Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: tax, Big Tech and influencing the debate, Playboy’s NFT play, Dogecoin and the deli, the chip crunch, and Veblen goods. To sign up for the Capital Note, follow this link.
Feeding the Crocodile (Part Deux)
This may have to be a pinned quote around here:
Each one hopes that if he feeds the crocodile enough, the crocodile will eat him last. All of them hope that the storm will pass before their turn comes to be devoured. But I fear greatly that the storm will not pass. It will rage and it will roar ever more loudly, ever more widely.
From CNBC last week:
Chamber of Progress, a new tech industry group funded by giants like Amazon, Facebook and Google, is announcing its support for a corporate tax increase like the one President Joe Biden proposed to fund his $2 trillion infrastructure plan.
The move sets Chamber of Progress, a new center-left group, apart from other business organizations that have opposed Biden’s tax hike, like the Business Roundtable and U.S. Chamber of Commerce. While the group’s endorsement does not reflect the individual views of each company that funds it, it does send a signal that the tech industry is open to higher tax rates and supports greater infrastructure investment.
Chamber of Progress launched late last month and is an industry coalition focused on a range of economic, social and consumer issues, including creating a social safety net and tackling income inequality.
Biden proposed raising the corporate tax rate from 21% to 28% to help fund his American Jobs Plan, which includes infrastructure proposals that span the entire economy. The plan includes money to expand broadband availability, which is key to the success of internet businesses, and other priorities the tech industry has emphasized, like clean energy.
“The plan speaks to a lot of goals that I think many people in the tech industry have wanted to see for a long time,” Adam Kovacevich, founder and CEO of Chamber of Progress, said in an interview with CNBC on Wednesday.
I cannot help wondering if their shareholders feel quite the same way.
A quick glance at the Chamber of Progress website shows that, as its name would suggest, its agenda covers rather more than Biden’s optimistically named “American Jobs Plan.” Among the list of causes for which the chamber proclaims its support are “Progressive Taxation” (given that the U.S. already has that — and dramatically so — this must mean the chamber favors an even more progressive tax system: Enough is never enough). Inevitably, it also calls for “bolder climate action.”
Read on, and what we see is yet another demonstration of how “stakeholder capitalism” (the idea that a company should be run in the interests of various stakeholders, of whom shareholders are just one class) fits neatly into the classic corporatist ideal of a society that should be run on the say-so of varying interest groups.
Chamber of Progress is a new tech industry coalition devoted to a progressive society, economy, workforce, and consumer climate.
Our volunteer Advisory Board includes a diverse cross-section of leaders from government, Democratic politics, public interest, and industry. Advisory Board members provide input on the organization’s work, priorities, and strategies. Advisory Board members do not play a formal governance role in the organization, and do not necessarily agree with every position taken by the Chamber of Progress.
Meanwhile, in an article on Medium, Adam Kovacevich, the Chamber’s CEO, discusses the planned tax hike in more detail.
For years Silicon Valley leaders have urged a bigger federal government investment in infrastructure — from clean energy to better roads to broadband. Now President Biden has proposed to pay for this investment by increasing the corporate tax rate. That’s a deal that the tech industry can support.
Recent headlines have highlighted business community opposition to Biden’s corporate tax hike. But business isn’t monolithic in its views. Tech industry leaders like Amazon’s Jeff Bezos and Lyft’s John Zimmer have registered their support for a corporate tax rate hike.
While no company leader would eagerly increase their company’s tax bill, there’s a growing recognition in the tech industry that the United States needs sizable investments in both tangible and human infrastructure. As Treasury Secretary Janet Yellen recently wrote, “by choosing to compete on taxes, we’ve neglected to compete on the skill of our workers and the strength of our infrastructure. It’s a self-defeating competition.”
The idea of “the race to the bottom” is, however, something of a myth. As I noted a couple of weeks ago, here is what the Tax Foundation had to say about that:
Contrary to the proposal’s claims about a “race to the bottom” on corporate tax rates, reductions in corporate rates have plateaued for more than a decade. When the U.S. cut the federal statutory corporate rate from 35 percent to 21 percent in 2017, it was not leading a race to the bottom but moving to the average. The U.S. combined (state and federal) tax rate on corporate income is now 25.77 percent. The average corporate rate among countries in the OECD (excluding the U.S.) is 23.4 percent.
