Business In Washington - Business Operations & Management Consulting

Yesterday, I heard unhappy news. Nordic Tugs, a highly respected Burlington boat building company, announced it is closing its Burlington manufacturing plant. Their outstanding boats are clearly a luxury purchase, and one that is not selling in these difficult, uncertain economic times. This is billed as a temporary closure “forced by the ongoing effects of the Great Recession”, according to their press release. They are not closing the business entirely and are hoping to resume building in the future.

I’ve had the pleasure of being onboard a Nordic Tug, so this news made me sad on more than one level. Most importantly for this blog post, it is an example worth considering in the context of our economy and what is being proposed to help it. I speak of tax increases, particularly the drive to raise taxes for the “wealthy”.

There are two specific tax increases to consider here. First, there is the upcoming expiration of the Bush tax cuts, which will result in a huge, across the board tax increase as of January 1, 2011. (No, the Bush tax cuts were decidedly NOT just for the richest 1%. That is a political lie that has been repeated so often, and not challenged enough, that many believe it as truth. It is not.) There is talk of a delay, but there is also much talk of delaying all but the taxes that fall on the “wealthy”. Second, there is an initiative on the Washington State ballot, proposed by Bill Gates Sr., that would initiate an income tax, again on the so-called “wealthy”. This one bothers me on two levels. The first, that it is a blatant end run around our state constitution which expressly prohibits an income tax, I will set aside for the moment. The second problem it shares with the national debate on the Bush tax cuts, namely allowing them to expire for the “wealthy”.

Why use that word in quotes? Because when you are talking about taxes, “wealthy” is a concept that depends on who defines it at the moment. It is also a fluid term that absolutely will change in time. To support that statement, one has only to read up on the history of the Federal Income Tax.

I am really tired of the class warfare rhetoric! This is America where everyone is supposed to have the opportunity to become really successful and wealthy by virtue of creativity, entrepreneurship and old-fashioned hard work. Why must we continually punish that success with ever higher taxes? Punish a behavior and you will get less of it. Reward it, and you will get more. We are currently rewarding non-work and punishing success. This is a really bad idea!!!

These two proposals, Federal and State, both set the bar for “wealthy” around the $250,000 per year mark, if I remember correctly. At that level, you hit two key constituencies that will get you more results just like the closing of Nordic Tug. Let me explain.

First, you will punish small business owners, a large proportion of who pay taxes at individual rates rather than corporate, since they are subchapter S corporations. Tax them more and you slowly kill the goose that has laid the golden American entrepreneurship egg throughout our history – that job creating machine that has fueled our amazing economic success.

Second, taxing the people with disposable income, i.e. those evil rich people, and they can’t buy things. That kills the market for products like Nordic Tugs. Now, before our natural envy of people with money kicks in, remember that their consumption is the fuel in the engine of that job creating machine.

A lot of people lost their jobs when Nordic Tug closed its plant, dedicated and highly skilled workers who took personal pride in creating a quality product. Contemplate that for a while before jumping to the conclusion that taxing the rich is a good idea.

I have no intention of preaching politics here. Truly. I do have very strong political views, so this may be tough. I may not be able to prevent some of them from leaking into my words. Please bear with me! To the best of my ability, I will keep this as non-partisan as possible.

Rather than politics, my message today is one of awareness and preparedness. This isn’t something Americans, especially business people and business owners, can ignore. There is a tsunami of tax increases building, the first wave scheduled to make landfall on January 1, 2011. My message to my readers: Be aware and take action as appropriate. (Yes, that may include political action. I will leave that up to each of you.)

The tax cuts enacted during the Bush administration are expiring in January of 2011. Contrary to popular myth and political sound bites, these tax cuts were NOT just for the rich. They were across the board cuts in tax rates. All of these end in January, because the current Congress and Administration have chosen to allow it.

In addition to the tax rate increases (the bottom rate, for example, will go from 10% back to 15%), the corrections made to the marriage penalty expire. Married couples with both spouses working and making similar amounts of money will wind up being taxed more because they are married.

Another biggie is the Estate Tax, also commonly called the death tax. The rate goes back to 55%, if I remember correctly. In addition, if your estate tops $1 million (a very low ceiling when you consider the value of real estate in this area), you will have to pay Estate Tax. This number used to be about $5 million, if memory serves. (I promise to check exact numbers in a later post. Time presses this morning, but I want to initiate this topic without delay!)

