by Marco Rubio
As my progressive young students listened to me explain why government was preventing them from using their cell phones to get home from the bars on Saturday night, I could see their minds change. They went from fervently believing that big government is necessary to protect the little guy to realizing that big government is often used to stick it to the little guy. Before I knew it, I was talking to a bunch of twenty- and twenty-one-year-old antiregulatory activists.
It was another one of those times when my students surprised me. The entire identity of liberalism as a political movement is built on the idea that liberals stand for the less powerful, that big government is necessary to fight big business. But as my students learned, the truth is often the opposite. More often than not, big business co-opts big government—and vice versa—and they work together. After all, big corporations can afford to influence government, and the little guys can’t. And the more power government has over the economy, the more those with the power to influence government win. Big business uses its influence to create regulations—typically under the guise of public safety or some other seemingly unassailable good—that it can afford to comply with but smaller companies can’t. Aided by the indispensable help of the coercive power of the state, big business gains a competitive advantage. Those of us without lobbyists on retainer have less opportunity, higher prices and less choice as a result.
Some call this “crony capitalism.” Both parties are guilty of it, but for liberals it presents a serious ideological challenge. After all, if the effect of liberal big-government policies is to put the powerful ahead of the powerless, what exactly do liberal progressives stand for? My Senate colleague and liberal populist hero Elizabeth Warren had a point when she told a MoveOn.org audience last year that “the game right now in America is rigged. It is rigged so that those at the top keep doing better and better, and everyone else is under increasing pressure, is under increasing economic strain. The rules don’t get better for America’s middle class. The rules are getting better for those who are a thin slice at the top.” As I said, Senator Warren had a point—it just wasn’t the point she thought she was making. It is government that is increasingly rigging the game against the working and middle classes.
A good example is a guy named Brad Soden and his marvelous invention, the Tankchair. Brad has been described as a “robotics savant.” But he’s really just a regular guy—he didn’t even go to college—with a talent for engineering and a wife, Liz, whom he loves. In 1999, Liz was in a car accident that left her paralyzed from the waist down. To make it possible for her to continue to go on family hikes, Brad began designing and building a wheelchair that could go off-road. He worked mostly in his garage at first, using whatever he had on hand—a lawn mower engine, an old air-conditioning unit. By borrowing some ideas from the army’s Bradley Fighting Vehicle and remote-controlled fighting robots, Brad eventually came up with the Tankchair. One writer described the Tankchair as “a wheelchair in the same sense that an aircraft carrier is a boat.”1 Instead of wheels, it has tracks. It can climb hillsides, traverse beaches and go up to thirty miles per hour.
Brad Soden’s gift of independent movement to his wife has since become Tankchair LLC, a family company that employs Brad, Liz and Brad’s parents. They custom build about two hundred chairs a year. Brad is a veteran and a lot of his customers are wounded warriors. He’d like to expand his business and employ disabled vets to build more chairs. What’s standing in his way is crony capitalism. Government is by far the single largest purchaser of power wheelchairs, through Medicare. If a company can’t get Medicare reimbursement for its power wheelchairs, that company can’t be competitive. But getting certified in order to be reimbursed by Medicare can cost a manufacturer up to $1 million in meeting government safety and other regulations. This government-created barrier to entry into the power wheelchair market has allowed the big manufacturers who can afford to get into the market to hugely inflate their costs without fear of being undercut by competition. One report found that Medicare pays these manufacturers four times what it costs to make power wheelchairs. The bill for this overpayment, of course, is ultimately paid by all of us. Meanwhile, Brad Soden, an innovator, entrepreneur and humanitarian—everything we should be encouraging in our economy—is frozen out of the market.
We’re all familiar with government picking winners and losers in the “green” energy market—mostly losers, it turns out, like the failed solar panel manufacturer Solyndra. The rampant crony capitalism in the green energy field is only the beginning of the story, however. As I will discuss in Chapter Five, the Affordable Care Act contains a provision that has been called a “slush fund” to guarantee that participating insurance companies don’t lose their shirts from Obamacare. When I introduced legislation to remove this bailout provision from the law, I was flooded with calls from insurance company executives telling me they couldn’t participate in Obamacare without the provision. These were the same executives, by the way, who had lobbied to get the law passed. The “slush fund” was their reward for supporting the law. With it, they won’t lose money even if premium prices go through the roof. Instead, the taxpayers will pay the bill.
Crony capitalism takes what we need most for our economy today—innovation, investment and a level playing field for competition—and squelches it. When big government and big business get together, political conformity—not innovation—is rewarded. Government spending crowds out private investment and companies that aren’t favored by government can’t attract private investors anyway. Most blatantly of all, this competition is the opposite of fair. To “unrig the game,” as Senator Warren might put it, we need less investment in government and more investment in America. We need to reward innovation, not political access. Most of all, we need a level playing field for U.S. businesses, large and small.
