Paul L. Caron
Dean


Friday, September 16, 2016

Harvard Business School:  Problems Unsolved And A Nation Divided — The State Of U.S. Competitiveness 2016

ProblemsHarvard Business School:  Problems Unsolved and a Nation Divided: The State of U.S. Competitiveness 2016, by Michael E. Porter, Jan W. Rivkin & Mihir A. Desai (with Manjari Raman):

Harvard Business School (HBS) launched the U.S. Competitiveness Project in 2011 as a multi-year, fact-based effort to understand the disappointing performance of the American economy, its causes, and the steps needed by business and government to restore economic growth and prosperity shared across all Americans. We draw on surveys of HBS alumni and the general public to solicit views about the state of U.S. competitiveness as well as the steps needed to restore it.

This report provides an overview of our findings on the evolution of the U.S. economy, the state of U.S. competitiveness in 2016, and priorities for the next President and Congress, drawing on our research and the May–June 2016 surveys of alumni and the general public.

While a slow recovery is underway, fundamentally weak U.S. economic performance continues and is leaving many Americans behind. The federal government has made no meaningful progress on the critical policy steps to restore U.S. competitiveness in the last decade or more. ...

Faltering U.S. economic performance

  • America’s economic performance peaked in the late 1990s, and erosion in crucial economic indicators such as the rate of economic growth, productivity growth, job growth, and investment began well before the Great Recession.
  • Workforce participation, the proportion of Americans in the productive workforce, peaked in 1997. With fewer working-age men and women in the workforce, per-capita income for the U.S. is reduced.
  • Median real household income has declined since 1999, with incomes stagnating across virtually all income levels. Despite a welcome jump in 2015, median household income remains below the peak attained in 1999, 17 years ago. Moreover, stagnating income and limited job prospects have disproportionately affected lower-income and lower-skilled Americans, leading inequality to rise.
  • A similar divergence of performance has also occurred between large companies and small businesses. While large firms have been able to prosper, small companies are struggling, startups are lagging, and small business is no longer the leading job generator.
  • Overall prosperity is growing slowly, but the benefits are increasingly not flowing to middle- and lower income Americans. This puts the American Dream, or the ability of any American to advance and prosper, at risk. ...

An economic strategy for Washington ...

  • In 2012, we put forward an Eight-Point Plan of federal policy priorities that would unlock U.S. economic growth and competitiveness. The Eight-Point Plan consists of the following policy recommendations: simplify the corporate tax code with lower statutory rates and no loopholes; move to a territorial tax system like all other leading nations'; ease the immigration of highly-skilled individuals; aggressively address distortions and abuses in the international trading system; improve logistics, communications, and energy infrastructure; simplify and streamline regulation; create a sustainable federal budget, including reform to entitlements; and responsibly develop America’s unconventional energy advantage.
  • Each of these areas represents compelling U.S. weaknesses, primarily controlled by the federal government, that can have the most significant and near-term impact on the U.S. economy. There is also wide consensus on the policy change needed to make progress in each area. There are two other crucial U.S. weaknesses, public education and health care, but these are in fields controlled heavily at the state and local levels with no clear consensus yet on solutions.
  • Progress on even some of these eight priorities would transform the trajectory of the U.S. economy and the economic prospects of all Americans.
  • A strong majority of HBS alumni and HBS students support all eight priorities, with consensus across all political affiliations. When asked in open-ended questions about which priorities alumni felt were most important for federal economic policy, the responses identify virtually the same priorities as those in the Eight-Point Plan. Alumni also mention education, health care, and the political system.
  • In the general public survey, there was net positive support for seven of the eight priorities, with a tie on territorial taxes. Public support tended to be somewhat weaker, reflecting the fact that many in the public could neither agree nor disagree, or did not know, whether the eight priorities were good or bad for the economy. Divisive political rhetoric and an uninformed national debate have confused the average American about what the country needs to do to restore the economy. This confusion is a serious obstacle to America’s ability to make progress.
  • Despite strong bipartisan support in business and net public support for the Eight-Point Plan, Washington has made very little or no progress on any of these federal economic priorities for well over a decade. The current presidential election is showing no signs of advancing a coherent plan to address these areas.

