A Stimulus Plan to Actually Improve Economy Fundamentals

The United States is at a critical juncture. The decisions that have been made to quell 2008's financial crisis, and those that are yet to come, will shape the way our country functions for generations. The breadth of the fallout from our decisions also coincides with actions taken by other countries, most especially, those deemed "emerging".

Demographic and economic trends have been indicating a shift in economic power from West to East. As India and China's economies grow and become more internally sustainable, market share spreads between developed and developing will continue to wane. While the decoupling theory has somewhat been disproven and the economy of the United States still drives global growth, it is uncertain how and when emerging economies will rebound from the present troubles, continuing their grab of the global market.

I am afraid that if the United States does not make fundamental and sustainable changes to the domestic economy now, our children may face the negative repercussion of such inaction. That statement is not bold; many people feel the same way. Economic stimulus packages and corporate bailouts may keep the economy afloat for the time being, but they don't change some of the structural flaws of our system – reliance on credit, consumption and spending to name a few. The longer our country's fundamental problems get bandaged, but not repaired, the more pronounced the fallout when it comes due. We learned in September that the original stimulus package did nothing other than artificially inflate our second quarter GDP figures. Let's not make another similar mistake.

President Obama's stimulus plan, still in developmental form, is a mixture of short-term stimulus as well as medium-term and long-term solutions addressing America's energy and healthcare problems. I see Obama's actions helping a great number of American employees in the short-term and setting up our country's inevitable shift into alternative energies longer out on the time horizon. However, I do not see these actions as being enough to get the American economy out off the hospital and into a position of fundamental recovery.

Targeting specific industries does not address the global paradigm shift that has been underway for more than a decade, impacting every industry in the country. Putting a down payment on alternative energies is practical, timely, and responsible; it will help. Unfortunately, it does not address long-term catalysts that will keep American jobs in the country, keep our wages competitive, and restore the public's trust in our corporations. Most of those issues are intertwined. Is there a way that all can be improved with a simultaneous action? I believe there is.

The centerpiece of a successful economic stimulus plan is a reduction in the corporate tax rate to a flat 15%. Initially, I would make this rate available to publicly traded companies - with a catch. In order to receive that lower tax rate, companies must agree to changes in the way executive and corporate board members are paid. Knowing the size of the problem this country faces, there would be other economic initiatives that would help private companies and small businesses. For simplicity, I am only focusing on publicly traded companies. The plan would look something like this:

Executive pay changes to get flat 15% corporate tax rate:

1. Tie executive pay to "average worker" pay.

2. Eliminate all options, deferred compensation plans, special executive retirement plans for the top executives.

3. Eliminate "golden parachutes" or make them company wide.

4. Make a significant portion of executive pay be in the form of restricted stock and make the holding period five years to receive preferred tax treatment.

5. Restricted stock would be subject to disgorgement if the executive is found guilty of corporate malfeasance.

Impact of a reduced corporate income tax rate to 15%:

1. Stock market would recover as public sees more value in publicly traded companies.

2. Pressure on state and local government pension plans would abate.

3. Federal tax receipts will increase as the economy recovers and grows, as well as increased repatriation of foreign earnings back to the U.S.

4. Foreign investors will invest more money in the U.S. economy, fueling additional GDP and employment growth.

5. Net effect to government would be higher revenues from higher net payroll taxes, higher net corporate tax revenues, and decreased unemployment costs.

6. Increased government revenues could be used for debt reduction and/or spending.

7. Faster GDP growth as benefits of lower taxes are reinvested in infrastructure and/or employees or paid out in dividends.

8. Using debt as a source of funding will be less attractive since companies get a higher tax benefit from using debt financing with a higher tax rate than a lower tax rate.

It is time to use the tax code to entice executives to do the right thing for shareholders and America. Those companies that decide not to follow this plan and continue to pay more lucrative compensation packages would be subject to the current higher corporate tax rate and a distinct competitive disadvantage. The market will reward those companies that follow the plan. Most importantly, and unlike stimulus packages or bailouts, the changes in the economy and in our corporations would be organic, setting up decades of future prosperity for all of the country's citizens.

