Reduced Employer Payroll Taxes: A Direct Path to Job Creation

A mega-trend drives economic disquiet in developed countries; the return on labor is falling while the return on capital remains relatively higher. You intuitively sense this. Economist Thomas Piketty provided data to support it in his 2013 book, Capital in the 21st Century.

This trend explains the restiveness about anemic economic growth and rising income inequality that is so evident in western nations. Brexit supporters in the United Kingdom reacted to foreign workers who drove down wages. Declining prospects for a better life motivated U.S. voters to elect Donald Trump; immigration and free trade were the lightning rods he raised. Similar sensibilities have a following in France, as evidenced by the support garnered by Marine Le Pen, the nationalist party’s presidential candidate.

There are three interweaving drivers of the declining return on labor—technology, management theory and a greater supply of labor:

  • Technology: the digitization of information makes it easy to relocate work. It is difficult to name jobs where earnings growth is not adversely affected by the ability to move work elsewhere. Robotics and other forms of machine learning have a similar effect—they move work from humans.
  • Management Theory: Beginning in the 1980s, companies decided they didn’t have to do everything themselves. Outsourcing took root with computer operations, payroll and customer support then moved to manufacturing. Offshoring was a skip and a hop away. Lean organizational philosophies are a variation of the idea and they are popular among emerging companies, which provides an ironic foretelling about the future of work. Since the 1970s, these types of employers have been responsible for more job creation than Fortune 500 companies.
  • Greater Supply of Labor: The end of the Cold War led China and India to develop an export orientation and this created wage pressure on workers in higher wage countries. It is unrelenting; China, for instance, faces wage competition from other Asian nations while it competes with western economies for high skill work.

The political landscape looks startling different once you recognize the drivers. As different as the moment in The Wizard of Oz when the screen transforms from black and white to color. Essentially, optimism among those who rely on the return on labor has been eroding because it is easier to change where their work is done.

In the face of these three drivers, is it possible for today’s job market to look much better? Might protectionist trade policies have significantly blunted their effect? If so, might government administration of those policies made the economy less competitive?

We can’t change what these drivers have wrought–the genie is out of the bottle. Today, there are two forward-looking questions. What policies will enhance productivity and thus, economic competitiveness? And, what can be done to ease the social unrest that has been unleashed?

Since economies are complex, policy prescriptions tend to rely on indirect cause and effect. Advocates of lower income tax rates, for example, believe that the prospect of higher after-tax income will lead businesses to make investments that, in turn, create domestic jobs. The idea relies on plenty of speculation.  Those who favor investments in education also rely on indirect solutions—more education makes a workforce more attractive to employers and that, in turn, creates more and better jobs.

Indirect solutions rely on theory, logic and intuition for validation, however, it can be easier to find hard evidence for direct solutions.

There is a direct solution for job creation—one that can test the effect of lower taxes on employment. Simply reduce employer payroll taxes. If it costs less to employ people, theory has it that businesses will hire more of them, right? Employers and employees share the payroll tax burden.  Employees see their portion on payday but may not realize that their employer pays about the same amount. The self-employed pay both portions.

The employer portion is a vestige of an age when job creation wasn’t such a concern and when labor was a larger component of product cost.  Increasingly, the cost is in materials with low labor content and business infrastructure/overhead; the drivers of the declining return on labor also reduce its cost.

The relationship between taxes and employment is intimate at the payroll tax level; all employers pay it and all would benefit from a reduction. By contrast, a reduction in the income tax rate only benefits employers with taxable income. The correlation between that and the payroll is weak—companies with lots of workers may be unprofitable and profitable ones need not have many domestic employees.

Tax code reform is desirable for many reasons…but job creation isn’t a direct one. Cause and effect between income taxes and job creation is indirect and uncertain.

Furthermore, lower income tax rates don’t affect the three drivers for the declining return on labor.  They could, however, increase income inequality; the rates on capital gains is already much lower that the rates on earned income.

Another problem with relying on the income tax code to encourage job creation is that law-making is influenced by special interests. Congress is the Wizard of Oz of tax policy: a benefit of an employer payroll tax reduction is that legislators will not feel compelled to cry out “Pay no attention to the (lobbyist and campaign contributor) behind the curtain!”  That’s because there will be broad support for changes that encourage employment of U.S. workers.

How to pay for it? A tax on the sale of securities in the secondary markets. One paid when a stock or bond is sold by an investor to another investor (i.e., not when it is sold by a company to raise capital). Effectively, it would be a sales tax on transactions that generate the return on capital. A minuscule tax rate would cover it. A higher one could be used to help make healthcare and education more affordable, something that would ease workforce anxiety and position it to be more productive.

Direct solutions trump indirect ones. A tax on the return on capital to underwrite the needs of those who rely on the return on labor makes economic sense—it promotes job creation and growth. It makes political sense too: the net loser from the three drivers vote—foreign workers and robots don’t.

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Karl M. Sjogren is writing a book about an idea for a performance-based capital structure for companies that seek to raise venture capital via a public offering. It is called The Fairshare Model because it balances and aligns the interests of investors and employees…capital and labor.

Storm of Beta, a behavioral finance website, interviews Karl Sjogren of the Fairshare Model

On October 10, 2015, the financial/economic education website Storm of Beta (www.StormofBeta.com) published an extensive interview with me.

