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Intel CEO Paul Otellini's politico-economic critique

By Justin Fox

Intel CEO Paul Otellini's dinner remarks Monday in Aspen have been making the rounds. Not having witnessed them, I can't say for sure, but they seem to have been a mix of the same things that Intel CEOs have been saying about U.S. competitiveness for the past few decades plus a bit of the Obama-bashing currently fashionable in business circles. Naturally, it's the latter that's getting all the attention, which is somewhat unfortunate given that Otellini's take on current events was partisan and off-the-cuff, but his views on U.S. competitiveness seem well-informed (if of course self-interested) and probably right.

"I think they're flummoxed by their experiment in Keynesian economics not working," Otellini said of Washington Democrats. Um, really? The experiment in Keynesian economics undertaken in the U.S. over the past couple of years -- and it was well under way in 2008, before Obama was elected -- has almost certainly worked in the sense of preventing even bigger job losses, as Dylan Matthews explained earlier today. It just hasn't worked miracles.

Otellini also launched into a favorite complaint of businesspeople lately: that it's uncertainty, much of it the fault of Washington, that's keeping corporations from doing anything productive with their big cash stashes. I don't doubt that there's lots of uncertainty, but blaming the current occupants of the White House or Capitol Hill for it strikes me as a little weird, given that the biggest government-related uncertainty right now has to do with the November elections. The real complaint here seems to be with the occasional direction changes inherent in a democracy. Which is one reason why businesspeople like China so much. And why they liked the Washington gridlock of the mid- to late 1990s.

But some of Otellini's other, less of-the-moment arguments made sense. The U.S. corporate income tax rate -- at 39 percent, it's the second highest in the developed world after Japan's, and Japan's may be about to drop -- is counterproductively high. It's probably the only tax in the U.S. these days that's conceivably on the wrong side of the Laffer curve; if we lowered the rate, we might take in more money. Our immigration laws are ridiculously unfriendly to talented workers from overseas (actually, that was Carly Fiorina's argument at the same event, but I'm sure Otellini would agree). As a nation, we sometimes seem to be actively discouraging R&D and locating manufacturing facilities here. But none of that's new to the Obama presidency, or even to the 2000s. I think it's been going on since at least the 1980s, when Washington policymakers and corporate chieftains began to fall under the thrall of financial markets and the financial sector (book recommendation of the day: Gerald Davis's “Managed by Markets: How Finance Re-Shaped America).” Got a plan for what to do about that, Mr. Otellini?

Justin Fox is editorial director of the Harvard Business Review Group and author of “The Myth of the Rational Market.”

By Justin Fox  |  August 25, 2010; 4:25 PM ET
 
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Comments

It should be clear to all by now that transnational corporations, with the aid of many US corporations, are in firm control of the global and US economies. The Fed and most federally elected politicians are their shills.

They will get EVERYTHING they want from our politicians, including an extension of the Bush tax cuts for the wealthy.

Posted by: lauren2010 | August 25, 2010 4:37 PM | Report abuse

Kevin Willis and I have talked about this here numerous times, but the corporate tax rate is ripe to be offered as a trade for passing some progressive priority. A substantial reduction in the corporate tax rate could be considered a win for conservatives who have groused about it for years and also, as Mr. Fox mentions here, be good policy. And in lowering the corporate tax rate we might be able to get something like a workable carbon tax in place in exchange.

Posted by: MosBen | August 25, 2010 4:43 PM | Report abuse

Oh, and lowering the corporate tax rate would be a great opportunity for eliminating the tax loopholes that allow some of the larger companies to avoid paying taxes at all.

Posted by: MosBen | August 25, 2010 4:45 PM | Report abuse

>>The U.S. corporate income tax rate -- at 39 percent>>

The maximum federal corporate tax rate is 35%. However, that's not the effective tax rates. US corporations tend not to actually pay anywhere near that high.

Posted by: fuse | August 25, 2010 4:51 PM | Report abuse

@MosBen Good ideas!

Posted by: JustinFox | August 25, 2010 4:52 PM | Report abuse

@fuse: 39.21% is the combined federal/state rate, which makes the most sense for international comparisons. And yes, of course, the effective tax rate paid by most corporations is vastly lower. That's the whole Laffer curve argument: corporations currently go to such lengths to avoid high tax rates that a lower statutory rate might not result in lower effective tax rates.

Posted by: JustinFox | August 25, 2010 5:02 PM | Report abuse

I'm sorry Ezra, but it was Keynesian policy that got us into this mess, and is getting us deeper into this mess now. As I wrote recently:

The last few days, I’ve been reading various opinions on the US Economy on the web, and thinking that they don’t really get the situation that we are in, both short- and long-term. I am increasingly disappointed with those proposing Keynesian remedies, because those were what got us into this pickle in the first place, and they think that more of the “hair of the dog” will rescue us from our drunkeness.

Consider, when in the last 40 years has our government not run a deficit, excluding flows from entitlement programs? I think the answer is has never been so. Stimulus has been the rule, the only argument has been do we do more or less?

