Tax fairness or a new unfairness

Here is an interesting idea from my friend Rob Atkinson over at ITIF: a one-size-fits-all tax code is not one-size-fit-all. In a new report, (U.S. Corporate Tax Reform: Groupthink or Rational Debate?), he points out that the push for tax simplification will actually harm economic competitiveness.
The current thinking in Washington is that the tax code impedes economic competitiveness because of high tax rates. In order to lower rates, the tax code should be “simplified”, i.e. eliminate many tax deductions and credits. Increased revenues from tax simplification would offset revenues lost from lowering the corporate rate.
The other part of tax simplification is a call for fairness. Many see these tax deductions and credits (aka loopholes) as breaks for special interests. Others argue that they are expenditures in discipline, not subject to budgetary discipline.
Both of these arguments contain more than a grain of truth. I have long argued that, contrary to popular perception, the United States has long had a (dis?)functioning industrial policy: the tax code. It is a de-facto policy hidden from public (and most policymaker’s) sight.
The problem with the tax code is not that it introduces economic distortions, but that we have the wrong set of incentives built into the system. The idea of a sectors or industry neutral tax code is a chimera. By the mere nature of the different businesses, a unitary tax code will impact sectors differently. Instead of the current ad-hoc system of tax incentives, we need a guiding set of principles for evaluating each incentive. One overall principle should be to provide incentives for production and investment and not for consumption. [Having said that, I recognize the need for some consumption incentives to both stimulate the economy during economic downturns and provide a boost of purchasing of certain sectors to spur innovation, such as tax incentives for purchase of alternative energy production equipment.]
Atkinson adds a new element to the discussion by showing that tax simplification would effectively raising taxes on sectors that are subject to international competition (such as steel, pharmaceuticals and electronics), while lowering taxes on non-tradable sectors (grocery stores, electric utilities and car dealers). That would have the opposite effect on competitiveness:

While the former [grocery stores, electric utilities and car dealers] provide needed services, if their taxes increase they are not going to build fewer grocery stores, electric wires, or car dealerships since those investments are largely based on levels of consumer demand. But if the taxes on steel companies, drug companies and electronics companies are raised, they will act as any rational company would by moving some production to nations that tax them less.

He argues that the tax code should be designed so that it achieves three goals:

1. Provides direct incentives for U.S.-based enterprises to invest in the building blocks of innovation, productivity and competitiveness: research and development and innovation commercialization, workforce training, and machinery and equipment (including computers and software);
2. Taxes firms in internationally traded industries at a lower rate than firms in non-traded industries; and
3. Lowers the average effective corporate tax rate from its current levels.

One of Atkinson’s recommendation is a version of something he and I have been advocating for years – a knowledge tax credit:

Congress should enact an American Innovation and Competitiveness Tax credit that provides a credit of 30 percent on expenditures on R&D and workforce training and a credit of 15 percent on machinery and equipment (including software) in excess of 50 percent of base period expenditures. For business to get the full benefits from new equipment, they need higher-skilled workers. Allowing employee training expenditures to be counted as qualified expenditures for the credit would help correct the problem that workforce training in the United States has fallen by approximately half as a share of GDP over the last decade.

As I noted in my recent comment in the journal Economists’ Voice (“Invest in Intangibles”)(see also earlier posting), we should be focusing on incentives for investments in intangible assets as well as equipment.
I don’t know if in the current budgetary climate of austerity such a tax credit is politically feasible. But it makes sense from an economic and competitiveness point of view. The issue of corporate tax reform will clearly be on the political agenda for some time. Let us hope this idea manages to get into the mix.

Value of artistic works in the UK

I have mentioned a number of time that the Bureau of Economic Analysis has been working on including intangible assets in the System on National Accounts (i.e. the GDP numbers) (see “Toward Better Measurement of Innovation and Intangibles”). One of those efforts is to look at the value of artistic originals. Rachel Soloveichik has been doing ground breaking work on this –see her paper “Artistic Originals As Capital Assets”. Her findings:

The $51.6 billion in current-dollar investment in artistic originals in 2007 breaks down by category as follows: $14.0 billion in theatrical movies, $7.5 billion in original songs and recordings, $5.5 billion in original books, $21.9 billion in long-lived television programs, and $2.6 billion in miscellaneous artwork.

Now, Peter Goodridge and Jonathan Haskel have put up a first draft of their analysis “Film, Television & Radio, Books, Music and Art: UK Investment in Artistic Originals”. There conclusion is that investment was £3.5 billion in 2009.
All of this reinforces the point made in at our conference on New Building Block for Jobs and Economic Growth: we are making good progress in macro economic measure of intangibles. Now we have to build on that progress to infuse an understanding and utilization of intangibles into both company strategy and public policy.
For more on the conference, see our New Building Blocks Forum.
(Thanks to IP Finance for a heads up on the new UK study).