Many countries have used corporate tax cuts as a harbinger of growth. For a country as large, talented, opportunistic, and proven as America, I think the benefits of such a move would be astounding. Why wouldn't our leaders want to make such a wide-reaching decision, especially at a time when the benefits would so clearly help us? What are the benefits of raising corporate tax rates and attacking the "tax havens" that have been created in other countries because of their attractive rates?

Consider the following excerpt from an AP article written by Ken Thomas and ask yourself how this country would benefit by increasing corporate taxes. In theory, it would be great for America to bring in 38% of a company's earnings, but in reality, the higher the taxes, the more likely money will be lost instead of gained. Even worse, this excerpt only details a fraction of how much this goes on.

Citigroup (C) had 427 units in 23 countries, including 91 subsidiaries in Luxembourg and 90 in the Cayman Islands. Morgan Stanley (MS) had 273 units, News Corp. (NWS) had 152 and Bank of America (BAC) had 115. Procter & Gamble Co. (PG) had 83 subsidiaries and Pfizer Inc. (PFE) had 80 in the jurisdictions.

Several major corporations have announced plans to leave Bermuda, a leading offshore business center, amid the global financial crisis and fears of tighter tax rules. Tyco Electronics Ltd. (TEL), which makes electronic components, and Foster Wheeler Ltd. (FWLT), an engineering and construction company, are reincorporating in Switzerland - which has a tax treaty with the U.S. - for tax and other reasons. Covidien Ltd. (COV), a health care products company, is heading to Ireland.

Disclosure: None.

Comments

[ROLEX18K:]

The stimulus plan is a plan and political manipulation, nothing can be improved immediately and politicas know it, they talk and economy goes it's natural way to depression.
But there are good news too, whatever will happen now, the economy will start to improve in 2015 at best, by then Dow Jones will be 2000-3000 points, most of Americans will be very,very poor and unemployment will reach by then 15-20%.
In the meantime there will be rallies as well, even in 1929 there were rallies.

Jan 23 07:02 AM

[Steve in Gr...:]

Why are the leftists so big on limiting executive pay? As a shareholder, I'd rather have a well-run, innovative company (led by very highly compensated execs) that pays 40% on large earnings than 15% on no earnings.

Eventually the U.S. must get its, world's-highest 40% corporate tax rate down to 15% anyway to be able to compete with the rest of the world.

Jan 23 07:17 AM

[Insiderman:]

Tax policy should be used for nothing except raising revenue. To do otherwise invites the types of "special consideration" that bring political contributions rather than economic growth. Government meddling (loaning money to those unable to pay) got us in this mortgage market mess and political contributions from FNMA and FHLMC set the stage for politicians turning a blind eye toward financial markets running amok with the bad paper.

Second, shareholders deserve more control over the directors. The directors rather than the government should set executive pay standards. Shareholders should be better able to hold the directors accountable.

Third, allowing failure teaches great lessons. Although harsh, we must learn the lessons. Sometimes we have to be taught the lesson more than once.

Finally, government's ONLY role in commerce should be to provide infrastructure and prevent concentration of market power. Protecting big companies because they're too big to fail leads to one of the lessons we must learn; that is, concentrating power is not necessarily the most economically efficient way to get things done (except in a purely theoretical world). Protecting concentrations of market power IS THE OPPOSITE of what government should do.

Jan 23 08:50 AM

[kelm:]

I agree that the tax changes and regulations you propose fr those running the companies are positive. But they alone will not return companies to profitability. We are partially victims of having become a consumer (importer) nation and one where our largest corporations have become global. America doesn't seem to produce nearly enough in America for export. Somehow that aspect has to be fixed.

Jan 23 09:15 AM

[dixie:]

A positive, growth oriented proposal.
Do the naysayers really think executives instead will opt to play pro basketball or football? Many European countries tier executive pay to that of average workers. They have not lost talent to "other occupations."

Jan 23 09:24 AM

[nonideologue:]

Either of the two sets of actions in the article: (1) "executive pay changes to get (2) a flat 15% corporate tax rate"; could be instituted by law without instituting the other. There would be effects of either: One or both might have desirable or undesirable results. But linkage of the two is not necessary, except to pursue ideological beliefs.