The interview is here https://stormofbeta.files.wordpress.com/2015/10/a-penny-for-your-stocks-karl-sjogren.pdf

Storm of Beta is a website that focuses on financial and economic insights. Its “penny for your thoughts” series covers insights into behavioral finance and its implications and applications to financial markets. That focus brought The Fairshare Model to the attention of Storm of Beta, as it is nothing if not an application of behavioral finance to the public venture capital market..

Karl

Three new chapters address objections to equity crowdfunding

The September 24, 2015 update to the draft of The Fairshare Model book adds three chapters that discuss concerns that have been raised about equity crowdfunding. The principal focus is fraud, overvaluation and business failure. Particular attention is focused on the cause of failure and a common cause of it–management.

Other objections discussed as well such as unethical sales practices and the sensibility that is expressed as “why don’t we simply rely on VCs to meet the needs of young companies?”

See the resources tab!

NewFinance presentation on May 28, 2015

On May 28, 2015, I made a presentation on the Fairshare Model to the NewFinance Meetup group in San Francisco. The slide deck is under the Resources tab.

When I made my October 2014 presentation (slide deck under Resources as well), I had just one chapter posted online–what is chapter two in the May draft.

Now, fourteen chapters are online! Therefore, this latest slide deck has more to summarize. In particular, chapter ten on the Tao of the Fairshare Model (my favorite) and chapter five, Target Companies for the Fairshare Model.

Check out the submissions for the world’s 1st crowd-sourced book on FINTECH

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What is the FinTech Book?  http://thefintechbook.com/

It is the 1st globally crowd-sourced book on FINTECH which will compile the insights and stories of the FINTECH community. [And the Fairshare Model is a candidate for inclusion]

Why is it important?

To date there only exits a fragmented source of knowledge on the Sector. This is reflected by the fact that the FINTECH sector is both recent in its development and wide in its scope. Therefore crowd-sourcing its content appears the best way to create a comprehensive book on the sector.

Who is the Audience:

Unlike other tech sectors the FINTECH industry will impact every one either directly or indirectly. Indeed if before finance was “needed by all but benefited a few” the FINTECH sector is now changing this by bringing back value to retail and institutional clients.

The FINTECH book aims to become an educational and inspiring piece of work targeted to entrepreneurs, financial institutions, decision makers, investors and consumers.

How does the Crowd-source process work?

There is a 5 step process for authors and the community spanning from March until July 2015.

  • Authors – Pitch their ideas by submitting via e-mail an initial 300 word article to the editors before the 30 April 2015.
  • Authors – Define their ideas by choosing one of the pre-selected topics.
  • Community – Throughout May the community can select the initial articles they wish to see in the FINTECH book

See Fairshare Model abstract https://medium.com/the-fintech-book/the-fairshare-model-90943089ae59

  • Authors – Selected authors must expand on their initial articles to have a 2,000 word chapter by the 30 July 2015.
  • Authors – Non selected authors will have their details and topic acknowledge in a special chapter.

The editors will then compile and edit the work ahead of the publication of the Book, due November 2015.

March 8, 2015 Update

The March 8, 2015 update adds two chapters. Chapter ten explores the potential for cooperation–cooperation within a company’s micro-networks of shareholders, employees, customers and suppliers–to provide a tool for competition. Chapter ten explains the Tao of the Fairshare Model. This is my favorite chapter and it will pride grist for thought for anyone with an interest is the defining characteristics of capital structures.

Here’s how chapter ten ends:

 This chapter concludes Section II, which began by examining a range of ideas about two macro-economic concerns that provide context for the Fairshare Model—economic growth and income inequality. It then considered how the ability to cooperate creates might offer diverse ways to address these twin challenges and how Fairshare Model promotes this. This chapter identified two structural elements that determine how a capital structure allocates uncertainty in an equity financing, something that will inform the discussion about economic growth, income inequality and equity crowdfunding. It also presented the most remarkable aspect of the Fairshare Model—it provides venture-stage companies a reason to offer public investors a low valuation. As a consequence, the model enables a well-performing team to create more wealth for themselves than if they use a conventional model and to create competitive advantage when it comes to managing human capital.
The tao of the Fairshare Model is clear—it is to balance the interests of entrepreneurial companies and public investors.
This section has been broad in content and philosophical perspective. Section III returns to narrower micro-economic matters, issues that come into play when venture-stage companies raise venture capital in a public offering—valuation, fraud and failure.

Karl

Jan. 29, 2015 exposure draft adds chapters on economic growth & income inequality

The exposure draft uploaded Jan. 29, 2015 moves the discussion about the Fairshare Model to a macro-economic level. The first two chapters in Section II deal with how the model fits into the on-going debate about how to spur economic growth, job creation and address growing income inequality.

All are topical subjects. Although the Fairshare Model is not designed to address any of them, they provide a macro-economic context for the micro-economic matters that were discussed in the first six chapters that comprise Section I.

I’ll add two more chapters to Section II in the weeks ahead. One  will deal with the potential for the ability to cooperate to be a competitive differentiator in the decades ahead and the other will deal with philosophic matters.

By the end of February, I’ll start Section III, which will lead off with chapters on valuation.

Karl

Jan 14, 2015 exposure draft of book has two new chapters

A new exposure draft of my book-in-progress is available in the Resources section. Two new chapters have been added, bringing the total to six. Chapter five will be of particular interest because it describes five types of companies that may adopt the Fairshare Model and illustrates scenarios for Performance Stock conversion.

I am grateful to those who comment on my book-in-progress. This crowdvetting process is very helpful to me on many levels.

Karl