Category: Wisconsin business

This column is not about Comrade Bernie Sanders and how he demonstrates his vacuum of knowledge about economics every time he opens his mouth.

No, this is worse. Mark J. Perry writes:

When a random sample of American adults were asked the question “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” for the Reason-Rupe poll in May 2013, the average response was 36%! That response was very close to historical results from the polling organization ORC’s polls for a slightly different, but related question: What percent profit on each dollar of sales do you think the average manufacturer makes after taxes? Responses to that question in 9 different polls between 1971 and 1987 ranged from 28% to 37% and averaged 31.6%.

How do the public’s estimates of corporate profit margins compare to reality? Not surprisingly they are off by a huge margin. According to this Yahoo!Finance database for 212 different industries, the average profit margin for the most recent quarter was 7.5% and the median profit margin was 6.5% (see chart above). Interestingly, there wasn’t a single industry out of 212 that had a profit margin as high as 36% in the most recent quarter. The industry “REIT-Diversified” had the highest profit margin at 33.5% followed by just one other industry – Wireless Communications  at 30.9% – with a profit margin higher than 30%.

“Big Oil” companies (Major Integrated Oil and Gas) make a lot of profits, right? Well, that industry had a below-average profit margin of 5.1% in the most recent quarter. And evil Walmart only made a 3.1% profit margin in the most recent quarter (as I reported recently), which is less than half of the almost 7% average government take on retails sales in the form of state and local sales taxes. Think about it – for every $100 in sales for Walmart, the state/local governments get an average of $6.88 in sales taxes (and as much $9.44 in Tennessee and $9.16 in Arizona, see data here), while Walmart gets only $3.10 in profits!

Bottom Line: The public’s complete overestimation of how much companies earn in profits as a share of sales explains a lot. If $36 of every $100 in sales at a company like Walmart, McDonald’s, Home Depot, Ford Motor Company or a local dry cleaner or restaurant really did turn into profits, then of course those companies could afford to pay unrealistic living wages of $15 per hour, accept unreasonable demands from labor unions, provide all sorts of generous fringe benefits including weeks of paid holidays, long paid maternity leaves, and gold-plated pension programs, etc. The public that believes in the fantasy-world of sky-high 36% profit margins would naturally think companies are just being greedy and stingy when they don’t pay higher “living wages” and have to be forced to do so through minimum wage, or living wage, legislation.

If the average person could realize that a 36% profit margin isn’t even close to reality, and that the typical, median firm has a profit margin of only 6.5%, or almost 30 percentage points below what the public thinksis a normal profit margin, then hopefully the average person would become a little more realistic about how the business world operates. Companies aren’t being stingy when they pay competitive wages, they’re just trying to survive on what are sometimes razor-thin profit margins, in a competitive environment where there’s not a large margin of error. If they’re not operating efficiently and watching costs very carefully, it’s pretty easy for a business to go from a 6.5% profit margin to a 0% break-even situation, and then to losses and bankruptcy — just look at the more than half a million businesses that fail every year.

My educated guess is that the Main Street businesses near you make even smaller profit margins. Owning a business is pretty much the only way for most people to make money, but that doesn’t mean most business owners are rich.

This also should explain why despite having the highest corporate tax rates in the world, neither the federal government nor the states that assess corporate income taxes get much take from corporate income taxes.

Perry doesn’t go into other aspects of public ignorance about business. What people think of as “corporations” such as the aforementioned Ford, Home Depot, McDonald’s and Walmart are actually publicly traded companies (that is, the public can buy stock in the company), which by the broadest definition totals all of 0.1 percent of American businesses. (And yet companies you’ve heard of probably make your 401(k) portfolio, which means you really should pay attention to such business news as corporate earnings.) Nor does Perry say that most businesses are organized in some sort of form of corporation — for instance, businesses with more than one owner, or businesses whose owner(s) want to be legally protected from liability against the company, the latter of which should mean all business owners.

Kevin D. Williamson:

What would the U.S. economy look like if there were eleven new companies the size of Pfizer?

A little back-of-the-envelope math: If those eleven companies each employed about the same number of people as Pfizer, that would be the better part of 1 million new jobs, which would take care of about 13 percent of those Americans currently jobless — and if they got nice Pfizer wages, too, so much the better. There would be an additional $2.1 trillion in the pension funds and individual retirement accounts invested in those companies’ shares. If those firms paid taxes comparable to Pfizer’s, their annual tax payments would exceed the annual total revenue of the National Football League and would by themselves more than fund the annual budget of the Environmental Protection Agency or the combined budgets of the Small Business Administration and the National Science Foundation. The money their employees paid in individual taxes could fund the entire budget of NASA or the Department of the Interior.

