Saturday, October 25, 2008

Mr. Main Street

There's an excellent article in today's Wall Street Journal about Fred Smith, CEO of Fed-Ex. It brings up an important point regarding tax policy and the flow of capital. Something we all need to think about as different solutions to the financial mess are bandied about:

...national policies that favor what he calls "the financial sector over the industrial sector."

"Rather than in our business where you have to have a dollar of equity for, 10 cents or 15 cents of debt," he explains, "it's exactly the opposite in the financial sector where you have one dollar of equity for 10, 25, 50 times risk."

"Not too many young people coming out of school are studying to be production managers at General Motors." He says that most of FedEx's first line managers come not from the top flight universities, but out of community colleges and the military.

He has come to hold the get-rich-quick Wall Street financiers in more than a little disdain. He views the heroes of the U.S. economy as the companies that actually produce real goods and services. He sees the Wall Street collapse as an inevitable byproduct of investment bankers building multitrillion dollar debt pyramid structures.

So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? "We've got to reduce the taxes on equity. Let companies expense their capital purchases."

This is how the "tax the rich, spread the wealth" mentality serves to hurt producers and enrich companies that don't add value to the economy. At a bank, the liabilities are the assets. Although the bank itself adds value by holding the debt, there is little to tax under the current system. Meanwhile, companies that actually make things have to claim revenue in order to buy capital equipment. They are then taxed at 38% on their revenue.

Fed-Ex employs 290,000 people, mostly blue collar, community college graduates and former military. Who do bankers hire?

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