Jan 23 09:25 AM

[patio:]

Well. hopefully our best and brightest will not have Wall Street in their sites going forward; we may even begin to graduate more engineers and scientists. Necessity being the mother of invention/innovation, it is possible we may see an increase in small biz start-ups as "regular" employment becomes increasingly harder to come by. With less overall consumption, you'lll need to be very clever, but we are a nation of pioneers, well we were anyway, maybe we can re-kindle that spirit.

Jan 23 09:35 AM

[whidbey:]

You social engineers know a great deal about how to motivate people, but very little about how things get done in business and risk taking. Most of the lower paid European executives are running firms that would not be of interest to investors in more competitive economies. The lower paid EU executives are typically kennel dogs who run "monopolistic utilities" to employ people for the central government. Is this what you have in mind??

Cap gains at 15% is OK, but better to deregulate the small things, the many "regulatory side shows" one must attend to just to make, and export pipe, for example. Simplification of government roles would go a long ways to making economic recovery feasible. As things stand today, we do 24 steps to get a WTO export agreement with China for a product that is in demand. This is sort of thing what is killing the recovery. And we fear it will get worse, so we are looking to Taiwan for our scale up venture.

Jan 23 10:04 AM

[The Egg:]

Great article! I think this is one of the more interesting solutions I have read. It's bold, exciting and comes with a nice ideological balance. This can be a game changer, which we are in desperate need of. There's a similarly interesting article written by a Loyola professor: www.baltimoresun.com/n...

Jan 23 10:59 AM

[virilio:]

why is it tax cuts - which doesn't increase jobs directly at all, doesn't do much for foreclosures either - instead of creating a government corporation that outright hires 4 million workers, at $40k per year, and ties them each to a mortgage on a foreclosure at the same time, as well as an auto loan on an american manufactured hybrid vehicle (toyota plants are located here too)?

Doesn't really matter what they build, but what the hell, why not put the majority into solar panel manufacturing and have the government buy the majority of the panels to put on rooftops in grid-tied systems?

Over time this idea pays for itself and does so by putting people back to work.

Jan 23 11:18 AM

[Chris B:]

The setting of tax rates is "social engineering" regardless of what choices are made (flat, progressive, income, sales, property, VAT, tariffs, etc.) because each choice sets up different incentives and results in different outcomes. I'm always amused to see people who claim that their proposal to change economic incentives is NOT social engineering, but the other guy's proposal to change economic incentives is!

Jan 23 11:20 AM

[OldLimey:]

whidbey: "The lower paid EU executives are typically kennel dogs who run "monopolistic utilities" to employ people for the central government. Is this what you have in mind??"

Didn't I read somewhere in the last day or so that the US now has more people employed in government jobs than in manufacturing? And that's BEFORE the stimulus package works its magic on public sector employment numbers. French lessons anyone?

Jan 23 11:29 AM

[savelongisl...:]

I couldnt agree faster and only read the first paragraph.

We need to create jobs yet we keep sending them overseas.

Jan 23 11:30 AM

[Kint:]

The answer isn't limiting executive pay - the answer is making executive bonuses truly performance-based. If the company doesn't meet its target goals, there should be no bonus - it should not depend on the goodwill of the executive to turn down the bonuses.

Jan 23 11:36 AM

[phaf:]

Steve in Greensboro asks "Why are the leftists so big on limiting executive pay?"
My guess is that they (and others) believe that:
1) executive compensation at 50 - >200x that of average workers is obscene.
-Why should it take multiple millions of compensation to motivate a talented individual to do one of the most interesting/engaging jobs out there? Tying exec pay to "average" (whatever that means) worker pay seems reasonable, then "a rising tide" truly "lifts all boats."

2) those responsible for the array of (at best, e.g. recent financials failures) deeply flawed, or (too commonly, e.g. Enron, etc etc) deeply corrupt/criminal business decisions should not be rewarded for bringing down their companies (and the rest of us with them).
-Particularly in the case of failed/failing firms, sending execs out w/ golden parachutes as the flaming wreck of their ship collapses is beyond logic. What happened to accountability?

I see the point of having top talent leading top firms, but the compensation situation is clearly out of hand. Kevin, I like you proposal for addressing this side of the problem.

