Lessons From Caterpillar's London, Ontario Exit - Page 2
People have families and need jobs, and we must never be casual about laying off folks. However, the market decides which companies will survive. With cooperation and flexibility, informed managements and unions should be able to find long-term sustainable solutions. Even so, job guarantees come from the market. Workers play a key role in being productive, cooperative, and behaving like owners.
Here are lessons, I think these three parties, government, unions, and the public, can take from the Caterpillar exit.
We must eliminate special breaks for businesses. Giving a tax incentive to move to an area is myopic. Unless the business is structurally sound, with solid products or services, tax benefits are makeshift, and market conditions will drive the business away to other temporary tax havens.
Replace these concessions with a zero corporate tax regime, and good infrastructure. This sounds unpalatable only because the news media, and the unions will assail it. Today, we tax businesses on their profits, both retained and distributed as dividends. This is nonsense. Why do we penalize retained profits? Tax only dividends that are paid out.
Therefore, a business would pay no tax, but it would withhold taxes on dividends paid to shareholders. Imagine the simplification to the tax code! So, if a business made $1 million profits, it would pay no taxes. If it pays dividends of $500,000, it would withhold 15% and pay it over to government. The business can use the remaining $500,000 to invest in machinery and equipment. It would get no special tax allowance for the investment, because it would pay no taxes.
Individuals getting $500,000 dividends would do tax returns as usual, and offset amounts withheld from their total tax liability.
Government revenues would be reduced along with major reduction in its expenses to administer the tax system. Most of all, business would have an incentive to invest its retained profits.
Did Caterpillar bargain in bad faith? I do not know. Were they prepared to destroy long-term shareholder value to close the plant? I do not think so. Unions must accept that businesses’ goal is to produce an adequate long-term return to shareholders; that is it. Unions must stop looking at a specific period’s “good” profit, and try to hike the business' future cost structure, based on it.Continued on the next page