A Stimulus Plan to Actually Improve Economy Fundamentals

by: Kevin Mackey

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