Jan 23 11:42 AM

[Socialism c...:]

I'm so sick of the bloody groupthink in Congress regarding the need for bailouts and stimuli!! Thinking about the other side of the coin, tax policy, as THE fundamental solution to this economic "crisis" just escapes them. Actually, the reason they won't consider it is precisely what another poster mentioned -- tax policy is required for them to maintain their power and perform social engineering. THEY decide how much we pay (not us, as we could/would with sales tax), and THEY decide how to configure the barriers for jumping societal classes. Yes, you can still jump up...but the tax structure is there to make sure THEY gain if you do.

Think about it:
1) We have an income tax-based government that thereby gains control over companies by all kinds of withholding regulations for both income and FICA taxes. It controls the earners by grabbing a share of their earnings before the earner sees a dime.
2) They don't just control your money, they also violate your privacy -- consider the vast amount of personal data the IRS amasses when you file your return.
3) The sheer inefficiency is an outrage -- consider how better all those minds could be used that are employed as tax accountants, IRS enforcers, etc. And how much time do many of us waste doing our returns, and worrying if we've gotten it all right?
4) It IS social engineering -- deciding for us how much each group gets to keep...vs. us deciding when and how much to spend.

If we'd go with a Fair Tax (or any form of consumptive taxation, instead of confiscatory taxation), all these issues are GONE.

Jan 23 11:50 AM

[User 283977:]

The author is suggesting that the political price for a flat 15% corporate tax rate is Laws with respect to executive compensation.

I suggest that a flat 15% tax rate should be provided with NO political strings attached. The mandate for the current administration is to stimulate the economy, not to forester politically value laden social engineering programs on companies executive compensation programs. I do support liimits on executive compensation, when a company has received tax payers money to bail the company out. However, as a general policy, executive compensation is the business of the companies shareholders, not the federal government.

What I would like to see is the development of corporate "guidelines" that foster transparency to shareholders on things like senior executive compensation, bonuses, and discretionary spending on things like executive offices. I doubt senior executives would spend 1.22 million dollars on re-furnishing their offices ala the now unemployed CEO, Mr Thain if the shareholders were aware of how those senior executives were miss-spending the shareholders money.

The only legal requirement would be that if a company was not currently bound by shareholder approved transparency guidelines, the company would have to submit said guidelines to shareholders for approval every three years. The primary reasons for excesses in executive compensation and excessive discretionary executive spending is that shareholders do not have access to that kind of information.

Jan 23 11:51 AM

[Tony Petroski:]

Cut the rates for all businesses, not just "publicly-traded ones" and also cut the regulations as Whidbey suggested. That way we don't need an army of attorneys and regulators litigating what the "average worker" is, what the average worker's pay is, and we can sidestep Eurosocialism which is where we are headed now.

Jan 23 11:51 AM

[prudentinve...:]

Steve,

I am not a leftist but believe your comment only makes sense in a truly free market, and with "natural" interest rates above inflation. By keeping interest rates artificially low, the government has forced savers and retirement plans to buy stocks as the only means of preserving the value of their savings. The executives used this government-sponsored rise in stock values to compensate themselves egregiously via stock options. Back in the 1970's, interest rates were reasonably above inflation, savers put their money in CD's at an adequate return, mutual funds did not exist, and great executives of the largest companies got total compensation of (salary+bonus+ options) that was typically $400k-$800k, and lived very well. So, adjusted for inflation, this would correspond to $2m-$4m, not the tens (or hundreds) of millions that have become routine, courtesy of the fed trashing anyone's savings unless he or she dutifully put them into stock mutual funds.

As it appears that the government's ultra-low interest rate policy is going to continue to drive the public's savings into stocks, as a substitute for dollars, this should justify government's regulation of the compensation at publicly traded companies.




On Jan 23 07:17 AM Steve in Greensboro wrote:

> Why are the leftists so big on limiting executive pay? As a shareholder,
> I'd rather have a well-run, innovative company (led by very highly
> compensated execs) that pays 40% on large earnings than 15% on no
> earnings.
>
> Eventually the U.S. must get its, world's-highest 40% corporate tax
> rate down to 15% anyway to be able to compete with the rest of the
> world.

Jan 23 11:58 AM

[Howard_T:]

Your plan will never be put into effect. The simple reason is that it makes too much sense.