Think of monetary policy post-Volcker. Who has been willing to allow a recession to harm marginal investments? No one. The punch bowl was removed slowly, but brought back rapidly, which brought the applause of politicians, and gave Greenspan the moniker “Maestro,” even though he was driving us into a liquidity trap. (Maestro, yuck: I’m a gentleman; I can’t express what a disgrace it is to lionize a man who did us such harm. Execution is out of the question, but can we send him to the North Koreans or the Iranians to have him run their monetary policy?)

Bernanke is little different, having learned the wrong lessons from the Great Depression, thinking that the response from the Central Bank and the Government was too weak. Rather, they did too much, and prolonged the depression more than it would have otherwise gone. Andrew Mellon was wiser than them all.

Governments are bad allocators of capital. They borrow money and allocate it to where the political return is the highest. Those projects may bump up GDP in that year but do little for future GDP. This is the lie of C+I+G=Y. Yes, in the short run that works, but in the long run, money spent by consumers and investors yields far more for growth in the economy than government spending. Our government is only interested in the short run, given their short-run fixation on the election cycle.

Consumers choose what helps them in the short-run, and Investors the long-run. The government has non-economic motives — their actions merely harm the situation. Better they should reduce taxes broadly than try to target certain areas that have clever lobbyists.

All that said, I believe government has a role in regulating commerce. There have to be standards established so that that people can trust in what they buy, in areas that cannot be easily verified by ordinary people.

More here: http://alephblog.com/2010/08/10/queasing-over-quantitative-easing/

http://alephblog.com/2010/08/21/queasing-over-quantitative-easing-redux/

http://alephblog.com/2010/08/13/the-four-roads-ahead/

Posted by: DavidMerkel | August 25, 2010 5:19 PM | Report abuse

"Otellini also launched into a favorite complaint of businesspeople lately: that it's uncertainty, much of it the fault of Washington, that's keeping corporations from doing anything productive with their big cash stashes."

I'm not sure the 'corporations sitting on cash' story is complete. If you take out a $100,000 loan, you technically have $100,000 in cash, but you need to consider both sides of the balance sheet. Nonfinancial corporations hit a record debt load of $7.2 trillion as of Q1 per the Fed Flow of Funds.

http://www.marketwatch.com/story/the-biggest-lie-about-us-companies-2010-08-03

In any case, given that we are running large deficits someone else must be stashing away an equal amount cash. If it wasn't the corporations it would be American citizens, and if it wasn't them it would be the Chinese or the Japanese etc.

As for uncertainty, it doesn't really matter whether or not a particular CEO's arguments for it are correct or not. A CEO can be irrationally nervous about the effects of recent legislation and decide to stay as lean as possible because of it. If I'm convinced aliens will abduct me if I step outside I won't be stepping outside, despite such a belief being wildly incorrect. It's a (very) small sample size, but the business leaders I know in my community seem honestly convinced that the government is permanently wrecking the economy.

Posted by: justin84 | August 25, 2010 5:20 PM | Report abuse

If Obama's policies are so bad for business, explain this Mr. Otellini:

"'Strong demand from corporate customers for our most advanced microprocessors helped Intel achieve the best quarter in the company's 42-year history,' said Paul Otellini, Intel president and CEO."

-From Intel's Q2 2010 Earnings Release: http://files.shareholder.com/downloads/INTC/997356966x0x386626/805273e3-e1e3-4b17-9acb-a99e1fefccb5/Earnings_July_13.pdf

Posted by: DeanofProgress | August 25, 2010 5:23 PM | Report abuse

@DavidMerkel Hi David! Ezra didn't write this post, I did. And I *think* you (and Andrew Mellon) are wrong about what caused/prolonged the Great Depression, but I don't think anybody can be absolutely sure about it.

As for @justin84 and @DeanofProgress: Good (if opposite) points!

Posted by: JustinFox | August 25, 2010 5:49 PM | Report abuse

Ok with me to lower the tax rate for corporations but raise marginal rates on the rich and raise the dividend rate back to ordinary income rates and put the capital gains rate back to 20%. IOW, don't extend the Bush tax cuts for the rich.

One consequence of lowering the rates on individuals was to create an incentive for corps' top management to pay themselves more and more of corporate earnings, instead of retaining them and using them to improve the corp (or pay workers). That's why individual rates have to be 50% at the very top (top 1%).

Posted by: Mimikatz | August 25, 2010 5:50 PM | Report abuse

I came here to criticize the part about corporate tax rates. The effective rate is pretty much zero. Please the blame where you'd like, but blaming a high corporate tax rate is silly.

Posted by: punditpending | August 25, 2010 10:19 PM | Report abuse

Re the alleged 39% corporate income tax rate cited by Justin Fox: nonsense.

From an article in the NYTimes today:

"The current corporate rate of 35 percent is higher than that in many other developed countries. But Congress has larded the code with so many deductions and loopholes — including a dollar-for-dollar credit for taxes paid to foreign governments and generous deductions for depreciation and debt financing — that the effective rate paid by most companies is below 22 percent, lower than in most developed countries."

