FedEx CEO: ‘Dysfunctional’ Tax System Is Stunting Job Growth

FedEx CEO Fred Smith recently vented his frustration with the U.S. tax system in an interview on CNBC. When it comes to spurring much needed growth in the private sector, Smith thinks the answer is very straightforward.

“Change the U.S. corporate tax system,” he said. “It’s very dysfunctional, and it retards investment. And investment, in turn, is what creates GDP growth and jobs.”

According to Smith, innovation and investment drive growth and wealth. Yet, today’s tax system is “prejudiced towards financialization, leverage and lack of investment.”

So he suggested his own prescription: lower the corporate tax rate, take out all of the special deals and deductions and provide an incentive for investment.

“I believe that the main reason the United States clawed out of the recession of ’08 and ’09 was the President’s support of expensing, the bonus depreciation . . . You get to the same place, you can either lower the tax rate to a worldwide competitive level of say, 25 percent, or you can provide an incentive for capital investment and investment tax credit, permanent 100 percent expensing, and, in fact, the administration supported, and in a bill that just passed, they have 50 percent bonus depreciation but it’s only for one year. It’s very straightforward, and I think there is agreement. It’s the politics that keep it from getting done.”

 

  • Fellow Traveler

    So it’s the politics that are stunting the investment.

  • John Dorman

    At a 0% corporate tax rate and no investment expensing, the effective price of an investment to the corporation (paid for with profits) is the full sticker price.

    At a 0% rate and FULL expensing, the price is still the full sticker price.
    (This is because though the expense will reduce pretax profits, the 0% rate means that the company gains nothing by doing so.)

    At a 50% rate and NO expensing, the price is the full sticker price.
    (Without any expensing, the investment must be paid for with post tax profits)

    At a 50% rate with FULL expensing, the investment is HALF price.
    (If a company makes $100K pretax profits, and fully expenses a $50K investment, then they reduce their pretax profits to $50K, meaning their post tax profit is $25K. If they had not made the investment, then their post tax profit would be $50K. This means that the investment actually only cost $25K)

    With full expensing of investments, the higher the tax rate, the cheaper it is to invest. In fact, the price of investments will be 100% minus the tax rate.

    This CEO gets the picture half right. We should actually raise the rate, but also make full expensing permanent. To be fair, this will give companies an incentive to make unwise investments. To make financial sense, that $50 investment above would only have to increase next year profits by $25K, which is clearly inefficient on its face. The upside is that the risk of innovation is dramatically decreased. Additionally, some company does receive the $50K, and they will have the same incentive to expense an investment.

    So not only would we increase the incentive to invest, the increased investment actually creates a feedback loop. To sweeten the deal, American companies would have a competitive advantage in technology development and increasing productive capacity.

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