Achieving tax reform

  • We believe tax reform is the single area with the greatest potential for immediate impact on the economy and is long overdue given changes in the global economy. Corporate tax policy has become a key obstacle to U.S. competitiveness and economic growth, and reforming both corporate and personal taxation is essential to achieving a sustainable federal budget.
  • Good tax policy should be guided by the goals of increasing economic efficiency, achieving greater equity, and reducing complexity. The forces of globalization have amplified the inefficiencies and complexities of the current tax system and demand that reform make the U.S. less of an outlier in key tax policy areas – particularly corporate tax policy. Efforts to reduce the negative effects of globalization should be focused on improving competitiveness, for instance, by upgrading the skills of workers threatened by offshoring, rather than on ill-targeted tax policies.
  • The top corporate tax problems, according to the surveyed business leaders, are the high corporate tax rate and the taxation of international income. Business leaders report overwhelming and bipartisan support (over 95%) for corporate tax reform. Consensus corporate tax reforms include reducing the statutory rate by at least 10 percentage points, moving to a territorial tax regime, and limiting the tax-free treatment of pass-through entities for business income. The transition to a territorial regime should be complete, not half-hearted via the inclusion of an alternative minimum tax on foreign income. The feasibility of corporate tax reform is promising given the broad consensus on the nature of the problem and the required direction for reform.
  • Comprehensive reform of personal taxes will be more challenging. There is less support for many types of personal tax reform. However, there is broad support for instituting a minimum tax on incomes above $1,000,000. Increasing the tax rate on savings; eliminating the deductibility of charitable giving, state and local taxes, and mortgage interest; and taxing employer-provided health insurance did not receive majority support. Respondents support limitations on deductions and exemptions in general but react strongly against them when specific examples were provided.
  • Carbon, not consumption, taxes are the best step forward. Carbon taxes are remarkably popular both as a separate revenue raiser and as part of a structural, revenue-neutral reform. In contrast, consumption taxes are quite unpopular and solicit the most spirited commentary, positive and negative, from our alumni. Several recently-proposed new ideas also receive support, including taxing non-C corporation business income, raising the cap on income subject to the payroll tax, and allowing for the deductibility of dividends at the corporate level.
  • HBS alumni also strongly support spending reductions as a means to fiscal stability. Nearly one-third chose not only reduced spending, but also reduced taxation. MBA students are much more accepting of tax increases and less supportive of spending cuts.
  • To achieve the right kinds of tax reform, leaders must begin to speak more realistically about the fiscal realities America faces. In addition, simplistic, polarizing and protectionist rhetoric must be avoided. The time for tax reform is long overdue.
  • Tax reform can also contribute directly to shared prosperity. The earned income tax credit (EITC) is probably the single most important innovation on the personal tax side over the last two decades. Simplification and expansion of the EITC is a promising direction for reform.

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A failing political system

  • The U.S. political system was once the envy of many nations. Over the last two decades, however, it has become our greatest liability. Americans no longer trust their political leaders, and political polarization has increased dramatically. Americans are increasingly frustrated with the U.S. political system. Independents now account for 42% of Americans, a greater percentage than that of either major party.
  • The political system is no longer delivering good results for the average American. Numerous indicators point to failure to compromise and deliver practical solutions to the nation’s problems. Political polarization has especially made it harder to build consensus on sensible economic policies that address key U.S. weaknesses. It is at the root of our inability to progress on the consensus Eight-Point Plan.
  • A large majority of HBS alumni believe the political system is obstructing U.S. economic growth and competitiveness. Many alumni who self-identified as Democrat or Republican blame the other party, but a sizable proportion also hold their own party responsible.
  • Among the general public, many believe that the political system is obstructing economic progress. However, many Americans are unsure, which we attribute to the divisive and partisan dialog on the economy which has confused the public on many issues.
  • There is strong support for political reform among surveyed alumni. On six common proposals for political system reform, a strong majority of HBS alumni support five of them. The most supported reforms are gerrymandering reform and campaign finance reform.
  • Among the general public, the top two political reforms supported are term limits for the House and Senate and campaign finance reform. However, a large percentage of the general public are unsure about which reforms they favor.
  • Overall, we believe that dysfunction in America’s political system is now the single most important challenge to U.S. economic progress. Many Americans are keenly aware that the system is broken, but are unsure why it is broken or how to fix it. While there is rising frustration with politics, there is, as yet, no framework for understanding the reasons for today’s poor performance and proposing effective solutions. Identifying such a framework, and the set of reforms that can change the trajectory of our political system, has become a crucial priority.

