Tax changes could save U.S. bacon

John Chambers says U.S. at risk of losing its competitive edge

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Visionary Series forum Oct. 19, and his message is clear: U.S. high-tech innovation and education is in danger of being superseded by emerging states — but it doesn’t have to be that way.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.”

About the Author

Sami Lais is a special contributor to Washington Technology.

Reader Comments

Mon, Oct 25, 2010

Wasn't there recently a tax amnesty for repatriation of overseas profits for companies, with companies supposed to use the money brought into the US to create jobs and invest in R&D? and haven't companies used the repatriated profits to make larger payments to shareholders/management? So don't US taxpayers have a right to demand some sort of commitment from companies to their side of the bargain before, before enriching them further. Companies with foresight will do this anyway without any additional incentives. They are not suffering from a shortage of funds, most of sitting on enormous amounts of cash - and they can borrow at very low rates.

Mon, Oct 25, 2010 Puregoldj Bethesda, MD

I was at Lockheed Martin when Norm Augustine was the CEO, and he was great asset to the company, because he understands technology, was able to think outside the box, and focused on sound strategy rather than on instant gratification. He has also consistently had great ideas about how to move industry and the economy forward. I heartily endorse his idea about the sliding scale on the capital gains tax -- it would eliminate the incentive for short term speculation which provides all the wrong financial incentives, and would reward more sensible investment based on longer term economic soundness. The politicians should listen to this guy more; he'd probably be a far superior economic advisor than the usual insiders from the financial industry.

Mon, Oct 25, 2010

Another idea would be to not change corporate but personal income tax. The cost of employees in the US places competitive advantage on foreign employees. Replace the personal income tax with a flat tax on finished goods. The government could generate the same amount of income with a 10% tax while eliminating the extensive manpower and database needs of the IRS. Win-Win!

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