But we aren’t getting eleven new Pfizers. In fact, we’re losing the Pfizer we have. Pfizer is merging with a smaller Irish pharmaceutical company, Allergan, and the legal headquarters of the new enterprise will be located in the Republic of Ireland rather than in the United States. The main reason for this is the U.S. corporate tax, which is effectively the highest in the developed world (it is exceeded on paper by the corporate tax of one very poor country, Chad, and one very economically weird country, the United Arab Emirates). Worse, the U.S. corporate tax is an especially cumbrous levy, with Washington seeking to tax companies on their worldwide business activities; the international norm is the territorial tax system, in which a company is taxed by any given country only on the business conducted in that country.

Pfizer is merging with a smaller Irish pharmaceutical company, Allergan, and the legal headquarters of the new enterprise will be located in the Republic of Ireland rather than in the United States. The main reason for this is the U.S. corporate tax, which is effectively the highest in the developed world (it is exceeded on paper by the corporate tax of one very poor country, Chad, and one very economically weird country, the United Arab Emirates). Worse, the U.S. corporate tax is an especially cumbrous levy, with Washington seeking to tax companies on their worldwide business activities; the international norm is the territorial tax system, in which a company is taxed by any given country only on the business conducted in that country.

Merging with a small firm overseas and relocating the corporate headquarters to a friendlier tax environment is called a “corporate-tax inversion,” and the maneuver, though entirely legal and ethical, cheeses off the sort of people who’d like to get their hands on a chunk of that corporate cash and use it to fund favors for their political supporters. (Also legal, though not obviously ethical.) Notice that U.S. companies are not relocating to Caribbean tax havens but instead to developed, prosperous, high-wage countries such as Ireland, Switzerland, and Canada, which have tax rates that are high relative to Gibraltar’s or Montenegro’s but low relative to the United States’.

The result is that many U.S.-based companies keep their overseas profits overseas, thereby delaying the payment of rapacious American taxes. Apple is the most famous cash-hoarder; if its more than $200 billion in sidelined cash were a separate company, it would be a firm somewhere between Chevron and Exxon in value.

We — we Americans, the investors, workers, and entrepreneurs behind the greatest economic engine the human race has ever seen — are denied the benefits that might be derived from the success of American firms abroad because of the greed and stupidity of American politicians. Never mind the value of that $2.1 trillion as cash today; imagine what it might have produced if it had been repatriated and reinvested in new and expanded enterprise. Not every investment is going to be a home run, of course, but: Google began with a $100,000 investment; Apple was launched on less than $1 million; Facebook began as a $15,000 project.

Politicians create economic incentives for firms to do certain things, such as park their foreign earnings abroad, and then howl when companies respond rationally to the incentives the politicians created. This is usually followed by denunciation, which is the mode the Democrats and some Republicans are in, lambasting as “unpatriotic,” “deserters,” “traitors,” and guilty of economic “treason” the companies in question. (You’ll recall the ritual denunciations of Mitt Romney as an “economic traitor.”) The next step is the threat to use force against firms that won’t toe the political line. Former secretary of labor Robert Reich, a leading progressive voice, has suggested stripping dissident companies of legal protections for their intellectual property. Hillary Clinton has suggested simply seizing the assets of companies that relocate abroad. (She calls this an “exit tax,” but it is, in fact, ransom.) Jeb Bush and quondam Democrat Donald Trump both have put forward punitive measures to discourage tax inversions. …

The reality is that it is getting harder and harder for politicians to bully businesses. New York City still treats its business community pretty shabbily, but its leaders do seem to have started to get the message that nobody really has to be on Wall Street any more. First they moved to Connecticut, then to Charlotte and Houston and beyond. There was a time when any serious financial enterprise had to have an office in Lower Manhattan. That time is past.

What the politicians don’t seem to understand is that there is no particular reason Apple needs to be a California firm. And, indeed, California has seen some valuable enterprises (including some Apple operations) migrate to Texas and elsewhere. All fine. But take the calculation one step further: There’s no reason Apple needs to be an American firm at all. Yes, there are many upsides to being domiciled in the United States, but that’s a cost–benefit analysis, with politicians adding to the “cost” column every year and doing damned little on the “benefit” side of the ledger.

And Apple has the other 96 percent of the human race to sell its wares to.

Frédéric Bastiat’s timeless counsel — that we must account for the unseen as well as the seen — is here applicable: The United States is a rich country, but one that would be much, much richer if capital were given a bit more liberty to work its magic. If Los Angeles were as competently governed as Zurich, it probably would be the richest city on earth by multiples of whichever came in second. If New York City had had a lot more John James Cowperthwaite and a lot less John Lindsay … who can imagine?

For that matter, Wisconsin would be better off with more John Menards, more Kohlers and fewer legislators with the suffix of (D–Madison) or (D–Milwaukee).

For that matter, since your retirement account probably includes the stocks of many of the companies listed here, you would be better off with lower taxes on business.

Tonight is the latest Republican presidential debate, in Milwaukee. It is also the latest debate I won’t be watching. I have to work, but even if I didn’t I have a life, and presidential debates are a charade.

