How You Can Start and Operate a Soup Kitchen

Mission Possible: How You Can Start and Operate a Soup Kitchen

Use investment tax credits to create American jobs

by Martin Tuchman, CEO of the Tuchman Group and the Vice Chairman of First Choice Bank

Budget cutting and tax increasing alone will not reverse the worst economic downturn since the great depression. In fact, in the short-run most budget cutting measures, i.e., cutting the defense budget, reducing the federal workforce, freezing domestic discretionary spending, will increase the nation’s staggering unemployment rate. Increasing taxes is also not a solution since it removes capital from the most productive sector of job creation: the private sector. To solve our nation’s economic problems we need to dramatically stimulate private investment.

The solution rests with the private equity firms that coincidently are flush with cash, have a reasonable long term view of infrastructure initiatives, and a distribution system that can spread the risk and raise the capital over many markets. The one element missing is an incentive to pry loose the billions of dollars sitting on the sidelines.

One such catalyst could take the form of an Investment Tax Credit (ITC). The nice thing about an ITC is that you only pay for success. We must be clear as to what the credit is being issued for, and simple in its application.

The tax credit serves two purposes. First, it allows the private equity firm to enhance its yield on the project, by effectively reducing its initial cost by the amount of the tax credit. Secondly, it tends to reduce the risk, should the investment not work out as expected.

It is my opinion that this credit should be 25% with 15% applied in year one and 10% in year two.
Since this is a “success based” program, much of the tax credit will come back in terms of payroll tax, as a result of the additional jobs created, as well as corporate taxes collected from the enterprises receiving the investments having the ability to earn profits. It is important to note that every dollar of American manufacturing generates $1.37 in additional economic activity, more than any other economic sector.
It is necessary for us to act with some degree of urgency, since it is not only the current pressure of so many of our citizens not being gainfully employed, but as time goes by these positions will be permanently lost, with no chance ever returning to this country.

The situation is a bit complex, so I will simplify it by using a specific case.

There are two major manufacturers of refrigerated units and generator sets that are utilized by the maritime industry used to keep perishables at the proper temperature as these goods are shipped from the Far East to the west coast of America. Once the refrigerated containers are removed from the vessel, they lose their electrical connection from the ship and must be plugged into a land based generator set.

The two manufacturers are Thermo King and Carrier. Recently Thermo King closed their US factory and opened one in China. The US workers were laid off, the factory dismantled and the operation moved to China, where long term leases were signed, investments made in employee training and a factory was built to produce these units in China. The cost to Thermo King is lower than it was before, for a variety of reasons; labor, components, rent, local taxes, etc. all lower than the US. In China, the government sets all of these items. No free market, no unions, no negotiations.

These generator sets are sold to vessel owners who are for the most part foreign operators. The manufacturer, Thermo King is still owned by the shareholders of the company. Indeed, they may be in the pension plans of many US citizens. Eventually, when the timing is right, an offer will be made for Thermo King by a group of Chinese investors, perhaps sponsored by the Chinese government. The company will then be 100% owned by the Chinese. Thus an entire industry will have left the United States, never to return.

The workers as well as the owners will no longer be Americans. The vessel owners, users of this product will also continue to be non-US entities.

A recent article in the Wall Street Journal (December 5th) titled “Chinese Clones, Sells Russian Fighter Jets”. It appears that a year after the collapse of the former Soviet Union, a cash strapped Kremlin began selling China a portion of its vast military arsenal, including the pride of the Russian Jets, the SUKHOV-27 fighter jet.

For the next 15 years Russia was China’s biggest arms supplier, providing over $20bil of fighters, destroyers, submarines, tanks and missiles.

After years of importing and reverse-engineering Russian arms, China has reached a tipping point; it can now build its own advanced weapons.

In the past 2 years Beijing hasn’t placed a major order from Moscow.

As mentioned, with the Thermo King factory, and its US workers, the jobs are lost forever. The labor force will continue to be under pressure as we relocate factories overseas.

There is, of course, little difference between protectionism and preservation of US jobs. And as long as our employment numbers are in the 4-5% range, we can afford, as a nation to be magnanimous, and take in goods and services that are either outsourced or made overseas.

However, once unemployment reaches the 8-10% area, it is time for an investment tax-credit to free up the capital currently residing at the private equity groups.

This is far more efficient than any kind of government run stimulus package.