new dog old trick

Setting the Stage for a Value Added Tax?

I hate to be cynical and distrustful of my government. But lately it seems to be the only attitude that makes sense. The latest reason - the new rules buried in the ObamaCare legislation requiring 1099 reporting of any business transaction over $600. You don't suppose these rules have some purpose beyond "healthcare reform" do you?

Jeff Cornwall posted yesterday about this issue. This is a huge change in the use of 1099 forms and will generate millions of 1099 forms to the IRS. As Jeff says ...

There is a change coming in 2012, that could drown small business under a sea of paper work. It involves a huge expansion in the requirements to file 1099 forms. Historically, 1099 forms were used by the IRS to capture income paid to freelance workers and other independent contractors. But not anymore. Now 1099's will need to be filed for hundreds and even thousands of transactions entered into by small businesses.

Jeff's post points to some other sources if you want more detail on the regulations.

But my question is WHY! Why has our governing class imposed this new regulation on business? What purpose is served? What purpose is served by the additional costs on businesses of all sizes to conform to these new regulations? What purpose is served by the additional governmental costs associated with processing, auditing, etc. these regulations? And what the heck does it possibly have to do with ObamaCare and the "reform" of the American healthcare system? How is healthcare improved by forcing me to tell the IRS that I purchased $1200 in tea from a wholesaler in Oregon or paid $3000 to a web design firm in Franklin, TN?

Again, I hate to be cynical, and I'm usually the first to make fun of conspiracy theorists, but it seems to me that one distinct possibility is that this regulation is intended to help set the stage for a Value Added Tax (VAT). There has been a lot of buzz out of Washington about the need to generate more revenue to pay down the massive increases in the federal deficit being generated by the Obama administration and its friends in Congress. The favorite means for raising that additional revenue is a VAT. A Value Added Tax works by adding a layer of taxes on top of goods and services at each step in the value chain. For a VAT to work, the tax authorities must have documentation on all of those transactions from business to business to business all along the path to the ultimate final consumer. And what does this new 1099 regulation do? It creates exactly such a paper trail.

If one were distrustful of the motivations of our governing class, one might suspect that having mandatory tax paperwork for every meaningful business-to-business transaction was setting the stage for introducing a VAT at sometime in the near future. If such reporting, or some meaningful subset of such reporting, is already mandated, the government can show how little incremental cost impact the VAT would have on businesses. But one would have to be very cynical and distrustful of our government to believe such a thing. Of course, one also has to believe that our government can think that far ahead on anything, so there is that factor working against my theory.

Father Robert Sirico at Belmont

Yesterday Father Robert Sirico spoke at Belmont University (where I teach entrepreneurship as an itinerant part-time adjunct professor). I attended his public speech and also was invited to sit in on a faculty roundtable discussion with Father Sirico. Father Sirico is co-founder and President of the Acton Institute. He gave a bracing speech titled "A Moral Analysis of the Economic Crisis". Even though I've been aware of Fr. Sirico since he first spoke at Belmont back in 2005, I must admit it is still a bit unsettling to see and hear a Catholic priest giving an unapologetic, intellectually rigorous, and energetic defense of free markets. Aren't clergy all supposed to be closet socialists?

I wish I more often heard our President or others in our political leadership give such a clear and reasoned defense of free markets and so many of our founding ideals. Even more, I wish they acted on such beliefs.

I really enjoyed the opportunity to hear Father Sirico. And thanks to my friend Jeff Cornwall for inviting me to the faculty roundtable.   

Unemployment statistics, entrepreneurship, and economic recovery

We're all aware to some degree or other that unemployment is now somewhat over 10%. We also understand to some degree that 10% is a lot of unemployed people - 1 out of 10 of us is out of work. But, as this article outlines, the real number that we should be focusing on indicates that closer to 1 in 5 people is really in need of a job.

The difference between 1 in 10 and 1 in 5 is the difference between the U-3 rate and the U-6 rate. U-3 measures the number of people out of a job and actively searching for a new one. That's the statistic that was at 10.2% for October. It's also the number generally cited by any news reports on unemployment. Arguably the more critical number relative to the health of the economy is the U-6 rate, which clocked in at 17.5% in October. U-6 is the statistic that includes everyone counted in U-3 plus "discouraged" workers (i.e. those who don't have a job and have stopped actively looking for a new one) plus those who are only working part-time but want full-time work and others who are underemployed. The number of people that an expanding economy must absorb back into the work force is represented much better by the U-6 rate than the U-3 rate. And even U-6 doesn't reflect the new workers that are being generated every year by new cohorts of high school and college graduates coming into the workforce for the first time.