If Mr. Fox wishes to reduce the stated top rate, rather than spreading misinformation and ignorance, he should inform himself and then push corporations to advocate on behalf of giving up the deductions and loopholes that they have carved out for themselves over many, many years. Simply reducing the stated rate would be meaningless.

Posted by: fredbrack | August 25, 2010 10:29 PM | Report abuse

I came here to criticize the part about corporate tax rates. The effective rate is pretty much zero. Pleace the blame where you'd like, but blaming a high corporate tax rate is silly.

Posted by: punditpending | August 25, 2010 10:55 PM | Report abuse

--"The experiment in Keynesian economics undertaken in the U.S. over the past couple of years [...] has almost certainly worked in the sense of preventing even bigger job losses"--

"We are making buggy whips in record numbers, despite the economic realities."

Posted by: msoja | August 26, 2010 12:39 AM | Report abuse

Effective corporate tax rates in the US are closer to 20%. It is a simple matter to divide corporate tax receipts by reported profit of public corporations, to get an upper bound on the effective rate.

Corporations use a variety of techniques to pay less tax. Multinational corporations like Intel have a wider variety of tools.

NYT ed on 9/9/06 American Jobs Creation Act after Intel announces layoffs


Intel was also one of the major corporations that took advantage of the American Jobs Creation Act, a one-year tax holiday for American businesses operating overseas that lawmakers claimed was going to act as an engine for job growth. By reducing taxes on repatriated profits, it was supposed to generate cash for companies to use in underwriting new hiring at home.

In reality, it was little more than a multibillion-dollar giveaway. Intel repatriated $6.2 billion under the program, which taxed foreign profits at a rate of just 5.25 percent, compared with the normal rate of 35 percent. Now, instead of creating new jobs, it is cutting existing ones.

Posted by: chase-truth | August 26, 2010 8:33 AM | Report abuse

"I came here to criticize the part about corporate tax rates. The effective rate is pretty much zero. Please the blame where you'd like, but blaming a high corporate tax rate is silly."

@punditpending,

The effective rate on average is typically about 25% (29.5% in 2007, 20.3% in 2009, 25.7% in 2010Q1).

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=53&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2004&LastYear=2010&3Place=N&Update=Update&JavaBox=no

Those net profits are then taxed another 15% when distributed to investors as dividends (outside of 401(k) and IRA accounts of course).

@fredbrack,

If you look above in the comments, Justin Fox has said that the 39% rate includes state level taxes. That the effective rate is much lower is, as Mr. Fox also mentioned, one of those Laffer curve effects. High rates produce tax avoidance, one of those avoidance mechanisms being hiring lobbyists to riddle the tax code with loopholes.

"By reducing taxes on repatriated profits, it was supposed to generate cash for companies to use in underwriting new hiring at home.

In reality, it was little more than a multibillion-dollar giveaway. Intel repatriated $6.2 billion under the program, which taxed foreign profits at a rate of just 5.25 percent, compared with the normal rate of 35 percent. Now, instead of creating new jobs, it is cutting existing ones."

@chase-truth,

Bringing corporate cash back to the states was not going to matter one bit for job creation here. If Intel thinks hiring will provide a good ROI, it will do so and it will find the capital needed to do so. If Intel doesn't have any good investment opportunities, no amount of cash will get it to invest. Intel is not going to burn through cash in order to please politicians.

That politicians were bamboozled is no surprise, but at least in their confusion they managed to get something right. For all the talk of giveaways, 35% of $0 is $0. 5.25% of $6.2 billion is $325.5 million.

Moving from 2006 to 2010, recent news suggests Intel has ramped up its recruitment of college grads this year, but that's because the chip business has been good this year.

Posted by: justin84 | August 26, 2010 9:41 AM | Report abuse

"The U.S. corporate income tax rate -- at 39 percent, it's the second highest in the developed world after Japan's, and Japan's may be about to drop -- is counterproductively high. It's probably the only tax in the U.S. these days that's conceivably on the wrong side of the Laffer curve; if we lowered the rate, we might take in more money."

Ezra, couple of problems with your "logic".

1- While corporate tax rates by themselves may be among the highest, you're engaging in an apples to walnuts comparison. By your logic, every person pays federal income tax. But, do they? No, about 47% of the people generally pay no federal income tax. Think deductions. This LOGIC applies to corporate taxes as well. As it stands now, the effective corporate tax rate in America is as low as it has ever been and much lower than these countries you compare the static tax rate to. Please don't tell me you weren't aware of this little fact.

2- When you talk about Laffer Curve, please know that at least a few readers will have some understanding of what it entails. So, before you try to take them all on a ride, beware of being caught by those who get it.

For starters, it is a "curve" (with symmetry) to begin with. And on BOTH sides of the curve, there is a point of SAME RETURN. As long as you don't go below either of those two points (too little in taxation or too much in taxation), you could be on this side or that side, and expect increased receipts. To think that tax cuts by default = increased receipts is a myth perpetuated by idiots to delude the simpletons. I expect better from journalists (if I can call you that), people who strive and are expected to create and promote balanced thoughts, not political scoring points.

Posted by: EinsteinsGhost | August 27, 2010 12:58 PM | Report abuse

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