Tuesday, September 27, 2011

Should We Reward or Punish Our Companies?

Parents when you are raising your children have you noticed that if you punish a behavior you do so to get less of that behavior, and conversely if you want to encourage the behavior you reward it? Do you think that by reversing the action and punishing the behavior it would lead to an increase? It seems that the Obama Administration does.

One of the onerous taxes in the Obamacare legislation is an increased excise tax of 2.3% on medical devices to help pay for Obamacare. Companies like The Cook Group of Bloomington, IN are quite concerned about the impact it will have on their bottom line and business. The Cook Group President, Ken Hawkins, estimates that the tax will slice $17 million from its yearly revenues starting in 2013. This has already caused Cook to stop cut back its U.S. spending now. Except for one Canton, Illinois, plant that Cook has committed to build in the home town of its founder, Bill Cook, "I've had to put all other small manufacturing plant plans are on hold as a result of this tax." Hawkins said. "It's the wrong kind of tax at the wrong time, on the wrong industry, and I think for the wrong reasons."

The device industry fought and won a reduction of the increased tax from 4.6% to 2.3% on everything from knee implants, heart stints, slings, walkers, hearing aids and more. A new industry sponsored study done by the Hudson Institute sponsored by AdvaMed, concludes that even the reduced rate will damage the industry as if it had a mild stroke. The study projects that the tax will nearly double the corporate tax rate on the medical device industry, causing it to shift 10% of its production to low tax offshore sites and shrink its U.S. employment by 11% or 45,700 workers.

The conclusion of a liberal think tank Families USA president, Kathleen Stoll, believes that most medical device companies should be able to offset the taxed-away revenues by reducing profits, CEO salaries, and shareholder returns. I wonder if she ever studied a single business class.

One of the largest U.S. device manufacturers, Boston Scientific Corp., said it would eliminate up to 1,400 jobs in the next two years and hire 1,000 new workers in China. Ray Elliott, CEO of Boston Scientific said it "discourages job creation, investment, and economic growth by limiting available R&D funds." Cook;s Hawkins said companies, such as his, will drop, or not develop, products with less profit potential. Today Cook stocks 15,000 different products, and many are marginally profitable. If new taxes cut incomes to the innovation-oriented device business he said "Those kind of niche products are going to never be done. And no one would ever know what products we never invent."

Wouldn't it make more sense to cut taxes to U.S.Companies, one of the highest corporate taxed countries in the world today, rather than punishing them? Who pays for these taxes? Each and every one of us. Through increased product cost, through lost jobs, lost revenue from those lost employees, and through lower standards of living without the miracle engine of innovation and discovery stripped by punishing those innovators. If we want to start standing in lines like Old Moscow for whatever the state produced that week, this is a step in that direction.