Ending crony capitalism is made more difficult by the fact that these programs are always passed in the name of helping the middle class and struggling Americans. To sign the ineffectual, pork-filled 2009 stimulus bill, President Obama traveled all the way to Denver instead of walking to the Rose Garden. Why? His press secretary explained that the trip “shines a light on the issues that average Americans are facing.” It makes me think of an “average” American family I’ve become acquainted with, the Broyleses, and how they fared under another law that was passed to “help” them.
Daniel and Becky own a small home furnishings store in Orlando called Foreign Accents. They sell unique handcrafted items from all over the world. The recession hit their business hard. Walk-in traffic to their store vanished. Longtime clients dropped them, and their biggest contracts were terminated. To survive, they turned to putting expenses on multiple credit cards. They knew it was a desperate move, but they had no choice. Sure enough, it backfired. After a few missed payments, the banks hiked their interest rates and the debt on their shoulders began to compound.
At this point—as in every time of trial in their lives—Daniel and Becky turned to their faith to get them through it. With three boys who depended on them, they prayed every day that God would reveal the right way forward. Becky considered going back to school in order to get an outside job, just so they could have a steady income stream and hopefully some benefits. But despite all the talk and all the spending in Washington, jobs remained scarce—good jobs were practically nonexistent. Taking a flier on finding decent outside work didn’t seem like a safe bet against the cost of going back to school.
Eventually, around 2012, the Broyleses’ business began to turn around. A couple contracts for hotel banquet tables started trickling in. Customers started returning to the shop again. Business wasn’t what it had been before the recession, but it was enough to break even and keep the debt from rising. And then, just when Daniel and Becky had convinced themselves to continue working hard to keep the doors of their business open, the government stepped in to “help” them again. The Affordable Care Act hit the Broyles family—and thus
their family business—hard. Their health insurance premium had been rising by small amounts each year for a while. But when the law went into effect in 2013, it shot up from $520 to $660. Worse, their deductible doubled, from $2,500 to $5,000. They couldn’t afford it, so they dropped their coverage and turned to a faith-based program called Medi-Share, which allows members to spread out the burden of health care costs and coverage.
Daniel and Becky’s business is still operating—for now, anyway. They love their work and they draw great meaning from it. Their oldest son helps out while he works toward his online bachelor’s degree. They’re not bitter, but you sense that they feel the system is stacked against them. Any success they have seems to come despite the mandates coming from Washington.
The Broyleses’ story is a graphic, real-life example of how our political leadership—from both parties—is failing families who can’t afford to influence the agenda in Washington. What they really need is not another expansion of the federal government disguised as help for the middle class. What they need is a strong and growing free-enterprise economy. This has been Washington’s greatest failure of all. It has failed to put in place policies that would foster such an economy in this new century.
Fostering a strong and growing free-enterprise economy in the twenty-first century means meeting four fundamental challenges: making America the best place in the world to invest and create jobs, keeping America the global leader in innovation, ensuring access to markets and consumers for American products, and winning the global competition for the most talented and innovative people. It’s fair to ask how meeting these challenges would help a struggling home furnishings store in Orlando. The answer is the same way it helped my father when he was tending bar in Miami or the way it helps the hardworking Uber driver in Washington D.C.: through the wealth-generating multiplier effect of an unfettered market economy. American investment and ingenuity creates jobs and careers in building automobiles and airplanes, creating personal computers and the Internet, or discovering new biomedicines and developing apps for smartphones. Then the people who have these jobs buy houses. And when they need to decorate their houses, they come and see Daniel and Becky Broyles.
Our first challenge is to make America once again the best place in the world to invest and create jobs.
There was once a time when there were only a handful of countries you could possibly invest in with any degree of confidence. But now there are dozens of developed economies capable of and willing to host new investment. This is good news for global prosperity. But for America, it also means we have competition. Today, capital investment moves freely across borders, landing wherever it can generate the best return. Americans are in a daily contest to attract investment here, to persuade investors to start a new business or grow an existing business in our country instead of abroad. In this contest for global investment, the United States has put itself at a great disadvantage.
As hard as it may be to believe, the country that produced Ford Motor Company, IBM, Microsoft and Amazon has the highest corporate tax rate of any advanced economy in the world. Combining federal and state taxes, our corporate rate is nearly 40 percent. The global average is under 25 percent. On the basis of taxes alone—putting aside the cost of regulations and labor—it is more expensive to invest and create jobs in America than in most other developed economies in the world. If we stick with this status quo, we risk losing the next great American company before it has the chance to begin. Already every day seems to bring news that yet another company has relocated its headquarters to Canada or Ireland. Liberals question the patriotism of companies that do this to avoid high U.S. taxes, but they fail to acknowledge that this behavior, although regrettable, is perfectly rational, even necessary to survive in a global economy in which we have stacked the deck against our own companies.
