gayer and Kip Viscusi, believe that human-generated climate change is real, they are asking serious questions about the Obama Administration’s calculation of the benefits of the EPA’s recent proposed rule on power plant emissions.
In a nutshell, Gayer and Viscusi find that the Administration defines the cost of the power plant proposed rule domestically while defining the benefits in global terms. “This practice,” they write, “is not only inconsistent with what we consider to be the proper scope of benefit assessment, but is also inconsistent” with existing OMB guidance.
Here’s the bottom line: the EPA estimates the benefits of its proposed power plant rule to be $30 billion in 2020 using a 3 percent discount rate. However, only 7 to 23 percent of those benefits would be domestic, based on the Administration’s own methodology. “As a result,” Gayer and Viscusi write, “the domestic benefits amount is only $2.1 billion – $6.9 billion, which is less than the estimate compliance costs for the rule of $7.3 billion.”
No other country employs this asymmetrical approach to cost/benefit analysis. It is entirely the product of the Obama Administration. As the authors note, if such an approach “applied broadly to all policies,” it would “substantially shift the allocation of society resources.” For example, “the global perspective would likely shift immigration policy to one of entirely open borders,” shift away from “transfers to low-income U.S. citizens towards transfers to much lower-income non-U.S. citizens,” and “drastically” change defense policy.
Indeed, such a methodology could profoundly change all administrative rulemaking, including such business-related agencies as the SEC. The prospect of altering commonly held views of the scope of cost/benefit analysis should not be accepted without careful debate because cost/benefit analysis is at the heart of measuring the growth effects of regulation.
Corporate tax reform is an evergreen issue in Washington. Most recently, House Ways and Means Committee Chairman Dave Camp has produced a reform proposal that has justly been praised by the tax expert Martin Sullivan as “monumentally important” for its seriousness and workmanship. It is also, as Sullivan, among others, admits, not likely to be enacted anytime soon.
Rather than try to reform the beast, isn’t it time to think about getting rid of the corporate income tax with all of its complexity, enormous compliance costs, and perverse loopholes put in place by business lobbyists who regard tinkering with the tax as their own perpetual ATM machine? Intelligent observers have suggested as much. For example:
- Paul O’Neill, when he was Secretary of the Treasury under George W. Bush, called for scrapping the tax. He took a lot of heat for doing so at the time. To his credit, now that he is out of government he continues to advance the idea along with a progressive consumption tax on the individual level (in itself a good idea).
- Lefty writer Matthew Yglesias, for his part, has given up on the possibility of corporate tax reform and advocates something “bigger and tougher:” abolition.
- Economist Laurence Kotlikoff of Boston University believes that the there is a “worker based,” pro-jobs case for eliminating the corporate income tax, particularly for “young and future workers.”
- Another commentator, Mark Levey, writing at the beginning of President Obama’s first term, somewhat optimistically hoped the new President would press for cutting the corporate tax rate to 0% as the “quickest way” to bolster the credit markets and “get money into the economy for true job creation.”
If getting rid of the corporate income tax seems hopeless, consider that in some ways it is already happening. As ABC Chairman Al West testified before the Center for Strategic and International Studies’ Strengthening of America Commission two years ago, there has been an “explosion” of firms organizing themselves as Subchapter S corporations or as partnerships.
These “pass-through” entities avoid the corporate tax entirely and their growth in number therefore erodes the corporate tax base. Nor are they all small businesses. More than 14,000 Subchapter S corporations have revenues of more than $50 million. We are thus, West noted, “in the position of having businesses of similar size selling similar products and services, yet facing different tax obligations based solely on the way they are organized.”
Ignoring, for a moment, the political difficulties, how would one eliminate the corporate tax while insuring that the wealthy do not subsequently use corporations as tax shelters?
One possible approach draws on Canada’s Gordon Commission from back in the 1960s. It involves what might be called an extreme integration of the corporate and personal taxes. Each year shareholders would get a report (like a 1099) that would say, in effect, “we paid you X in dividends and paid Z in corporate taxes on that portion of profits. Add X+Z to your taxable income and take Z as a tax credit. We also reinvested A in the corporation and paid B corporate tax on that part of profits. Add A+B to your taxable income and take a tax credit of B. Also raise your cost basis in the stock by A for the purpose of capital gains taxes.”