Or here is an extract from the Wall Street Journal’s editorial on this topic:
If this is a race to the bottom, most national capitals are conspicuously ambivalent about winning. Global corporate rates have never converged at the floor set by the biggest tax cutters.
Instead, the name of the game has been tax reform. Competitive innovation in the mechanics of national tax codes—such as credits and deductions for physical investment, or treatment of research and development costs and intellectual property—is the true race.
To cite one example, the United Kingdom in its new budget proposes to increase the headline corporate rate but to partially offset that with a tax credit for investment in physical plant. It’s a flawed plan, but the goal is to lift investment to boost the post-Covid-19 recovery.
This type of tax competition was central to the 2017 Trump tax reform, not that Ms. Yellen or other architects of the Biden proposal want to admit it. They focus on the reduction in the federal top marginal corporate tax rate to 21% from 35%, while ignoring provisions that broadened the tax base . . .
So far as infrastructure is concerned, the idea that it has been neglected is also not entirely moored in reality — as David Harsanyi pointed out here:
Our infrastructure, as you’ve no doubt heard, is “crumbling.” Reporters have been perfunctorily repeating this claim for decades. I’m relatively certain the last time the word “infrastructure” was uttered without “crumbling” was before I was born. In 1986, the New York Times editorialized that “our crumbling infrastructure” was a “national disgrace.” By 1992, numerous publications were lamenting the nation’s “crumbling” infrastructure. Bill Clinton warned that the infrastructure was “crumbling.” Barack Obama said we had “crumbling infrastructure.” Donald Trump also said infrastructure was “crumbling.” And until all of us are riding high-speed bullet trains to our union jobs assembling solar panels for the common good, the infrastructure shall continue to crumble.
In Pittsburgh last week, Biden rolled out his $2 trillion “American Jobs Plan” — which will be coupled with another reportedly $2 trillion effort to fix our health care system, again — to fix the “crumbling infrastructure.”
Biden does a lot of big thinking with your grandkids’ money. Two problems: One, the infrastructure bill has as much to do with traditional infrastructure as his COVID-relief bill had to do with the pandemic — which is to say, if we’re being generous, about 7 percent of its spending. Two, we already “invest” a ton of money on our infrastructure, which is, despite perceptions, in pretty good shape.
Of course, the American people love to hear about new roads, highways, and bridges. For many voters, “infrastructure” is about the pothole they hit on their way to work rather than the thousands of miles of roads they drive on that are safe and fine. Around $115 billion of President Biden’s bill would be allocated for the type of “infrastructure” most people are probably imagining. The rest is another grab bag of left-wing policy wants, union bailouts, and green-energy projects . . .
Adam Kovacevich takes a sunnier view of the president’s plans for infrastructure (it is well worth reading his article in full). Under the circumstances that was to be expected, but I was struck by his comment that “tech industry leaders have clamored for years for these kinds of big investments in training, manufacturing, and clean energy.” Fine, but if so, who were they speaking for? Themselves, “stakeholders,” or the shareholders to whom they, you know, owe a fiduciary duty? The same question can be asked with reference to Kovacevich’s headline “Tech Industry Leaders Are Happy to Pay Their Fair Share.”
As so often, the word “fair” is doing a lot of work here.
Read on some more, however, to find this:
America’s leading tech companies operate globally, so it’s in America’s national interest to have a fair global tax system. For the past few years, European countries have singled out American tech companies for discriminatory “digital service taxes” on their European sales — despite the fact that the US levies no discriminatory tax on, say, German-made BMWs sold to American consumers.
The Biden Administration recently rebutted these tech-targeting proposals with a fairer proposal to tax all global sales by the world’s top multinational firms. The Administration is also lobbying for a global minimum tax rate to avoid a global race to the bottom. The tech industry is cheering Secretary Yellen’s leadership on this front.
