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The swinging pendulum: Where is it headed next?

January 2, 2015
TAGS Cuba / trade
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There is a delicate balance between ownership and labor, and government and business, and the pendulum that swings between those balances affects your life.

I recently watched a “60 Minutes” report on Cuba. You can see the ravages of socialism in the film clips of Havana. The other extreme was pre-“trust busters” America, when railroads, banking and critical industries were under the control of a few powerful and politically well-connected individuals.

As a small business advocate, unions are supposed to be my natural opponent. I once heard it said that General Motors got the union it deserved. My grandfather started working at Buick in Flint in 1918, working 10-hour shifts without breaks. The expectations of workers at that time were not what they are today, and a job in manufacturing probably was more attractive than eking out a living on a farm in Cheboygan. His description of an auto industry job sounds harsh, but it was a different time. In fairness to the UAW, without it, conditions would be the same in 2015 as they were in 1918.

In 1918, GM had absolute control. By 1970, the UAW had attained the upper hand. Conditions of 1918 are no longer acceptable for labor — and the UAW dragging the corporation into bankruptcy also is not acceptable.

Near balance is what makes things work. Absolute balance means nothing happens. The pendulum swinging too far means failure due to excess profit-taking or excess wages and benefits. Excess profit-taking leads to loss of creativity and attention to quality. Excess wages and benefits lead to short-term benefits for workers followed by complacency and a sense of entitlement.

Government has no limit to its need for taxes, just as the robber barons had no limit to their need for profits. Teddy Roosevelt brought a balance of power between government and corporations. Just as the GM-versus-UAW struggle harmed the auto industry when the UAW attained the upper hand, the business-versus-government power struggle has harmed business since government got the upper hand.

In Michigan, at least, the balance of power has shifted.

With the implementation of the Michigan Single Business Tax, the state of Michigan forced on its business community a punitive, poorly constructed and regressive tax. The state was able to use its power of law to levy taxes on businesses that were unable to afford them because the power structure was out of balance.

As the population of Michigan began to understand that liberal policies were destroying the state’s employment base, the pendulum swung in favor of business and we eliminated the Single Business Tax and became a right-to-work state.

On the federal level, the flow of the balance of power shows up in the tax structure. In Washington they spend first, then look for revenue after they have broken the bank. Business sometimes does the same thing but is quickly brought under control by the owner, board of directors, bank, etc. Bankruptcy is the final solution for companies that stay out of balance. Economic stagnation is the fate of government that is out of balance.

There are two tax plans that never went into effect because the system of balances worked.

In the mid-’80s, I learned from staffers in the Senate of a tax plan that was being championed by Ted Kennedy. Some liberals realized that wealth was being accumulated by individuals tax free by not selling appreciating assets. Ted, being a savvy economist, came up with a brilliant tax scheme. Taxpayers would list all of their assets at the beginning of the year at market value. They would then list all their assets at market value at the end of year. The tax would be based on the increase of a taxpayer’s net worth at the end of the year.

I hope I don't have to explain the nightmare of administrating such a tax. My point is that such an absurd concept was actually considered.

Another tax concept that failed was the flat tax. It sounded so reasonable: Write your income down on a card. Apply the applicable percentage. Send it in on a postcard. East Coast billionaires such as Steve Forbes were pushing hard to get it implemented.

There was a major flaw. Interest and dividend income were not taxed. Now why would a person who had inherited billions push such a tax? Could it be that if you inherited a fortune, the bulk of your income would be dividends and interest?

I had the privilege of participating in a panel discussion in Washington with Stanford University’s Alvin Rabushka, who had designed the tax. It is amazing how smart people can use their intellect to justify a ruse instead of coming up with real solutions.

Those two tax proposals represent the yin and yang of political tax activists. One is absurd in its complexity and destructive effect on individual security building. The other is absurd in its simplicity and its unfair treatment of earned versus passive income. One would punish the owners of assets and the other would punish the working people in favor of those with substantial assets.  

Michigan was once a union-dominated state with a small business tax structure that would have made Carl Marx smile. Now we are a right-to-work state with a less-than-perfect but improving tax structure.

Our current federal tax system is a mess but it could be worse. The unions will struggle to get Michigan back under their control, and who knows what insanity is being considered for revenue enhancement in Washington.

The pendulum will swing and it is important to your business to know where it is, where it is headed and what you can do to make it swing in your favor.

Paul Hense is the retired president of local accounting firm Hense & Associates. He is also the past chairman of the Small Business Association of Michigan.

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