Presumably in reaction to the Business Roundtable’s pronouncement about their commitment to stakeholders rather than stockholders, the editors of the Washington Post open with this paragraph:
AMERICA’S CAPTAINS of industry are political orphans. Until relatively recently, both political parties struck a respectful, indeed solicitous, posture toward companies and the chief executives who ran them. The near-collapse of the economy in 2008 shook the legitimacy of both capitalism and its corporate stewards, however, with lasting repercussions — prominent among them a bipartisan swing toward populism.
Both sentences are false or at least exaggerated. Neither political party has driven Fortune 500 CEOs from their doors and, indeed, they are split between the Democratic Party and the Republican Party as suggested by the eye-catching graph at the top of this page.
The second sentence might have been true if the sources of the financial crisis had been capitalistic overreaching rather than just pursuing the incentives that borrowers and lenders alike had been given by the government or if the government response had been less predisposed to protect stockholders at the expense of everything else. It’s not impossible. When Sweden faced its own financial crisis some years before we did, the Swedes, made of sterner, more capitalistic stuff than Americans are, shuttered insolvent banks and sold off their remaining assets.
Let me propose some measures for making capitalism more “socially positive” by making it more capitalistic:
- When economic downturns occur as they inevitably will, do not save mismanaged companies. Save their employees. Let the stockholders fend for themselves (even if those stockholders are public employee pension funds).
- Do not allow the importing of goods from foreign companies that do not operate under the restrictions (environmental, labor standards, safety, etc.) as or more stringent than we impose on domestic companies. At the very least impose tariffs in the amount of the estimated cost of those restrictions.
- Abolish the corporate income tax. It imposes costs and encourages short term thinking.
- If you absolutely must continue the corporate income tax, restore the pre-Clinton rules on CEO compensation. They, too, encourage short term thinking.
- Impose extremely stiff tax surcharges on the private sector incomes of individuals who leave government service for the private sector for a lengthy period, at least until their Rolodexes aren’t valuable any more.
- Reforms governing boards of directors are needed.
I could go on by pointing out that most Americans’ notions of ethics and morality are about at the level of a ten year old or that I’m skeptical that any standard of morality can be maintained on a mass basis in the absence of traditional religion but those are the materials for other posts.
“…do not save mismanaged companies. Save their employees.â€
Employees are not a special breed who should be saved, whatever that means. Mismanaged companies should obviously be let go. But protecting employees eliminates a powerful feedback loop to poorly run companies.
“… corporate income tax. It imposes costs… “
More importantly, it imposes costs that will be manipulated to affect their incidence on those various and precious stakeholders, and not in a good way.
“…restore the pre-Clinton rules on CEO compensation.â€
Phantom equity plans are fairly easy to construct.
“Impose extremely stiff tax surcharge..â€
I wonder if that would stand up in court. Non-competes are almost unenforceable as a restraint to making a living.
“Reforms governing boards of directors are needed.â€
Yes they are. That would be a subject for an entire thread of its own. Large corporate boards are a travesty.
At the same time you abolish the corporate income tax you should also abolish the capital gains tax, which effectively compensates for the double taxation the corporate income tax imposes. Income is income, whether earned through hard work, dividends, sales, gambling, or theft. It should be taxed at the same rate. Note: I am not for a flat tax, which hurts the poor. I’m fine with graduated taxes, as long as they don’t become confiscatory (and I pay lots of tax).
There are alternatives. My favorite would be a prebated VAT (look up “fair tax”). The prebate is graduated which renders the tax progressive. The argument against generating revenue with income taxes is that they’re inefficient. When you tax something you get less of it. We’re taxing income and employment. Do we really want less of those?
The corporate income tax is almost pure economic waste. The revenue is relatively small and the costs of recordkeeping and tax avoidance are just about equal to the tax. It should be abolished and the personal income tax increased to make up for the lost revenue. The reason we don’t is political not economic or fiscal. Just about any economist even Democratic economists say the same thing. The optimal corporate income tax is zero. Just about any economist will also acknowledge that the fairness claim made in favor of the corporate income is hooey—the costs are passed on to consumers and that tends to be regressive.