That approach effectively does away with the corporate tax. However, there are complications. How do you deal with sales of stock during the year? How do you deal with different classes of shares – preferred, voting, nonvoting, etc.? The first problem could be dealt with using year-end records. Presumably the market would recognize that stocks purchased during the year came carrying a tax credit. The latter problem could be dealt with arbitrarily.
This proposal was deemed far too radical for conservative Canadians. But it has a certain intellectual purity. The equivalent of a 1099 for shareholders would not be that complicated. As for keeping track of adjustments in cost basis for stock held for a long time, presumably this would be done through brokerage accounts (the vast majority of shareholders own stock through brokerage accounts).
Another approach could be drawn from the world of non-profits. Foundations pay a tax based on failure to payout a percentage of principal every year. There are clear formulas and all foundations try to avoid paying taxes by meeting the disbursement requirements, which is the objective of the tax after all.
The same concept could be applied to corporations and undistributed profits. It could be based on a percentage of profits which would be easy to do as GAAP are clear and disbursements would be easily audited. The percentage to be paid out could begin by simply adopting the existing tax rate structure. It could be changed annually by reviewing tax revenues generated.
Actually most individual taxpayers that would receive these dividends would be in a higher tax bracket than the corporations and if the government so chose it could make this class of distributions taxed at a higher rate than ordinary income, capital gains or dividends. There could be thresholds of exemptions and accelerating rates based on levels of income. “This,” one ABC member has written,” could be a no-brainer benefiting corporations and giving the government the opportunity to generate even more tax revenue. The money that corporations would save by not having to file tax returns would be substantial as would domestic business expansions and job creation.”
Of course if neither of these ideas, or anything similar, is likely to be put on the political table, if only for discussion. That’s because, on tax policy, the power centers in Washington, while ostensibly in intellectual opposition to one another, almost always converge to enshrine the status quo, which is what they know best. The problem is, in the current competitive world, the status quo is a recipe for decline.
At the recent Apple shareholders meeting, Tim Cook, the company’s CEO, popped his cork during the question and answer session. A representative of an organization that owns Apple stock and is apparently skeptical of Apple’s sustainability programs, asked Cook to commit to such programs only if they are good for Apple’s bottom line.
Something about the question or perhaps the questioner got under the CEO’s skin. Certainly he wouldn’t be the first corporate executive to find questions from shareholders annoying. Rather than hold his temper and finesse the question, Cook asserted that in some cases he does not “consider the bloody ROI [return on investment].” He then told his interlocutor that “if you want me to do things only for ROI reasons, you should get out of this stock.”
Advising shareholders to sell a stock at a time when the stock is already widely considered undervalued was probably not the best of responses. Maybe Cook had no choice given that his most famous board member, Al Gore, was sitting on stage behind him.
Still, the notion that a CEO can claim to make decisions arguably not in the financial interest of shareholders and that such decisions should not be subject to questioning by those shareholders seems odd. It is an illustration of a much larger public perception that corporations are or should be vehicles for social change rather than merely organizations to create wealth. This idea is appealing only insofar as one agrees with the “non-ROI” decisions of the CEO. That may not always be the case at all companies.
It would probably be best for CEOs to focus on generating shareholder value in a manner consistent with our laws and ethics. Doing so may indeed include supporting sustainability programs as part of building that value.
But looking to CEOs to use at their discretion shareholder money to effect social and political changes unrelated to the bottom line is a very bad idea. That it is a bad idea whose time may have come is, at bottom, a commentary on the dysfunction of our political system where social and political change should, ideally, be debated but so often is not.
President Obama’s FY 2015 budget will not include a proposal to adopt a so-called chain-weighted Consumer Price Index (CPI). The chain-weighted provision, one way to measure inflation, would have moderated the growth in cost-of-living adjustments (COLAs) for some entitlement programs such as Social Security and slowed the adjustment of tax brackets, which are also indexed to inflation. Put simply, adoption of the chain-weighted measure of inflation would have simultaneously lowered the cost of entitlement programs while raising new revenues.