I don’t know if Kurt Bauer, president of Wisconsin Manufacturers & Commerce, was invited to tonight’s debate; if not, I assume he’ll be watching. Bauer does, however, perform the valuable service of asking some questions for the GOP candidates. I will perform the valuable service of proposing answers for each:

Taxes: At 35 percent (39.2 percent when state taxes are included), the United States has the highest income tax rate in the industrialized world. Compare the U.S. rate to China at 25 percent, United Kingdom at 20 percent, Canada at 15 percent and Ireland at 12.5 percent. High U.S. corporate taxes fuel so-called inversions where U.S.-based companies are incentivized to domicile overseas and the punitive rate levied on dollars earned abroad keeps them from being repatriated and invested at home.

What should the U.S. corporate tax rate be in order for U.S. companies to be globally competitive? How would you use overall tax policy to grow the economy?

Taxes should be to raise money for government services, not pick winners and losers based on their behavior. The correct business tax rate, federal or state, is zero. Income should be taxed once, not multiple times.

Regulations: U.S. businesses spend an incredible $1.88 trillion annually to comply with federal regulations, according to the Competitive Enterprise Institute. The DC-based Manufacturing Institute estimates that it costs 20 percent more to make something in the U.S., excluding labor, than other industrialized nations. Regulations are suffocating businesses and the U.S. economy along with it.

To make matters worse, the Obama Administration supports time-off, minimum wage and overtime mandates that punish small businesses for being an employer.

How would you address the weed-like growth of federal rules that are often promulgated without congressional approval or meaningful oversight? Do you think raising the costs of being an employer leads to more hiring and wage growth?

The federal government should be mandated to issue a cost–benefit analysis for every new regulation, and every new regulation should require a Congressional vote. (Or, in Wisconsin, a vote of the Legislature. That means the old ones, too.) And, by the way, a large number of government employees should be permanently laid off and their positions permanently eliminated.

Government Debt: The U.S. national debt is $18.1 trillion or 101.1 percent of U.S. GDP. While the federal budget deficit declined to $483 billion in 2014 from a peak of $1.4 trillion in 2009 (the year of the stimulus), the Congressional Budget Office projects deficits to begin rising again in 2017. Last year, interest on the debt was 7 percent of the federal budget, behind Social Security (24 percent), Medicare/Medicaid, CHIP and marketplace subsidies (24 percent), defense (18 percent) and safety net programs (11 percent). When interest rates inevitably rise, debt service will begin to choke off other spending priorities.

Student loan debt has become a campaign issue. But shouldn’t the cost of the massive national debt and top-heavy entitlement programs be as much if not more of a concern to young people? After all, every American will inherit those costs, not just the ones who went to college.

Before long, entitlement programs will cost more than everything else government does, including national defense. The federal government will be a riddled-with-debt provider of entitlements and nothing else, if we’re not already. (Which makes one wonder why anyone would want to be president.)

Immigration Reform: Wisconsin has a workforce shortage that is projected to become a crisis in the near future. For example, Wisconsin is one of 15 states that has more baby boomers than millienials and its working age population will grow by just 0.04 percent through 2040, according to the Applied Population Lab at the UW-Madison.

Wisconsin was first settled by Norwegians and Germans who began arriving in the 1840s. They were followed by many other diverse groups of immigrants from around the world. Do you support immigration reform that allows and the best and the brightest to establish themselves as legal, productive and taxpaying U.S. citizens?

For those who believe business and the GOP are one and the same, the immigration issue proves that is not the case. The nativist side of the GOP wants the impossible task of deporting — or, who knows, maybe executing — every illegal immigrant, as if deporting 10 million people would have one second of support from the vast number of nonideological nonpartisan Americans. It is impossible for me to understand why having more skilled immigrants in the U.S. would not be a good thing for this country.

Energy: Wisconsin is a manufacturing state and affordable, reliable energy is vital to this economic super sector. The federal Environmental Protection Agency (EPA) has proposed several new rules that will dramatically spike the cost of energy in Wisconsin. The rules disproportionately harm manufacturers, but also adversely impact all commercial and residential ratepayers.

Do you believe the supposed benefits of those rules, which the EPA itself admits will be negligible, are worth billions of dollars in lost economic activity and the loss of thousands of middle-class Wisconsin manufacturing jobs?

Let me fix that last sentence: “Do you believe the supposed benefits of those rules, which the EPA itself admits will be negligible, are worth billions of dollars in lost economic activity and the loss of thousands of middle-class Wisconsin manufacturing jobs?” There.

The only thing that protects the environment is a healthy, growing economy, which provides enough tax revenue to fund cleanups of polluted areas. The communist Eastern Bloc didn’t have healthy, growing economies, so they did anything and everything to prop up their economy, which left most of Eastern Europe a giant Superfund site, yet crashed their economy anyway.

Related to that was the ironic timing of Barack Obama’s pulling the plug on the Keystone XL oil pipeline one day before back-to-back ethanol-spilling train derailments in Wisconsin. Killing Keystone benefits Warren Buffett, whose Berkshire Hathaway owns Burlington Northern Santa Fe; it doesn’t benefit anyone else, particularly Wisconsinites.