The sheer magnitude of the U-6 number is one of the reasons that many are concerned that any recovery may be "jobless" or seem that way for quite a long time. We've got to add back an awful lot of jobs before we start to absorb all those people in the 7.3% of the workforce above and beyond the 10.2% U-3 number.

Anyone who as been paying attention to recent postings here (all 2 of you) also know that recent research shows that the vast majority of net new jobs in the U.S. economy over the past 20 or more years have been generated by young (not just small, but relatively new) companies. Unless something is happening to totally change that fact - and to my knowledge nobody thinks that something that fundamental is changing in the economy - that means that the companies that are going to hire most of the unemployed and underemployed are companies that were started within the past five years or will be started in the next two or three years. And with startup activity apparently down over the last year or so - and with attitudes and policies in Washington that are in many cases hostile to young and small business - it becomes even more difficult to see how the U-6 number comes down significantly or rapidly over the next few years.

Unemployment going to 12%?

A year or so ago, maybe less, the idea of unemployment going to 12% or more during the current recession seemed highly unlikely. Now that we've seen the course of the recession develop a bit, seen the "stimulus" plan not deliver a lot of stimulus, seen the new administration in Washington and it's cronies in Congress unveil huge spending and tax programs like the Climate Change bill and the various healthcare bills, and seen the generally anti-entrepreneurship and anti-small business attitude in Washington it is not so far-fetched at all to talk about 12% unemployment not only being reached but lasting for some time.

Here's one perspective on where employment is heading. It's from economist David Rosenberg as reported by James Pethokoukis on his blog at Reuters in a post titled: "12 reasons unemployment is going to (at least) 12 percent".

Gluskin Sheff economist David Rosenberg, formerly of Merrill Lynch, thinks the unemployment rate is going to at least 12 percent, maybe even 13 percent. Optimists, Rosenberg explains, underestimate the incredible damage done to the labor market during this downturn.

Whether you agree or disagree, it is a scenario for which we need to plan in the event that the analysis is correct. If you are an entrepreneur, what would this mean for you? Is it bad news? Or is it opportunity as large numbers of candidates are available in the labor pool to fill needs that you may have? Does it mean that you can keep a job in the U.S. that might have gone overseas? Does it mean that you have access to skills at a price you might not have been able to afford otherwise? Is this all necessarily bad news (it clearly ain't all good news, but I'm convinced that where there's bad news there's almost always a pony buried somewhere nearby).

Follow-on Big Shift report

John Hagel and John Seely Brown and the Deloitte Center for the Edge have just published the second analysis of what they call "The Big Shift". The first report defined their Shift Index and analyzed the Big Shift long-term trends at the level of the entire U.S. economy. This new report analyzes those same trends at the level of 14 specific industries.   

The new industry report is lengthy and I haven't digested the full report yet. But Hagel summarizes some of the key findings of the report in a post on his Edge Perspectives blog. Read his post to get a summary or follow the links in his post to download the full report.

All of the analysis of The Big Shift is thought-provoking and loaded with implications for public policy, entrepreneurship, leadership of existing enterprises, etc. Some of it helps explain trends and shifts that we've seen happening around us for quite a few years. Some of it is predictive relative to additional changes that need to happen as we move forward. Those who read the shift and whose timing is good in acting on the shift are likely to be big winners in the next stages of the evolution of our economy.

Business Model Fest for NewDog

Wow, it's looking like 2009 will go down as the year of business models around here. First the business model centric Getting to Plan B by John Mullins and Randy Komisar, which we just got done reviewing. And then today, a brown box shows up in the mailbox and out pops my copy of the just published Business Model Generation by Alex Osterwalder and Yves Pigneur. It's a fantastic-looking book that I am very much looking forward to reading this week.

Business Model Generation is the result of a lengthy project that is described on Osterwalder's website/blog The book describes a complete process to help you understand, design, and differentiate your business model. It includes a great visual tool for modeling and describing a business model.

