The companies of the US economy hold two types of resources crucial to growth: intellectual capital and financial capital. These two different types of capital depend upon each other. It takes money to hire the best talent, and it takes the best talent to further increase monetary results. A healthy economy has an equal distribution of these two types of capital across companies, industries, and geographic locations. In the modern US economy, and especially in its tech sector, these two resources are being further driven into granular locations. The intellectual capital is further compressing itself into the Silicon Valley region and the companies based there are stashing their profits out of this country entirely in non-taxable offshore accounts.
The contemporary American economy has moved from producing hard goods to the swift innovation of the modern tech startup. Never before has it been easier to bootstrap a company and directly begin creating a technological value proposition. This speed to market is enabled in a large part by the venture capital firm, which has become an all-in-one investment house, consultancy, and PR agency. Venture backed technologies have become the fundamental driver and tool for almost everything we do today, providing the backbone for finance, health, education, manufacturing, design, media and research.
Since today’s tech industry is so reliant on venture capital, if we were to graph American innovation we could start with the locations in which investment is occurring. Below is a geographical heat map showing the investment portfolios of four VC firms: Andreessen Horowitz (including seed fund), NEA, In-Q-Tel, and Kleiner Perkins. Please note that the investment portfolios of these firms are constantly changing. These numbers were pulled from their online portfolio pages in early 2014.
There is nothing inherently wrong with these VCs’ investing practices (especially because it is working), but it does bring up some interesting questions about the tech industry at large. It is simply a fact that major venture capital firms devote most of their technology investments to Silicon Valley. This has led this region to vast success and growth, but meanwhile many other parts of the country are in a state of decline and redefinition.
From a broad perspective, the centralization of the economy appears risky to have the majority of America’s (if not the world’s) most brilliant technical and financial innovators in one heavily concentrated area. This dense concentration of human capital makes Silicon Valley a potential target. This could manifest itself in many forms from man-made disasters, terrorist attacks, natural disasters, and pandemics. As a country, we put massive defense assets into protecting special events like the Super Bowl, but we are actively leaving our valuable human capital unprotected.
Another threat to the stability of the American economy is the tech economy’s financial capital sitting overseas. American tech companies are investing a vast amount of money outside of this country’s borders. The amount of money that has flowed out of the United States from large corporations is astounding, with an estimated, “$2.2 trillion in offshore earnings that are not being taxed by the U.S.” (Robertson, 2013). The biggest offenders are large technology companies. In fact, the top ten corporations with the highest amount of money currently being held overseas are in the technology industry. The top 25 corporations alone have a combined $429.3 billion in cash sitting overseas.
Why are American CEOs reluctant to bring this financial capital back to this country? The answer is simple business sense. The US currently has the highest combined (federal + state) corporate income tax rates in the industrialized world at 39.1% (Pomerleau, 2013).
What is the solution to these problems? My plan is a multifaceted strategy that includes:
- Setting up tax-free zones in select areas to spur economic development of cities across the US.
- Positioning these zones in areas that have existing infrastructure and potential to develop into economic hubs.
- Allowing US tech companies to re-patriot money into the tax free zone areas while bringing outsourced jobs back to this country.
- Create incentives for tech companies to move to some of their personnel to these new regional offices and become mentors.
The tax-free zones will allow companies that have been sheltering and investing money overseas for tax purposes to bring that money back to America without it being taxed at the average rate of 39.1%. As long as they invest it into one of these designated tax-free zones for a period of 10 years, the repatriation of this investment should be tax-free. This plan, when executed, will have direct and instant impact on the economies of the regions surrounding these tax-free zones. The by-product will reduce the national security threat from a single area to a more geographically disbursed area, while simultaneously boosting the economy and redistributing human capital throughout the United States.
There should be 5-10 zones at any given time, so that the investment of money is concentrated enough to make a major impact on the economy of a given zone. These zones will grow and develop at dramatic rates due to the movement of factories, offices, and people into the area through long term committed investments by these technology companies. Once the zones have reached a critical mass of human and financial capital, they will be rotated out of the system so that a new zone could be added.
The location of the tax-free zones is an important part of the program. Each potential zone will be evaluated on a combination of factors including the existence of modern infrastructure with the potential to scale, proximity to a major research university, current state of the economy, and local culture and recreation. Obviously many areas in the United States fit these criteria, but there are three potential zones that seem ideal.
Detroit, Pittsburgh, and the region encompassed by parts of Iowa, Nebraska, and Missouri are the leading candidates to take on this new innovation status. All of these areas have infrastructure capable of supporting an influx in population, while also providing resources to support a modern tech economy. They all have elite educational institutions and large research universities to fuel the human capital necessary for innovation. Better yet, they have all shown some early success in fostering tech startups capable of growth down the line.
This plan is obviously just a start. It is about identifying problems and risks with the American economy and coming up with a creative solution. I have intentionally left out a lot of the details here as a means of spurring conversation. If you want to read more details please check out my extended white paper.
Our most successful companies should be thinking about the US first – Let’s start thinking about Pittsburgh, Blacksburg, and Vicksburg before we think of St. Petersburg.
Robertson, J. (2013). Microsoft, IBM Top List of U.S. Tech Firms with Biggest Overseas Profit Hauls. Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-08-13/microsoft-ibm-top-list-of-u-s-tech-firms-with-biggest-overseas-profit-hauls.html
Pomerleau, K. (2013). Another Study Confirms: U.S. has One of the Highest Effective Corporate Tax Rates in the World. Tax Foundation. Retrieved from http://taxfoundation.org/blog/another-study-confirms-us-has-one-highest-...