The combination of less spending on entitlements and more revenues would amount to savings of around $400 million over ten years. That’s not enough to address our long term fiscal problems but it’s a start – one that some thought would enjoy bipartisan support. The chain-weighted provision also has the added advantage of being, according to many economic analysts, a fairer gauge of inflation and consumer response to higher prices. This paper, from the Moment of Truth Project, makes the case for the superiority of the chain-weighted measure.
The President had included a chain-weighted provision in his FY 2014 budget. The question is, why did he drop it this year? Some liberal Democratic Senators have made it clear they oppose the chain-weighted CPI, opting instead for an inflation measure that would increase cost-of-living adjustments. Their argument is not based on economic accuracy; they simply want to expand entitlement payouts.
Moreover, Congress just recently repealed, and on a bipartisan basis, a COLA adjustment for military retirees – a provision that it had overwhelmingly passed shortly before as part of the 2013 budget compromise. One can argue that this volte-face was primarily driven by a desire not to single out veterans. Nevertheless, Congress’s action demonstrated for all who care to see that any kind of COLA adjustment that reduces entitlement spending, however economically justified, is a tough sell – one that Republicans and Democrats have little stomach for undertaking.
Demographers have famously compared the life stages of the Baby Boom generation to a swallowed pig making its way through a python. Now as the Boomers move to and past retirement age, they may be too far through the snake to accept arguments for moderating the growth of retirement programs. Could the President’s decision to drop his chain-weighted CPI proposal be an early sign that the nation – or at least older Americans who reliably vote – simply don’t care about America’s future?
The Congressional Budget Office’s (CBO) recent report on the effects of a minimum-wage increase on employment and income has earned a lot of attention, mostly because Democrats seem to be planning a vote on legislation to raise the minimum wage.
President Obama has already, through executive order, raised the $7.25 minimum wage federal contractors must pay workers to $10.10 per hour (beginning January 1, 2015 on new contracts). The President’s executive order was of course meant to be a precedent for a broader bill.
Raising the minimum wage serves the Democratic agenda in two ways. First, it is designed to mitigate objections that their immigration reform program will harm low-wage workers by flooding the labor market. Second, it fits nicely into the President’s attack on what he sees as the mal-distribution of wealth. Senate Majority Leader Harry Reid, has made this point on his Twitter account: ”The Koch bros made over $18 billion last year, but middle-class families have watched their incomes stagnate for decades. #Raise the Wage”
However satisfactory it would be to pick the Koch brothers’ pockets, it isn’t clear that raising the minimum wage will get the job done. Consider this paragraph from the CBO report:
“Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.”
In other words, it looks like one of the economic effects of the minimum wage would be in the form of a transfer payment from some poor workers to other poor workers. That many more workers might benefit compared to those thrown out of work is not a compelling argument for those in the latter category.
How many workers would lose their jobs if the minimum wage is raised? If the wage were raised to $10.10, CBO’s “central estimate” for the second half of 2016 is a loss of 500,000 jobs. By contrast, raising the minimum wage to $9.00 yields a “central estimate” of 100,000 jobs for the same time period. The White House argues that the CBO’s estimate for job losses is wildly inflated. In fairness to CBO, it presented a range of possible employment impacts with, as noted, the 500,000 and 100,000 numbers characterized as “central estimates.” So, yes, job loss could be less; it could also be much higher, too.
The number of workers potentially affected by a minimum wage increase is considerable. According to an interesting study from Brookings, only 2.6 percent of workers are paid the minimum wage, “but 29.4 percent of workers are paid wages that are below or equal to 150 percent of the minimum wage in their state” (some states have minimum wages higher than the federal minimum wage). These latter workers, if history holds true, would also see increased hourly compensation as part of a ripple effect.