Jan 23 12:29 PM

[Chris B:]

Which option would lead to more economic growth: cutting corporate taxes or cutting individual income taxes? Here are a few hints:

-Consumption is 70% of the US GDP.

-Corporate earnings are distributed to the owners of stocks and bonds, a significant percentage of whom are in foreign countries such as China, Japan, and Saudi Arabia. Thus, a portion of the lost tax revenue would benefit foreign investors and their economy, not ours. The effect would be to subsidize these investors at the expense of US taxpayers.

-The current recession occurred because individuals do not have enough money to consume, not because corporations lack the resources or incentive to produce. Savings rates are near 0%.

-If government borrowing to cover the tax cuts was too excessive, inflation would result in the future. This would further dampen consumption.

-A corporate tax cut would do nothing to prevent foreclosures. An individual income tax cut would, by giving individuals more money to devote to their mortgages.

Jan 23 01:59 PM

[THofler:]

The clearest form of double taxation is the combo of corporate taxes and dividend income tax, made worse by the Obama proposed 20 or 25% top dividend tax.

We are not going to get a 15% corp. tax under any circumstances in this political environment.

How about a corp. tax break comprised of 40% corp. tax reduction on any profit paid out as a dividend? Maybe include a 60% tax reduction on any dividend payout in excess of a 30% payout ratio (based on a 3 yr moving average of profits).

This would incentivize a more responsible dividend policy as opposed to those crazy stock buybacks when prices are sky-high, only to leave the coffers dry during today's cash crunch.

Jan 23 04:11 PM

[pigdog67:]

I have not seen hardly any talented executives. Warren Buffett, Bill Gates and Steve Jobs are the only ones that come to mind. I do not begrudge them a penny. I think the same of Henry Ford.
But most corporate executives today bring nothing to the table. The executive that brought down Nortel about 10 years ago was paid hundreds of Millions for destroying a great world beating company.
In most companies it is the grunts that make it successful, Apple, Microsoft excluded.

Jan 23 08:13 PM

[number2son:]

Who are you, John Thain?

Leftists? Too funny.

And here's news for you - that 40% tax rate is a canard:

danshaviro.blogspot.co...

On Jan 23 07:17 AM Steve in Greensboro wrote:

> Why are the leftists so big on limiting executive pay? As a shareholder,
> I'd rather have a well-run, innovative company (led by very highly
> compensated execs) that pays 40% on large earnings than 15% on no
> earnings.
>
> Eventually the U.S. must get its, world's-highest<wbr... 40% corporate
> tax rate down to 15% anyway to be able to compete with the rest of
> the world.

Jan 24 10:19 AM

[gdoran:]

People lack confidence in purchasing stock. Corporation that do poorly, still reward their CEO's beyound any reason. Stock used to be a relatively safe investment until greed set in big time and resulted in legalized gambling with the futures. SEC must have some authority and hold these folk accountabe.


On Jan 23 10:04 AM whidbey wrote:

> You social engineers know a great deal about how to motivate people,
> but very little about how things get done in business and risk taking.
> Most of the lower paid European executives are running firms that
> would not be of interest to investors in more competitive economies.
> The lower paid EU executives are typically kennel dogs who run "monopolistic
> utilities" to employ people for the central government. Is this what
> you have in mind??
>
> Cap gains at 15% is OK, but better to deregulate the small things,
> the many "regulatory side shows" one must attend to just to make,
> and export pipe, for example. Simplification of government roles
> would go a long ways to making economic recovery feasible. As things
> stand today, we do 24 steps to get a WTO export agreement with China
> for a product that is in demand. This is sort of thing what is killing
> the recovery. And we fear it will get worse, so we are looking to
> Taiwan for our scale up venture.

Jan 24 11:44 AM

[Leftfield:]

Government puts all kinds of shackles on us from all levels. They keep getting worse the more they take from us and the more they regulate. I can only see this proposal being circumvented soon by the bigshots and their enablers in Congress. Current executive pay packages evolved from reforms meant to make them performance-based originally. Now, the "leaders" who make not only obscene pay packages just to be run-of-the-mill performers, game their system to land bonuses when they're losing money and now, while they're being bailed out.

