Noting U.S. taxes and regulation, one venture capitalist says: 'We'll invest in China instead and let them do it.'
By Henry R. Nothhaft
Harvard Business Review, 193 pages. $26.95
By NICK SCHULZ
The prophets of American decline are on the march in numbers not seen since the days of Jimmy Carter and stagflation. Who knows, maybe this time they'll be right—a sclerotic political system, enterprise-stifling regulations, a foolish tax structure and shortsighted public policy may finally send the U.S. economy into the permanent tailspin long predicted by experts with a grim turn of mind.
Henry Nothhaft is not one of these professional declinists. His first-hand experience with the way America does business nowadays has prompted him to raise an alarm with "Great Again"—and to propose several ways to restore American dynamism and creative vigor. (click below to read more)
Mr. Nothhart, a veteran Silicon Valley entrepreneur who is the CEO of the technology-miniaturization company Tessera, chronicles how difficult it has become, particularly in California, to start capital-intensive enterprises. Excessive regulation and Washington policies, he argues, undermine initial public offerings and discourage the launch of businesses that provide jobs and drive productivity.
Another disincentive to start a business in the United States: corporate taxes. As Mr. Nothhaft notes: "America now has the highest corporate tax rate in the world," with the exception of Japan—and if state taxes are figured in, we beat the Japanese too. The federal 39.2% corporate rate is higher by half than the 25.2% average among the nations, most of them European, in the Organization for Economic Cooperation and Development.
Mr. Nothhaft profiles Conrad Burke, a 44-year-old, Irish-born physicist and technology entrepreneur who heads Innovalight, a Silicon Valley company that has succeeded in producing liquid silicon semiconductor material, which may prove vital to the solar-power industry. "It's probably harder for a start-up to raise money than it's ever been." Mr. Burke says. "Especially for any sort of manufacturing. Yes, Silicon Valley is still innovating. But it's mostly the Twitters and Diggs and other software start-ups that don't need much capital."Money for companies that require capital to produce tangible products is much harder to come by. Why? Mr. Burke recites the environmental, safety and other bureaucratic regulations that raise costs and slow creative ferment. He also highlights the tax burden beyond the corporate rates. When his company paid $10 million for German manufacturing equipment, California levied a "use" tax—Innovalight was using equipment purchased outside the state—of nearly a million dollars. "That's not a tax on our income," Mr. Burke says, "it's a tax on growing our business."
It might be tempting to dismiss these gripes as the usual complaints of the business class, but consider the consequences of such a tax and regulatory environment. Venture capitalist David Ladd's bluntness is startling: "We would not fund a company that was building hardware or semiconductors, nor any of the tough physical sciences," he tells Mr. Nothhaft. "We'll invest in China instead and let them do it."
This is no idle threat: In 2009, there were 16 silicon semiconductor plants built world-wide. Six of them were in China. How many in the U.S.? Just one, and that was in upstate New York, a long way from San Jose. Regulations and taxes are helping drive the silicon out of the Valley.
And despite the recent successful LinkedIn public offering, there is no doubt that the regulations imposed on public companies by the Sarbanes-Oxley Act of 2002 have considerably dampened the IPO market. When Mr. Nothhaft was preparing a mobile-Internet firm called Danger to go public in 2007, he says, the company had to spend $3 million and many precious man-hours to become Sarbox-compliant. When the law was enacted, Mr. Nothhaft dryly observes, the government estimated that the average cost of compliance would be $91,000.
Then there is the U.S. patent system, an essential function of government meant to nurture and protect business. Instead, the U.S. Patent and Trademark Office has become more a corporate inhibitor. How many patent applications were stacked up, awaiting approval, as of the first of the year? A "staggering" 1.2 million, the author reports. That's triple the number of a decade ago. To be fair, the patent office isn't entirely to blame. It is chronically underfunded by Congress, which in the past 20 years has diverted to other uses more than a billion dollars in fees collected by the office.
With patent applications languishing, weakening intellectual-property protections, companies encounter more trouble finding funding. Technological advance slows. Despite all the talk on both ends of Pennsylvania Avenue about the need for more jobs, Washington is crippling one of our most effective economic stimulants.
Compare the American business environment with some of its competitors in Asia. The corporate tax rates alone are astonishing. In China, the author reports, new semiconductor manufacturers don't pay any taxes for the first five years and for the next five years pay only half the top rate of 25%. Many high-tech manufacturers in China are entitled to a permanent 15% rate. Taiwan also offers a five-year zero-tax policy for manufacturers. Qualifying firms in Singapore are exempted from corporate taxes for 15 years, followed by an additional five years with rates as low as 5%. And such deals are not restricted to low-wage markets: "Germany, Ireland, Israel, and most other non-Asian nations also provide manufacturers with major tax incentives."
Mr. Nothhaft does not fit the Silicon Valley stereotype of the college dropout tinkering in a garage. He's from a small Pennsylvania manufacturing town, a Naval Academy graduate who served as a Marine captain in Vietnam. He has a deep love for a country that has been very good to him. His common-sense advice in "Great Again"—cut corporate taxes, reduce regulatory burdens, rev up the patent office—would go a long way toward making sure that America will be just as good to those who come after him.
Mr. Schulz is a fellow at the American Enterprise Institute and the editor of American.com.
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