Innovation at work (or is it marketing?)

Is consumer research really research? That seems like a silly question — the answer of most techies would be no, its marketing. But I beg to differ. And here is an example. This story is about Motorola Solutions. Motorola Solutions is the communications equipment half of the recent Motorola split; the other half is Motorola Mobility, the cellphone company. The story (from the New York Times – Motorola Has New Tricks to Teach) relates the following:

For a single product set — the communications gear inside a police cruiser — [Motorola] Solutions conducted in-depth interviews and ride-alongs with more than 250 officers. The technology that resulted can scan license plates in a parking lot at speeds up to 20 miles an hour, remotely control gun locks that keep officers safe and help the police talk to headquarters while chasing bad guys.

To me, that research is as important to the innovation process as the folks in the lab doing the work on optics that end up in that license plate scanner. So here is my question: did Motorola Solutions count the expenditure for those interviews and ride-alongs as part of their $1 R&D budget? Did they get the R&D tax credit for it (probably not)? And if not, why not? Or is meeting customer needs not considered “innovation” in our current mindset?

May trade in intangibles

The May trade data is out and it looks like the economy is reverting to some past (bad) behavior. The deficit increased by $6.6 billion to $50.2 billion. Exports were down by $1.0 billion while imports were up by $5.6 billion. The deficit had shrunk somewhat in April (see previous posting). Analysts had expected a deficit of $44.5 billion, only slight up from April’s $43.6 billion (revised). The really bad news is that deficit grew in both petroleum and non-petroleum goods — so the trade deficit is a function of both our energy and manufacturing problems.
Our intangible trade surplus increased slightly in May — up by $107 million. As in April, imports and exports of both business services and royalties increased, with exports rising slightly faster than imports in all cases.
Our Advanced Technology Products deficit also grew in May to $7.9 billion. Export grew slightly while imports rose by almost $1.2 billion. It was a mixed bag with some sectors, such as aerospace, seeing increased exports and decreased imports while others, such as information and communications technology, seeing declining exports and rising imports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Intangibles trade-May11.gif
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Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Some intangibles are priceless

For those of you who are baseball fans, you know that Yankee shortstop Derek Jeter got his 3000th career hit on Saturday. For those of you who aren’t baseball fans, let me assure you that this is big deal. In fact, no New York Yankee has ever done it. It happen to be a home run, giving some lucky fan the chance to grab the ball as it bounced around the stands. The luck fan was a guy by the name of Christian Lopez.
So, what does the holder of such a piece of valuable memorabilia do. Well according to Jason Gay’s column in the Wall Street Journal, you have 4 option — sell it, return it, keep it or throw it back on the field. Lopez choose to give it back to Jeter. And the fans loved it — Jeter being especially respected in New York (which says a lot). As Gay noted in his column:

Surely, there will be moments when Lopez wonders if he did the correct thing–if it was smart to be so sentimental in a sports era that often feels money-driven and cold.
But right now, Lopez is beloved. And as Derek Jeter knows after 17 years, you can’t put a price on that.

I agree — sometimes intangibles are truely priceless.

June employment

Are we seeing an economy that has essentially stalled? The news from BLS this morning’s on the employment situation is not good:

Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment continued to trend down.

Economist had expected between 105,000 and 125,000 new jobs. Likewise,the number of involuntary underemployed remained essentially unchanged (see chart below). Clearly, for all the other news about how well companies are doing, we are seeing a classic job-less recovery — something that is becoming all too familiar in this new economic structure.

Why information on worker re-training is important – and what we should do with it