The book itself is the result of an interesting design process and is not your standard business book. The book's design and the thinking behind it is also discussed on Osterwalder's blog (just scroll down a little way) or on the book's website. It's very much the result of real design thinking by a talented team of collaborators. My congratulations to all involved!

There will be more on this subject later this week after I've had a chance to read the book. But I'm looking forward to not only discussing Osterwalder and Pigneur's thinking but comparing and contrasting their view of a business model with that of Mullins and Komisar.

Another subtle issue with VAT taxes

Jeff Cornwall posts today on the momentum that seems to be growing for VAT taxes in the U.S. Jeff points out some issues with VAT taxes, esp. relative to the burden that VAT taxes place on business for additional compliance and reporting costs. From the perspective of small business and entrepreneurial business, VAT taxes are highly problematic due to the disproportional cost impact of compliance activities. Yet another additional burden that will suppress job growth and entrepreneurial activity.

There's another aspect of VAT taxes that should frighten us all relative to their imposition. I strongly believe that one reason political elites like VAT taxes is that VAT is almost invisible. It gets baked into the cost of all goods, so the consumer never really is aware of the amount of VAT that is included in everything that they purchase. In this sense, it's even more invisible than a standard sales tax, which is added at the cash register on top of the shelf or list price of goods. VAT on the other hand is included in the list price.

Having lived in Europe for a time during the 90s, what I recall is that as an American I was generally aware of the fact that prices for most things seemed higher than we would pay in the States, but locals generally did not have that perspective in their day-to-day shopping. Now, Europeans were certainly aware of the cost differences in a general sense, hence the fact that any Europeans visiting the U.S. would stock up on all sorts of clothes and other products when they were here. But to a much greater degree than a sales tax or income tax the VAT becomes invisible. The same relative degree of increase in VAT will not generate the same degree of awareness or opposition as an increase in income taxes.

This insidious aspect of VAT is something we should all worry about before signing off on adding a VAT to the tax mix in the U.S.  Personally, I think we'd all be better off if all taxes were very visible and in our faces whenever we pay them.  For example, gas pumps should be forced to display clearly every tax that's baked into the price of a gallon of gasoline.  Every tax should be as visible to us as our income taxes are on the bottom of the form 1040 every April 15.  It should be an integral part of being an informed citizen, instead of cattle for the political and corporate elite to bamboozle from Washington. 

On the other hand, a VAT is a consumption tax instead of an income tax, so it is less burdensome on those who invest and save vs. those who consume. In that sense, many feel a VAT is more "fair" (whatever the heck that somewhat slippery term means). Personally, I'd prefer that at least some degree of the tax burden in the U.S. be shifted to consumption taxes and away from income taxes. But I'd also strongly prefer that to be part of a much larger rethink of the tax code in the U.S. that moves away from today's massively complex, loop-hole and preference ridden disaster of a tax code and toward a clean, flat-tax based income tax code possibly combined with some form of consumption tax. If done right that could and should result in less compliance costs for all businesses, less bias in the tax code against small business and entrepreneurs, and lots of productive resource freed up from tax-related administrivia, game playing, and rent-seeking.  Odds of this happening seem vanishingly small, but it's good to have dreams.

UPDATED - to expand and clarify some of my original points

Entrepreneurship and The Big Shift

A couple of connections between entrepreneurship and The Big Shift (TBS) clicked for me while I was reading the research report I've discussed here and here. I'm not sure if those connections are valid but they still work for me after a few days of consideration.

I see the "entrepreneurial economy" that has risen in the U.S. over the past 25 years or so as partially being both cause and effect of TBS. The drivers behind TBS have created waves of disruptive innovation in industry after industry which partially gives rise to the dramatic rise in topple rate found by TBS researchers as well as helps create the dramatic rise in competitive intensity. Once this starts it seems to me that another impact of the digital technologies that are being deployed in the big shift is that you get a self-reinforcing spiral of innovation, more toppling, even more competitive intensity, etc.

All of the disruption of industry leaders has also led to many workers being shaken loose from companies impacted by lower ROA, increased competition, etc. I think that's had the effect of creating lots of new entrepreneurs. Some of these new entrepreneurs felt pushed to start businesses due to changes in the economy while some viewed it as an opportunity to take control of their own destiny. Some transitioned back to established company jobs when one came along but many came to love the combination of freedom, control, passion, learning, etc. that they felt as entrepreneurs.