U.S. companies also need to be able to compete fairly against foreign competitors, and that’s why Congress should focus on how to fairly tax U.S. companies’ foreign revenue. Our tax system should also continue encouraging companies to invest in research and development. And Congress should take a close look at how the current cap on state and local tax deductions might threaten the ability of tech companies to attract talent.
Kovacevich is quite right to highlight the extent to which some European nations have singled out American tech companies for “digital services taxes” (indeed, it has seemed likely that more will follow suit). A critical part of the dealthat Biden is offering other countries in exchange for accepting the derogation to their sovereignty represented by his proposed global minimum tax is for an increased share in their tax take from the largest multinationals. What the tech companies must be hoping to get from this is that any grand bargain will include the shelving of what Kovacevich correctly describes as “discriminatory” digital-service taxes.
Put another way, it is hard not to suspect that at least part of the thinking of some of the companies funding this new chamber flows from a recognition that taxes are going to be increased anyway and that it would be better to try to influence the way that such changes are structured rather than to simply oppose them. (Note also Kovacevich’s reference to the tax treatment of R&D expense, as well as to the SALT deduction.) That would be a position easier to reconcile with what shareholders, at least traditionally, have expected their managements to support. More broadly, I would guess that a good number of these companies will hope that the existence of this “progressive” chamber will be helpful when it comes to pushing back, say, against efforts to undermine the gig economy or against attacks on the immunities provided by Section 230 of the Communications Decency Act, or, for that matter, against the antitrust onslaught that the tech sector is likely to face.
To the extent that this is the case, it would, in a way, be a far more ambitious variant of the (failed) strategy (which I discussed here) adopted by the U.S. Chamber of Commerce of throwing a few bucks at Democratic candidates in the hope that it would make a difference. However, my guess is that, at least so far as the gig economy (probably), Section 230 (probably), and antitrust (almost certainly) are concerned that it will fare no better given the current political climate. On tax, a great deal will depend on how other countries react to Biden’s suggestions. And that, from the tech companies’ point of view, may well be bad news. On the other hand, and taking a longer view, it could well be that the Chamber of Progress could yet come to establish itself as an element in the corporatist state that is now under construction, a stakeholder state of which much of Silicon Valley appears, unwisely, to favor, so there is that.
Around the Web
Playboy, NFTs (and, of course, a SPAC)
A tale from the bubble era:
Playboy — yes, that Playboy — has become the stock market’s hottest play for NFTs with its shares jumping more than 150% since returning to public markets via SPAC on Feb. 11, even after a 20% correction over the last two days.
What’s happening: Having shed its roots as a magazine dads kept hidden under their beds and rebranded as a sexual health and lifestyle brand, Playboy, now PLBY Group, is catching fire as investors look to cash in on the company’s brand recognition and its future on the blockchain.
The intrigue: Playboy is working with companies like Nifty Gateway to offer fractional ownership in the company’s original artwork — think the original Marilyn Monroe Playboy cover or the Kim Kardashian centerfold — as well as artwork the company has accumulated over the years and sell their digital rights as NFTs.
The company also is shifting what it means to own an NFT — after dividing digital ownership rights into fractional shares, Playboy will retain an ownership piece that will pay the company long after the original sale.
What we’re hearing: “NFTs for us are a really interesting opportunity to monetize not only new work that we would commission but really those 10 million pieces that we have in our archives plus our 5,000-piece art collection,” PLBY Group CEO Ben Kohn tells me on the latest episode of “Voices of Wall Street.”
“We have a Matisse in our board conference room that John Lennon actually put a cigarette out in one night when he was in the Playboy mansion on a bender.”
Don’t sleep: Kohn’s pitch is not about Playboy’s ability to capitalize on the moment but on the company’s ability to deploy NFTs as a long-term revenue stream that can create a brand new collector base and keep earning money from those collectors literally forever.
“We can dictate what terms we want moving forward. …Not only can you receive 80% of the initial sale, every subsequent sale thereafter you receive 10% of.”
“So the same thing works whether we do it with Nifty, SuperRare [digital market on Ethereum] or even on our own platform, we can create a down-market revenue stream that lasts in perpetuity.”