Press and blogosphere coverage:

https://taxprof.typepad.com/taxprof_blog/2016/09/problems-unsolved-and-a-nation-divided-the-state-of-us-competitiveness-2016.html

Scholarship, Tax | Permalink

Comments

Businesses and entrepreneurs need time to assimilate and translate against risk broad and sweeping governmental intrusion. During the Great Recession, Congress chose to act (which is generally good) but did so poorly (in this case – for recovery purposes – it might have been better to address the status quo). In 2008, I posited that it would at least be 2017 before business would be able to see “where the dust settles” and some semblance of normality would be present.

Yes, corporate or entity tax reform would most certainly be helpful. As a tax attorney, it is clear that our tax system is so complex it can confuse the professionals. However, in the face of a “weaponized IRS,” it is going to be very difficult to build consensus to supplant a Code 103 years in the making. Professionals and bureaucrats exist simply to promulgate their livelihoods.

I spent yesterday afternoon speaking at a CLE on Dodd-Frank, the CFPB, Recent Consent Orders and the Proposed Rules of the CFPB. Passed with little bi-partisan support, still facing Constitutional scrutiny for its composition (violation of separation of powers), it has resulted in over 23,000 pages of regulation. Named for Barney Frank and Chris Dodd, the irony and hypocrisy is that they were the beneficiaries of special treatment (Friends of Angelo – Countrywide Bank) and resisted earlier cries to cure the mortgage market – yet used “the crisis” to further interject government into markets. It was passed on the rallying cry “too big to fail,” yet we have seen “big bank” growth since 2008 at a level estimated at 125%. This was in the face of failing to build a graduation into Dodd-Frank institution regulation architecture for size of the institution. As a result, “big banks” (who “had a seat at the table” during drafting) have had a huge advantage as a result of economy of scale over small, community and mid-sized banks. Thus, there is tremendous pressure by virtue of the Act for added conglomeration. This failure doesn’t even take into account the pressures relating to non-financial institutions, non-traditional lending sources and, quite frankly, the interference with the practice of law despite the Act expressly exempting attorneys from CFPB oversight. This juggernaut of an agency is a “chainsaw” of a cure where a “scalpel” was needed. This doesn’t count the “systemically important institution” fights (Financial Stability Oversight Council) of non-financial institutions or the broad investigative intrusions that are slowly being beaten back (at, I suspect, some significant cost)

Then, over the loud and vehement objection of the majority of the US voters (which resulted in a change in the composition of the US House), Congress passed the Patient Protection and Affordable Care Act – or, as more commonly described Obamacare. This Act has resulted in more than 33,000 pages of regulation. Ocare’s overall failure is in the news everyday concerning exchange failure, death spiral and is the rallying cry (as publicly postulated at the time of adoption) for the “single payer” (wholly government run) healthcare system. More devastating is to watch the rural small and community hospitals closing in counties across the country as the Medicare and Medicaid reimbursements dry up.

Next, turn to the new minimum salary base in the salary exemption rules being increased by more than 100%. Just yesterday, it made news that the NFIB is seeking extension of its imposition from the Department of Labor because businesses are claiming they haven’t had enough time to restructure their workforces. Although man has enjoyed the benefit of technology, the tension of work displacement has and will always exist. Where government seems to find incentive as cure to economic woes in driving salary base and minimum wage further upward – I postulate that these financial pressures have advanced job displacement by technology at least five years. Technology doesn’t come with unemployment compensation, healthcare costs, failure to appear, FMLA, workers compensation, etc.

These are just a few comments on how government has done virtually everything it could to “trip up” and delay a vigorous recovery. The retardation in economic expansion and job growth (certainly full-time) rests in the hands of those who came through the Great Recession virtually untouched and seem wholly disconnected from the realities of markets. It is a testament to the roots of our economy that we have experienced the recovery that we have. However, it is clear that the aggressive federal legislation has impacted the flow to the lower and middle class.

Posted by: Tom N. | Sep 16, 2016 8:34:21 AM