I have two huge issues with the Estate Tax. (Sorry, but the opinion just had to creep in.) First, it is blatantly unfair. Those dollars have already been taxed during the deceased’s life time, with income tax, property tax, and capital gains taxes. Why tax them again? Second, this tax nails small business owners. Without careful tax planning and succession planning, many heirs wind up losing family farms and businesses because they can’t pay the taxes. The value is in land, fixtures, equipment, etc., all the things needed to run the business, not in cash. Many must liquidate critical assets or sell the business to raise the cash to pay the tax bill! Now, exactly how is this going to benefit our economy and the jobs picture, especially given that small businesses make up the lion’s share of the job creating engine of our economy? So, my major beef here is that this tax is really stupid!

Now, I realize that governments at all levels in this country are hurting for dollars, big time. Many are way past cutting fat out of their budgets and are slicing deeply into muscle. But time and again, they prove that raising taxes does NOT put more money into their treasuries. Au contraire. Taxes dampen the economy still further, resulting in less income, property, etc. to tax, so tax revenues drop. Read your history!

In contrast, tax cuts allow our economy to take off, producing more income and ultimately bringing more into the government coffers, even though they are collecting it at a lower rate. Again, history has proven this over and over. Now, isn’t a booming economy with lots more jobs and dollars for everyone, including government, the real goal?

Please, gentle readers, forgive this opinionated and VERY concerned blogger and give all of this some serious thought. We must all prepare for the coming onslaught. And, as appropriate, we must take action.

We have just celebrated a Glorious Fourth, the anniversary of the founding of our country. We celebrated with hot dogs, S’mores, chips, lemonade and beer, maybe even a few veggies to assuage our guilt. We joined friends for games, good company, good food, and fabulous fireworks. It was a great party weekend, with firecrackers going off well into the night.

As an old-fashioned American patriot who finds it difficult to sing the Star Spangled Banner without choking up, I also celebrate by contemplating the founding of this country, the incredibly difficult and bloody struggle of our War for Independence, and the courage and wisdom of our founding fathers as they laid out a form of government.

Perhaps the greatest of the founding fathers was George Washington. So I took some time today to look up some of his words to share with my readers. First, on the subject of commerce, he had this to say, from a letter to Benjamin Harrison on October 10, 1784:

“A people… who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything.”

To me, this speaks to the spirit of entrepreneurship. With energy and an environment that encourages commerce, a person can do great things. And in this country, we have!

On trade, he said this in his Farewell Address, September 19, 1796:

“Harmony, liberal intercourse with all Nations, are recommended by policy, humanity and interest. But even our Commercial policy should hold an equal and impartial hand: neither seeking nor granting exclusive favours or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of Commerce, but forcing nothing; establishing with Powers so disposed; in order to give trade a stable course.”

Sound like a recommendation for a stable economy - regulation by “gentle means”, “forcing nothing”. Words of wisdom for Washington D.C.? Especially now as the pendulum is swinging from too little regulation to way too much?

In a letter to the Marquis de Lafayette, dated June 19, 1788, he said this:

“I hope, some day or another, we shall become a storehouse and granary for the world.”

We have. Let’s not lose it!

Let me close with a couple more quotes from our first, and one of our greatest Presidents, George Washington, a man I greatly admire.

From his Annual Message, December 1793:

“If we desire to secure peace, one of the most powerful instruments of our rising prosperity, it must be known, that we are at all times ready for War.”

One more from his Farewell Address, September 19, 1796, words about Patriotism:

“Citizens by birth or choice of a common country, that country has a right to concentrate your affections. The name of American, which belongs to you, in your national capacity, must always exalt the just pride of Patriotism, more than any appellation derived from local discriminations.”

Amen. Happy Birthday, America!

As I have watched the economy tank and our government react and overreact, I keep having flashbacks to the 1970’s. There was a lot more to the 70’s than bell-bottom jeans, leisure suits, sideburns, double-knits and green shag carpet. It was a terrible economic time.

