May 05, 2009
I like and respect Carl Guardino a lot. Guardino is the CEO of the Silicon Valley Leadership Group (which was formerly known as the Silicon Valley Manufacturers Group). Carl represents many of the area’s leading employers. He and his group of activist CEOs have accomplished many good things for our region over the years. They’ve waged successful campaigns for improved public transit, spurred the development of affordable housing, worked to improve public education and found many other creative ways to contribute to the public good. I admire that record and hope what follows will be taken within that context.
I was saddened today to see the esteemed Mr. Guardino blast President Obama’s proposal to reform the tax code that rewards U.S. companies for moving jobs overseas by eliminating the tax deduction they currently receive for those expenses. It’s a somewhat complicated issue (see below). But President Obama estimates that making this change will generate $60 billion for the federal treasury over the next nine years. Guardino’s oppositional response was captured by the San Jose Mercury News:
“This is a $60 billion hit on American employers that their foreign competitors won’t feel,” said Carl Guardino, CEO of the business-oriented Silicon Valley Leadership Group, referring to one of the president’s proposals.
Here is the problem with that logic. By definition, every tax imposed on any consumer or business here in the United States is a tax that “foreign competitors won’t feel.” Different countries tax different things at different rates. They are not uniform. Should we set our sales tax or income tax rates based on what our trading partners charge, even though many of them are not even democracies?
The more pertinent question is: what do firms based in the United States get in exchange for their tax dollars?
For starters, they get immediate access to the world’s largest market. But more importantly, and this is the key, they also get protection against the sudden confiscation of their profits and property by a stable, constitutional democracy that operates under the rule of law (unlike most of the rest of the world, see: China, Russia, Venezuela, etc.). Asking U.S. companies to pay taxes on the profits they generate in foreign markets seems a fair price to pay in return for this substantial protection, which history has time and again demonstrated has enormous value.
But President Obama’s proposal does not even go that far. He is NOT asking U.S. companies to pay taxes on their foreign earnings. He merely seeks to change the tax code so that U.S. companies cannot take a tax deduction for costs related to foreign operations if they are not paying U.S. taxes on profits from those operations. As reforms go this one is relatively minor. And, ironically, it’s also actually in line with the way most of our major trading partners operate. I have seen no evidence, for example, that China or Russia or any other countries grant domestic tax credits to companies that make investments in factories in the United States. (On the other hand, I don’t read Chinese or Russian so I can’t examine their tax codes, if anyone out there can, please let me know and confirm or refute).
That is why it so disappointing to see business leaders hyperventilate over the reforms President Obama has just proposed. Consider the circumstances:
Our economy is experiencing the worst downturn in a generation. The crisis was created, in large measure, by powerful corporations that turned our legislative bodies into obedient lapdogs when they should have been watchdogs protecting the public interest. In each case, corporate interests pursued their own very narrow goals at the expense of the rest of us. With congressional blessings financed by special interests, financial services firms pushed sub prime loans and predatory credit cards, while energy interests slowed down the development of renewable, and in particular, decentralized, forms of energy generation. In the process, our economy has literally crumbled, fallen apart, not because Americans won’t work hard, but because special corporate interests looking out only for themselves got their way.
President Obama has been in office for less than six months. He deserves our support at least as much as President Bush did in the early days of his administration. President Obama is trying to restore fairness and equity to a tax code, widely viewed as unfair, that has contributed to the steady erosion of our national industrial and productive base and capacity. Making the reforms that are needed will require sacrifices from many sectors of our society, including respected local corporations that properly and legally took advantage of a tax loophole that helped them but hurt the rest of us, and harmed our national economic interests. What’s more, President Obama has pledged to use at least some of the money generated by closing this loophole to strengthen the research and development tax credits made available to many of these same companies.
It would be wonderful to see the respected members of the Silicon Valley Leadership Group competing not only to see who can reward their CEO’s more lavishly, but also to see who among them will emerge as the most responsible corporate leaders, willing and ready to work with the President to restore a viable productive economic base here in the United States and willing to support the changes in our tax code that make that more likely.
Or, if they like, they can move their corporate headquarters to China, Russia or Europe, and take their chances.