Toyota just fired some top execs for having their first losing quarter in memory. Detroit would pay them billions, I think, for that performance.

Corporate boards in this country are cushy sinecures for the wealthy and rubber stamp anything, apparently. Corporations are amoral by their nature and I can't see singling them out here for breaks. We need to reduce the terrible obstacles government has created that make Americans uncompetitive at the wages needed to live and pay taxes here. Corporations will just send employment overseas if tax breaks cause them to expand.

Handing out targeted goodies seems like business as usual to me. I don't know if the political class can possibly think outside that box until Americans start voting these fools out.

Jan 24 02:12 PM

[JLB in Mary...:]

Steve in Greensboro states, “As a shareholder, I’d rather have a well run innovative company (led by highly compensated execs) that pay 40% on large earnings than 15% on no earnings.

First of all, as a shareholder, this tells you he’s more interested in keeping his stock shares price up. Second, do you really believe that execs pay 40% taxes on their earnings? Not likely with all the tax shelters and loopholes they use to shield their earnings. If every company stopped paying these high salaries and bonuses, where would they go and who would care? And wouldn’t it mean that the products they made would be more affordable to the consumer? This is why they have their products made overseas. To get the price of their product down and keep their salary packages.

Insider man states, “Third, allowing failure teaches great lessons. Although harsh, we must learn the lessons. Sometimes we have to be taught the lesson more than once”. Why do the consumers need to learn this lesson? The companies should be the ones learning the lesson when they go bankrupt and have to fold. Why should the taxpayers be the ones to foot the bill? This is the part that irritates me the most.

Whidbey suggests that we deregulate companies and allow them to run their businesses in ways that will make them profitable regardless of what impact it has on the environment and health of it’s citizens. Sounds like a corporate exec speaking to me. And I don’t see those EU execs causing their companies to go bankrupt and it’s employees getting laid off. Granted they may not be making a lot of money, but at least they make a living and aren’t having their homes foreclosed on.

My opinion, and it is strictly mine, is that we should bring all manufacturing jobs back to the U.S., learn to make quality products, stop the obscene executive pay scales and bonuses, lower the middle class tax rates or eliminate them altogether, at least for a while, raise taxes on people who make more than $250,000 a year, like Obama campaigned on but later reversed, and stop bailing out companies that ran their companies badly to start with. The problem with this country is greed, pure and simple. I don’t know that there is any solution to this problem and I’m sure there are people on both sides of the road as to whether greed is good or bad. I think it is great that people are innovative and entrepreneurial, but when it comes to adversely affecting other people, I think it goes too far and should be stopped. Naturally the rich will disagree with this, but people who have struggled should agree with it.

Jan 24 03:15 PM

[scfranklin94:]

"Average worker pay", sounds like another 'leave-no-accountant-b... policy like Sarbanes-Oxley. Instead of trying to limit the ways executives get paid, why not just say that all compensation beyond $5 million, or whatever cap, for an employee can't be accounted for as an expense for tax purposes? That will put a ceiling on executive pay in a hurry. Exceptions could be made for professional athletes and other similar industries. Also make all non-pension payments after ending one's employment non-expensable would close down another huge loophole.

Change all corporate tax rates to 15%, that will make many manufacturing processes here in the states competitive when you factor in the true cost of shipping in the future (oil isn't going to be below $60 forever). The drop off in corporate tax revenue will be marginally offset by overseas earnings that would be repatriated to the US and by increased competitiveness of dosmestic corporations. If we make it desirable for businesses to manufacture here, they will.

Jan 24 06:18 PM

[Kunst:]

Two problems with paying executive well:
1) A lot of times, they aren't really adding much value to the company, which leads to:
2) Who sets their pay? How much say do you as an average stockholder have on the matter? None. Most larger stockholders (e.g., funds) don't get involved in this either. Too many times, the CEO's pay is set by a board he largely selects and controls, and then he does the same favor for his cronies. In reality, the owners of most companies simply don't have effective control.


On Jan 23 07:17 AM Steve in Greensboro wrote:

> Why are the leftists so big on limiting executive pay? As a shareholder,
> I'd rather have a well-run, innovative company (led by very highly
> compensated execs) that pays 40% on large earnings than 15% on no earnings.

Jan 24 07:14 PM