Now, the Big Shift isn't the only driver to all of this. Globalization is as well, although it seems to me that TBS and globalization have a bit of a cause/effect relationship too. I think we'd be seeing big changes in the economy due to globalization even without the rise of digital enabling infrastructures, etc. But, I think that TBS has enabled the effects of globalization to accelerate and intensify - which also has driven greater rates of entrepreneurship in both the U.S. and elsewhere.

Key findings of the Big Shift project

I talked about The Big Shift project a couple of days ago as research that I felt was fundamentally important to understand. Here are some key findings of the research as summarized by Big Shift co-author John Hagel on his blog.

For the moment, though, we have a report that draws attention to some of the key findings in the Index. The report is accessible here. Perhaps the most interesting findings can be summarized as follows:

• Return on assets (ROA) for U.S. firms has steadily fallen to almost one-quarter of 1965 levels at the same time that we have seen continued, albeit much more modest, improvements in labor productivity.
• The ROA performance gap between winners and losers has increased over time, with the “winners” barely maintaining previous performance levels, while the losers experience rapid deterioration in performance.
• The “topple rate,” at which big companies lose their leadership positions, has more than doubled, suggesting that “winners” have increasingly precarious positions.
• U.S. competitive intensity has more than doubled during the last 40 years.
• While the performance of U.S. firms is deteriorating, the benefits of productivity improvements appear to be captured in part by creative talent, which is experiencing greater growth in total compensation. Customers also appear to be gaining and using power as reflected in increasing customer disloyalty.
• The exponentially advancing price/performance capability of computing, storage, and bandwidth is driving an adoption rate for our new “digital infrastructure” that is two to five times faster than previous infrastructures, such as electricity and telephone networks.

Given these long-term trends, we cannot reasonably expect to see a significant easing of performance pressure as the current economic downturn begins to dissipate—on the contrary, all long-term trends point to a continued erosion of performance. So what can be done to reverse these performance trends?

The return-on-assets gap was not something that I recall reading anywhere before and was just one of the bits of information that caught my attention the first time I read the summary of the research. More to come.

The Big Shift

Last week I discovered, courtesy of a post by Irving Wladawsky-Berger on his weblog, the recent research report The Shift Index. I downloaded both the entire research report, as well as the abstract. I then went back and dug out my July-August issue of Harvard Business Review which has an overview of the Shift Index. I believe that this is important research that deserves to be widely read and discussed.

The Shift Index research was developed under the auspices of Deloitte's Center for the Edge. The effort was led by John Hagel and John Seely Brown, two very respected thought leaders.

What's the Shift Index about? Here's Irving Wladawsky-Berger's summary:

As we all know, digital technologies are causing long-term transformations in the global business environment. The team at the Center for the Edge has been studying these long-term business transformation, which they named the Big Shift . They have been trying to render explicit some of the major drivers behind this historical transformation, as well as providing an overall framework for research on the subject.

Here's John Hagel's take on what sparked the research project...

... everyone acknowledges that we are in the midst of a fundamental shift playing out on the business landscape on a global scale over many decades. We may not all agree on the exact dimensions of the big shift, but the reality is so widely recognized that it is often unstated. When we looked for indices that gave us some insight into the nature and pace of this big shift, we pretty much came up drive [dry?]. There were isolated measures and one-off analyses, but there was nothing resembling a comprehensive index of key metrics updated on a regular basis.

So we decided to develop one. We had a team work for about six months developing the conceptual framework for describing the dimensions of the big shift and how these dimensions related to each other. We then spent the next six months working to define the specific metrics for a Shift Index and collect and analyze the data related to these metrics.

This research strikes me as very meaningful. It's complex, and multi-faceted, work of significant depth, even at this very early stage of development. I believe the work has many implications.

I am particularly struck by the predictive implications of the research as it relates to entrepreneurship and public policy. I'll post more on the subject here later.

I suggest starting with either the abstract of the full report or the Harvard Business Review article, which is a somewhat abridged version of the abstract.

The full Shift Index report can be downloaded here.

The abstract can be downloaded from co-author John Seely Brown's website.