This is especially true when it comes to smaller and midsize employers. After all, politically connected corporations are able to carve out loopholes in the tax code that shield them from its anticompetitive effects. General Electric is the poster child for this. While GE may not have reduced its tax burden to zero as was reported in 2012, it’s safe to say it didn’t pay the full 40 percent.
But what happens to the employer that can’t hire a large law firm to find the loopholes? What happens to the employer that can’t hire the Washington lobbyist to create the loophole? What happens is that either they open overseas or, more likely, they never open at all.
It starts with not having access to the money to open up in the first place. Over 70 percent of new businesses are launched using savings or by borrowing against assets, particularly houses.2 But the housing crisis all but choked off this source of investment funds. Therefore, making it easier for people to start new business in America begins by giving people access to more of their own money. Utah Senator Mike Lee and I have dedicated ourselves to begin to accomplish this through the development of a new, modernized tax reform plan. Our plan is broad and fundamentally both pro-growth and pro-family. I will discuss the pro-family aspects of the plan in Chapter Five. As for the plan’s pro-growth emphasis, it rests on creating new investment in American jobs by lowering taxes and leveling the playing field.
Because so many small and new businesses pay their taxes on personal income tax returns, our proposal integrates both the individual and business sides of the tax code in order to put small businesses on an even footing with big corporations. It prioritizes replacing our current business tax system with a new, globally competitive model. Instead of carving out exemptions for favored industries that have lobbyists, we propose a pro-growth tax code that treats all employers equally, regardless of their business structure. Furthermore, our plan would allow American employers to be more competitive with foreign companies by lowering our tax rate on businesses.
We also propose allowing employers to immediately deduct every dollar they invest back into their business. The Treasury Department estimates this deduction would stimulate investment about four times as much as lowering the tax rate. The reason is simple. Being able to immediately expense investment would apply only to new investment, incentivizing businesses to undertake more of it.
As it stands today, when a business calculates its taxable income each year, it is allowed to deduct only its operating expenses, like wages, materials and taxes. Investment expenses, like new buildings and machines, are treated differently. Businesses generally aren’t allowed to immediately deduct these expenses. Instead, they have to pay taxes on that money and then write the costs off over several years or even decades. The result is that the current system discourages employers from reinvesting their profits back into the business to grow it, because deductions years in the future are worth less than deductions today. Our plan would change that by allowing all companies to take a full and immediate tax deduction on all the income they reinvest in their business.
Take the example of a business that brings in $50,000 per month, with $20,000 in basic operating costs. The owner has to decide whether to withdraw and spend the other $30,000 or to use it for investments that would grow the business, allowing it to hire more people. Under the current system, the safe thing to do is to withdraw and spend the money.
But under our plan, the company will immediately deduct every dollar that it reinvests back into the business. By allowing immediate expensing of investments, this cash is more likely to be invested, boosting productivity and leading to increased wages and the hiring of new workers. The more a business invests, the less the federal government will get to take away.
Our current tax system also encourages companies to keep the money they make abroad, and in many cases to incorporate abroad instead of in the United States. About 15 to 20 percent of the products made in the world are made by American companies operating overseas. We would like to see these companies bring the money they have made abroad back to America. We want them to invest their profits earned abroad to create new jobs here.<
br />
But our current code has the opposite effect. Under our current tax laws, if they bring this money back to America, they pay U.S. tax (with credit for any taxes paid abroad). As a result, there is an estimated $2 trillion of American corporate profits sitting in bank accounts overseas. To put it in perspective, this is equivalent to the total annual size of the German economy.
The answer is what is called a territorial tax system, under which companies are not taxed on profits brought home from abroad. The fact that the vast majority of developed economies in the world already have a territorial tax system—including all other G8 nations—has put American companies at a major competitive disadvantage. By keeping American firms competitive in the global marketplace, a territorial tax system will lead to job creation and reverse the recent trends of stagnant wage growth.
The second challenge posed by the new economy is to preserve and strengthen America’s position as the global leader in innovation.
In their fascinating book The Second Machine Age, MIT’s Erik Brynjolfsson and Andrew McAfee envision a future in which America can turn the challenges of the new economy into opportunities for better and more prosperous lives. Brynjolfsson and McAfee argue that we are at a historical technological turning point. Improvements in digital hardware, software and networks are combining to create an economic and lifestyle shift every bit as sweeping and profound as the industrial revolution.
The possibilities are genuinely exciting. Innovations that were previously confined to episodes of Star Trek are being realized in rapid succession. Brynjolfsson and McAfee predict we will have autonomous—self-driving—vehicles in our lifetimes, creating millions of hours of productivity for harried soccer moms and commuters. And not only have we created a computer that can beat a human at Jeopardy!, that computer is now going to medical school and its diagnostic capabilities are being uploaded to the cloud for the benefit of all humanity.