The Brookings scholars conclude that “35 million workers from across the country could see their wages rise if the minimum wage were increased.” To their credit, the authors of the Brookings study “hasten to note that a complete analysis of the net effects of a minimum wage increase would also have to account for potential negative employment effects.” Their piece does not provide this “complete analysis.”
The attraction of raising the minimum wage as a kind of magic bullet to help low-wage workers is undeniable. And its political attractiveness has been made all the greater by the failure of opponents to make the case for pro-growth, pro-job policies. The exhaustion of faith in our economy and in the efficacy, or even possibility of economic growth through private sector expansion, is the best friend that proponents of an increase in the minimum wage could hope for.
As ever, when the pie doesn’t grow, the temptation to reslice is hard to resist.
Legal reform is far from dead, although the battleground is not in Congress – yet. Here are three very important examples.
Halliburton Co. v. Erica P. John Fund, Inc. This case will be argued before the Supreme Court in March and probably decided in June. At issue, as one amicus brief put it, “is the most powerful engine of civil liability ever established in American law: the fraud-on-the-market presumption of reliance.”
Created by the Supreme Court in Basic Inc. v. Levinson (1988) fraud-on-the-market, which embraces the efficient capital markets hypothesis, profoundly facilitated the creation of securities class actions under Section 10(b) of the Securities and Exchange Act of 1934. Under Basic, individuals did not have to show actual reliance upon company misstatements to seek redress because, the Court argued, “the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations.”
We are not in the business of handicapping upcoming Supreme Court decisions, but those who do are betting that the Court will repudiate Basic both on the basis of the confusion it has caused (for example, what is a well-developed market”?) and because the efficient market hypothesis has come under fire recently and anyhow was never intended to influence private rights of action under the securities laws. If Basic is overturned, it will put a big hole in the securities class action juggernaut.
Changing Discovery The Advisory Committee on Federal Civil Rules is considering some major changes to the basic rule on discovery Rule 26, which applies to all litigation in federal courts. The changes are out for comment. The deadline for cmments is February 15.
There are three proposed changes to the rule that could change the dynamics of big litigation:
- narrow the definition of discoverable material;
- permit judges to require the party seeking discovery to bear the cost (this could be huge); and,
- limit the liability risk for routine record destruction.
ABC will be offering positive comments on this initiative; others concerned about the litigation explosion should as well.
Diversity Reform Mass tort cases – asbestos litigation comes to mind – are susceptible to “forum shopping.” Forum shopping is the means by which plaintiffs’ attorneys direct law suits to “friendly” state courts that typically make outsize awards to plaintiffs at the expense of corporate defendants. A new group, the Access to Courts Initiative (ACI), argues that the bulk of such cases should be removed to federal courts. Removing these large interstate cases to federal courts is consistent with Article III’s diversity provisions and would assure a more neutral forum for resolving interstate disputes. This article, just published in the Harvard Journal of Law and Public Policy and written by the distinguished attorney Charles Cooper, makes the Constitutional case for diversity reform.
Under the Constitution (Article 1 Section 8) Congress has the power to regulate commerce with other nations and thus Congress must grant to the President the authority it holds. The last grant of trade promotion authority to the President expired in 2007.
Last month, Senators Max Baucus and Orrin Hatch, respectively the chairman and ranking minority member of Senate Finance, introduced the “Bipartisan Congressional Trade Priorities Act of 2014.” Similar legislation was introduced in the House by Dave Camp, the chairman of Ways and Means.
The Baucus-Hatch-Camp legislation renews the President’s right to enter into trade agreements before July 1, 2018. The bill provides for an extension of that authority to July 1, 2021 if the President requests such an extension and if neither house of Congress adopts a resolution of disapproval. Thus, the next President will be able to enjoy trade promotion authority, potentially through his or her first term.
Passing trade promotion authority is going to be a heavy lift politically, especially since Majority Leader Harry Reid has announced his opposition.
The Baucus-Hatch-Camp initiative may be the only pro-growth legislation of consequence to emerge this year. In this letter to members of Congress, written almost a year ago, ABC’s chairman and president make the case for trade negotiating authority and, more generally, the importance of trade for our economy. The letter seems as relevant today as when it was sent.