The bottom line: Playboy’s model of divvying up and selling digital rights while also retaining a partial ownership stake and holding onto physical copies and copyrights could open up new revenue streams for dozens of other companies with similarly recognizable brands.
“The ability to monetize that over time, both through original pieces, creating new pieces, creating collages off of it, it becomes really, really interesting,” Kohn says.
“We believe for us, long term, there’s a big business there.”
A paragraph from the bubble era.
Bloomberg’s Matt Levine on a $2 billion (or $100 million) deli and Dogecoin’s 4/20 surge:
We talked above, and yesterday, about the deli. People find the deli’s $100 million, or $2 billion, valuation very strange. But the deli is real! Dogecoin is explicitly a joke and it’s worth more than Ford Motor Co., because it’s 4/20 today. And you’re going to go to work today and build a discounted cash flow model for some industrial company and try to figure out its debt capacity and how to market it to potential strategic buyers, as though any of those things were things.
In the event, Dogecoin did not fare so well as some expected yesterday, so there’s that.
The Wall Street Journal:
The world’s leading suppliers of semiconductors are pushing to overcome the prolonged chip shortage that has hampered production of everything from home appliances to PCs to autos.
Chip makers are trying to eke out more supply through changes to manufacturing processes and by opening up spare capacity to rivals, auditing customer orders to prevent hoarding and swapping over production lines. The bad news is, there are no quick fixes, and shortages will likely continue into next year, according to the industry’s executives.
On top of a spike in demand, producers have been hamstrung by a series of freak events that have knocked out supply, while ongoing U.S.-China political frictions and concerns of a prolonged shortage have prompted some manufacturers to stockpile chips.
The current shortfall includes the less-advanced chips that the industry’s biggest players have been pulling away from to pursue higher-margin, cutting-edge chips. Building new production capacity usually takes years.
That could slow down the post-pandemic recovery for certain industries that use the chips that are looking to take advantage of rising consumer spending. It also feeds into inflation concerns as higher chip costs can stoke prices throughout the economy.
Claire Jones and Jamie Powell writing in the Financial Times:
A bombshell in the world of men’s shoes hit Friday, via an email from shoe retailer Herring:
“We have just been informed that Church Shoes Ltd have decided to increase their prices to reposition their brand at a higher price point. As a simple example, in the UK the price of Consul, a black calf, toe-cap Oxford will increase from the current price of £495 to £720.”
Yes, you read that right — north of £700 for a pair of shoes from a luxury brand that some customers have complained has seen quality wane since Prada Group’s takeover in 1999.
The price hike might not be as mad as it sounds.
It looks to us as though Church’s might be trying to take advantage of a concept economists refer to as Veblen Goods. While demand for most goods falls as the price rises, the opposite is the case with Veblen Goods. The idea being that the higher the price, the greater the cachet of the good, and the more people covet it. Think expensive street fashion label Supreme, prestigious private schools, Air Jordans or err, the Financial Times. (If you want a wider index of these sorts goods, we recommend inflationista favourite The Chapwood Index for a more comprehensive list.)
That, famously, was a concept that could be seen at work among the so-called New Russians, the business class that did well — very well — after the collapse of the Soviet Union. They were the subject of envy, mockery, and a few good jokes, many of which ran on these lines:
New Russians Ivan and Sergei compare similar new watches.
Ivan: How much did you pay for yours?
Ivan: Poor you. I paid $10,000.
Perhaps you had to be there at the time: hastily, back to the FT:
In the current climate, positioning yourself as a Veblen Good would make a lot of sense. One of the most profound aspects of the economic impact of the pandemic is that a lot of people at the top of the wealth pyramid have done much better than those further down. They’ve also had a lot more to spend on consumer durables, what with there not being so many opportunities to dine out or holiday.
No surprise then that, in the early stages of the pandemic, we saw demand for (and the prices of) luxury staples like Hermes’ Birkin Bag rocket. Given the nature of the recovery, perhaps what’s more surprising is that more high-end fashion manufacturers haven’t followed suit . . .
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