Data and information is the life blood of the I-Cubed Economy. Yet, in the Federal government data collection is often treated as a lonely step-child. When Congress looks to cut, studies and data are one of the first things to go. Now comes a perfect example of why such actions are penny-wise-and-pound-foolish — in today’s Wall Street Journal (Jobs Study Is Too Late for Debate on Trade).
Congress is currently debating new trade agreements with Colombia, South Korea and Panama. A key element in the discussions is continued funding of the Trade Adjustment Assistance (TAA) program. As well all know, there are benefits and costs to such trade agreements. Like it or not, companies are exposed to increased competition and workers displaced. The TAA program is meant to buffer the negative effects of trade agreements. Yet, the debate on the program is flying blind. As the Journal reports, “The lack of up-to-date government data on how effective the $1 billion-a-year program is at helping the unemployed find well-paying work has hobbled efforts to identify and make improvements.” Specifically, a study by the Labor Department originally due in 2007 will be ready at the end of the year — after the debate is over.
I can’t say that budget cuts to research and statistical analysis have directly caused the delays in the study. But there has been a pattern over the decades of “cut-research-first.”
– – –
There may be a bit of hope in this situation, however. I have long advocated for a broader overhaul of our working training programs. There are two problems. First is the fragmented nature of the programs. TAA is a perfect example. It only covers those who can get certified that their unemployment was due to trade agreements. That is a narrow class of workers who need re-training due to economic shifts. This lead to the situation I encountered back in my Senate staff days where auto workers were eligible for TAA assistance because of increased auto imports, but the guys who drove the auto delivery rigs (taking the cars to the dealers) were not (even though their jobs were directly tied to domestic production as well).
The rationale is that the government should pay for re-training for unemployment caused by government actions (i.e. trade agreements). That is an outmoded view in an economy where human capital is one of the most important ingredients to economic prosperity. And we have gradually been expanding worker re-training — but is a piecemeal fashion. We need a better overall training policy.
Second, the system is focused on re-training. We need a system that continually upgrades worker skills so they stay competitive and don’t lose their jobs in the first place. We know that preventative medicine is better and more economical than waiting for illness to strike. Our training system needs a big dose of the preventative mindset.
Maybe the release of the Labor Department study will help turn attention to the broader issue once the narrow trade debate has worked itself out. I like to remain optimistic.

Knowledge is the World Bank's greatest asset.

Many think of the World Bank as a solely financial establishment — making loans and grants for projects in developing countries. Yet, the real strength of the Bank lies in the combination of money and knowledge. In fact, the knowledge part may ultimately be the more important. And part of that knowledge is in the form of data — which World Bank President Robert Zoellick is opening up. As the New York Times (World Bank Is Opening Its Treasure Chest of Data) reports:

Long regarded as a windowless ivory tower, the World Bank is opening its vast vault of information. True, the bank still lends roughly $170 billion annually. But it is increasingly competing for influence and power with Wall Street, national governments and smaller regional development banks, who have as much or more money to offer. It is no longer the only game in town.
And so Mr. Zoellick, 57, is wielding knowledge — lots of it. For more than a year, the bank has been releasing its prized data sets, currently giving public access to more than 7,000 that were previously available only to some 140,000 subscribers — mostly governments and researchers, who pay to gain access to it.
Those data sets contain all sorts of information about the developing world, whether workaday economic statistics — gross domestic product, consumer price inflation and the like — or arcana like how many women are breast-feeding their children in rural Peru.
It is a trove unlike anything else in the world, and, it turns out, highly valuable. For whatever its accuracy or biases, this data essentially defines the economic reality of billions of people and is used in making policies and decisions that have an enormous impact on their lives.

Of course, as the story points out, this is not necessarily a new strategy. Former Bank President James D. Wolfensohn tried positioning the Bank as a “Knowledge Bank”. Both he and Zoellick have clearly understood that the Bank’s intangible assets are just as important, if not more so, than its financial assets. The challenge they both faced however is getting the Bank to understand the difference between these assets. Knowledge assets are often times most valuable when they are shared — especially when the organizations mission is based on using that knowledge to help others. But trying to move such a large organization in the direction of creating a culture of sharing is difficult. This latest action of opening the databases appears to be next step in that ongoing process. And a clear recognition by the Bank leadership of the importance of managing its intangible assets toward fulfilling the organization’s mission of “inclusive and sustainable globalization.”

Failout from the Nortel patent auction?

The battle for Nortel’s patent portfolio is over (see NYTimes and WSJ). The Canadian telecommunications company fell into bankruptcy and the trustees began selling of assets — specifically selling off various business units. Recognizing that Nortel’s patent portfolio of 6000 patents constituted a stand-alone asset, they set up a patent auction. The winner, announced yesterday, is was a consortium of Apple, Microsoft, Research in Motion, Sony, Ericsson and EMC. Losers in the bidding were Google and Intel. The price tag: $4.5 billion. And that was for a portfolio that most observers believe will be used for defensive purposes.
Over at the IAM blog, Joff Wild has a good take on what this might mean for the relationship between companies and investors:

Nortel investors, on the other hand, will look at all of this and weep. How could the company’s board failed to have seen the potential in the patent portfolio that it owned? I don’t know if it is possible, but if it is surely some kind of action based on negligence or complete incompetence is going to be taken. Though in the end, I suppose, if investors had taken any notice of IP themselves, perhaps they could have asked a few questions that may have alerted senior management to issues that they were ignoring.

Maybe, just maybe, Joff is right and this will raise the issue of IP value — and one hopes the broader issue of intangible asset management — to the level of the Board of Directors. But I agree it will take an investor lawsuit to get people’s attention. So we will see.