I finished college in 1975 and took my two degrees into an abysmal job market. I found something, but struggled for several years before finding a good job, one that I stayed with for 15+ years. During the early years of my career, I did what all young professionals do. I tried to succeed at my job, build up some savings, find a life partner, and establish myself personally and professionally.

However, it was a tough time to do this. Inflation ate up every salary increase and limited my savings. I wanted to buy my first house, but the market stayed one step ahead of me in spite of my efforts as housing prices and mortgage rates soared. It took me until the 1980’s to make the leap into the housing market. I managed to obtain a mortgage at the eye-popping rate of 13.5%, and for the time this was a good deal! The resulting PITI house payment took more than half my monthly income.

For some time now, as I have observed our current economic crisis, I see a 1970s redux in the near future. And it isn’t pretty! There is an excellent opinion piece in today’s Wall Street Journal written by Arthur Laffer of “Laffer Curve” fame. He is also one of the authors of the recent book, “The End of Prosperity”. I have read part of it. It is excellent and scary.

I urge my readers to take a look at Mr. Laffer’s article. Press here to read it.

I look forward to hearing your comments!

It was probably inevitable. The AIG bonuses, followed by Congress’ knee jerk response. The final straw. The tipping point that would convert economically frightened and somewhat paralyzed Americans into a raging group of Howard Beales. Remember him?

Howard Beale was the character in the 1976 movie “Network” who encouraged people to “get up right now, sit up, go to your windows, open them and stick your head out and yell - ‘I’m as mad as hell and I’m not going to take this anymore!’ Things have got to change. But first, you’ve gotta get mad!. You’ve got to say, ‘I’m as mad as hell, and I’m not going to take this anymore!’ Then we’ll figure out what to do about the depression and the inflation and the oil crisis. But first get up out of your chairs, open the window, stick your head out, and yell, and say it: I’M AS MAD AS HELL, AND I’M NOT GOING TO TAKE THIS ANYMORE!”

I am struck by the parallels here, both the economic conditions of the time (I was there. The economy at the time was worse than now.) and the helpless outrage of the people. We need to be angry now. There are very good reasons for our current outrage. My concern is that we direct it at the proper targets. Although many want to aim at the AIG execs themselves and castigate them as greedy SOBs, beware the mob mentality that sends death threats to their family members. As Americans, we can and must be better than that.

Instead, let’s channel our anger into positive action. First, understand the causes and players here. Learn the facts. Then, consider actions that are more likely to make a difference. As business people, there are some real dangers looming as well as some real lessons to learn. Here are points I am focused on at the moment and I offer them for your consideration.

• The bonuses were huge and completely inappropriate, but they were contractual and legal.
• Key members of Congress and the administration were fully aware of the bonuses ahead of time. In fact, language they deliberately placed in recent legislation allowed the dollars to flow.
• The move in Congress to tax them at 90% is most likely NOT legal, or constitutional. (And this from our supposed lawmakers! Have they read the Constitution? I have. Haven’t you?) It is also a dangerous precedent that business people need to watch very carefully.
• Not all corporate execs are greedy bad guys. In fact, most are not. As a business owner, I am a business exec, and I assure you that I place ethics and integrity at the top of my corporate principles. Corporations are not evil entities, but people like you and me, making a product or offering a service as a fair exchange for a customer’s dollars.
• Actions have consequences, some of them unintended but still very real. Congress needs to study this principle, especially now that our Treasury Secretary is proposing a public/private partnership to address the toxic asset problem strangling our banks and lenders. Will private companies and their executives (some greedy, most not – don’t forget that!) feel comfortable participating if they fear punitive taxation, especially when it comes after the fact, essentially altering the rules of a game in progress?

I think our government should abandon their punitive mentality and go after these guys with simple, old-fashioned shame. Take the higher, principled road and use the bully pulpit to encourage greater integrity. For example, try returning all those campaign dollars they received from AIG. Perhaps then Congressional actions will be viewed as examples of the best in America, rather than political pandering.

Finally, remember that the profit motive is really a positive thing. It only becomes greed when it goes too far. A healthy profit motive, the hope of reasonable reward for effort, is what encourages Americans to innovate, build, become entrepreneurs, and ultimately drive our capitalist economy. It will not help our economy recover if our government keeps punishing success!