Tax changes could save U.S. bacon

The United States should revamp its tax structure to increase technology investment and productivity, or else it risks losing its competitive advantage over other countries, Cisco's CEO says.

EDITOR'S NOTE: This is Part 2 in a series on Cisco Systems CEO John Chambers and his views on technology trends. Click here to read Part 1.

Cisco Systems Inc.'s CEO is on the road, speaking at conferences large and small, including the Association for Federal Information Resources Management’s IT Visionary Series forum Oct. 19, and his message is clear: U.S. high-tech innovation and education is in danger of being superseded by emerging states — but it doesn’t have to be that way.

“A large part of future growth for every country in the world is going to be in developing companies,” said John Chambers, Cisco CEO and chairman of the board. But the United States operates as it did when he was growing up, when 18 of the top 20 companies in the world were in this country, he said. “Now it’s in the single digits on its way to zero.”

For the United States to compete against emerging countries, “we’ll need more education, more innovation, and business and government will have to learn to work together,” Chambers said.

He sounded a similar theme at the Northern Virginia Technology Council's annual banquet, also on Oct. 19.

Chambers' view is not a unique conclusion. As National Academy of Sciences and National Academy of Engineering authors wrote in a 2005 report, “Rising Above the Gathering Storm,” “the United States is today a net importer of high-technology products. Its share of global high-technology exports has fallen in the last two decades from 30 percent to 17 percent, and its trade balance in high-technology manufactured goods shifted from plus $33 billion in 1990 to a negative $24 billion in 2004.”

Innovation is also down, the report states. “In 2003, only three American companies ranked among the top 10 recipients of patents granted by the United States Patent and Trademark Office.”

And U.S. education, especially in the sciences is faring abysmally, the report states. “In 2004, China graduated about 500,000 engineers, India 200,000 and America 70,000.”

Among other recommendations, the report suggests providing tax incentives for U.S.-based innovation. Chambers said he would take it further.

Chambers said one of the first things needed is to repatriate some of the estimated $1.2 trillion that U.S. companies make abroad by greatly reducing corporate tax rates. Along with increasing the tax credit for research and experimentation and related tax breaks, the idea was a central plank in the platform of Sen. John McCain (R-Ariz.) during his 2008 presidential campaign. Chambers was co-chairman of McCain's campaign.

The cuts would bring back about $800 billion, equal to the amount of President Obama’s stimulus package, and cuts are “what most of the world already does," Chambers said.

Within the next three to five years, Russia, China, India, Mexico, Brazil and other countries developing their high-tech industries will require that foreign companies invest some part of their income within the country, he said. “This is not an issue that’s going to go away.”

It also might not be as clear-cut as Chambers presents it. Although smaller corporate tax bites abroad do entice some U.S. companies to move operations, pressure in other areas also contribute. “Industry is doing relatively little basic research because of the pressure on it for near-term profits, profits next quarter,” said Norman Augustine, former Lockheed Martin Corp. chairman and CEO and chairman of the committee that produced the “Gathering Storm” report, in an interview with Washington Technology in 2009. “A recent survey of senior financial executives found that 80 percent said they’d be willing to not fund research and development in order to meet their next quarter’s projections of profits.”

The whole market system needs an overhaul and more innovative thinking, Augustine said. One suggestion that would make a huge difference is changing the capital gains tax structure to allow a sliding scale, he said. For example, “if you held an asset that produced a gain and held that asset for one day, the capital gains tax would be 99 percent. If you held it for 10 years, the capital gains tax would be 1 percent. Then you could draw a curve between the two points to produce whatever revenue you wanted."

“That would change the way CEOs made decisions. It would change the way people invested. It would change the tax policy, and it would cut out all this nonsense that goes on in New York about getting rich quick. Let’s get rich over time. I think that would make a huge difference.”

Power, broadband and angry parents

IT is a driver for “the rapid transformation that is taking place in business and government today,” Chambers said. “Now, almost everything we do, from health care and education to defense and interaction with the citizen, will have the network behind it.”

Understanding how IT will enable process changes is crucial, he said. “The first thing I ask the leader of a country when we go in is: What are your top five priorities?” he said.

Next, he said, he looks at how IT can help accomplish those objectives. “But when you start to implement these, don’t necessarily go after the highest payback ones,” he advised. “Go after the one with the group that will support you. Because very often, the most successful groups in government and business are those that are the source of change.”

Fast, universally available broadband is the foundation for even more change that could help awaken the U.S. public to the threat of a less-than-super-powered future, Chambers said.

“One of the great things about IT is that it breaks down barriers,” he said. “Americans are going to realize that the education we’re giving our children is not competitive. Parents, instead of comparing their child’s education to that [offered] by the school down the block, they’re going to be looking at how much better the education is that children are getting in Europe or Asia.”