Columnist Lee Schafer provides short takes on economic incentives and choices, business strategy and performance, market moves, what business leaders are saying and doing and other topics that pique his interest.

The Perkins view: Unless Congress Acts, There's Going to be More Inversions

Posted by: Lee Schafer Updated: July 25, 2014 - 1:00 PM

The quarterly client newsletter from Perkins Capital Management was eagerly anticipated because, from an exchange of email, it was clear that founder and patriarch Richard “Perk” Perkins was going to address the Medtronic-Covidien tax inversion deal.

The transaction, a stock and cash deal that valued Covidien at over $93 per share, is also taxable for shareholders of both companies. This was a surprise to many longtime Medtronic shareholders, including Perkins, who have seen Medtronic acquire numerous companies before with no such tax.

The tax savings and balance sheet flexibility to be achieved by relocating to Ireland “all sounds great at first blush, and maybe it is in terms of creating long-term value, but it gives many Medtronic shareholders apoplexy in the form of a large tax bite, because the exchange of Medtronic shares for new Medtronic PLC shares is a taxable event,” he wrote.

“This is especially hard for Minnesota shareholders as Minnesota does not distinguish between long-term and short-term gains and, worse, all capital gains are the same as ordinary income for tax purposes. Therefore, a Minnesota resident could pay as much as 30 percent in combined federal and state tax on this exchange.”

The interesting thing here is a Perkins does not blame the company’s management or board for creating this taxable event, as the case for going ahead with a corporate inversion is such a strong one.

In this newsletter, he reprinted a chart produced by the Tax Foundation that ranked all 34 nations in the Organization for Economic Co-operation and Development by statutory corporate income tax rate.

At the top, at 12.5 percent, is Ireland, one day soon the home of Medtronic PLC. At the very bottom is the United States, with the highest corporate income tax rate of over 39 percent, considering also the effect of state taxes.

The average rate is 25 percent, and many of the countries with below average rates are less wealthy and so the effort by their policy makers to attract and retain businesses is at least understandable.

It’s also striking to see countries like Sweden and the United Kingdom, which are perceived to be high tax places, charging not only far less than the U.S. but also below the average of all these countries.

Unless and until Congress acts to lower the relative U.S. corporate income tax rate, Perkins wrote, expect the corporate inversions to continue.

How will Comcast vote its ValueVision shares?

Posted by: Lee Schafer Updated: June 13, 2014 - 4:52 PM

It’s coming down to the wire on the vote for the board members at ValueVision Media, and one of the most interesting questions is whether the decisive votes will be cast by somebody who maybe shouldn’t even vote – Comcast Corp., the cable TV giant.

ValueVision is also in the TV business, of course, as a TV shopping retailer. It’s had a long history with NBC, and until recently its shopping channels were known as ShopNBC.

Comcast acquired the relationship with ValueVision in its two-step purchase of NBC from General Electric. As of the last report, Comcast owned about 14.3 percent of the outstanding common stock of Eden Prairie-based ValueVision. GE remains in the relationship as well.

The activist campaign of Clinton Group to oust the board has been going on for months. Only shareholders with an appetite for tedium could have gotten through every page of all the filings.

Clinton’s effort now presents a choice for Comcast, although it is no ordinary shareholder. Through a shareholder agreement it has rights other shareholders do not have and has a cable distribution agreement with ValueVision to carry its shows.

It is very difficult, if not impossible, to imagine a scenario in which Comcast decides it has to vote to oust the board. It’s in business with ValueVision. It's has had executives on the ValueVision board during the tenure of the CEO Clinton Group has said also needs to go.

It would be more than a vote against a partner; it would be a vote against itself.

Oddly, however, voting for the incumbents also doesn’t seem to be a comfortable choice. Comcast has a distribution agreement with ValueVision. It gets paid to carry the company’s shows. And the activist campaign is about the performance of the company over time, which Comcast may not care to be seen as defending. 

The best option may be to abstain.

How Comcast votes won’t be disclosed -- although it’ll probably be apparent if more than 7 million shares show up in the abstention column.

Target's chief marketing officer: 'Speaking with honesty is a gift'

Posted by: Lee Schafer Updated: May 14, 2014 - 12:47 PM

The search for a CEO at Target has certainly led folks to assume that Target’s senior leaders are in maintenance mode until a new boss arrives.

Now, there’s more evidence to suggest that isn’t the case. It comes from a post by Target Chief Marketing Officer Jeff Jones put on LinkedIn last night. 

It was a remarkable thing for an executive vice president of Fortune 500 company to write and share publicly, but these are remarkable times for Target. And leaders need to step forward.

Jones was effective in part because he was a little unpolished -- and so he came accross as authentic in a way that a canned statement never does.  

Jones was responding to what’s reportedly an anonymous employee email posted on the website Gawker that said the company is in desperate need of help, direction and vision, starting from the top down,” in large part because of a culture of mediocrity and conformity around just being “Target nice.”

Jones replied that, yeah, it would have been better to have had this conversation face-to-face and not over the Internet. But he added, “The reality is that our team members speaking with honesty is a gift. Because much of what they are saying is true….and challenging norms is exactly what we need to be doing today and every day going forward.”

 “In the coming days and weeks we will embrace the critiques of Target -- whether it’s from outsiders or our own team -- like an athletics team puts the negative press on the wall in the locker room,” he continued.

He slipped a bit in to corporate-speak as he ticked off what is now happening inside Target.

“We are accelerating our innovation pipeline,” he said. “We are simplifying how decisions are made. We are exploding cultural symbols of bad behavior. We are searching for a new CEO…but in the meantime, we’re not standing still. Yes, the truth hurts. But it will also set you free. Our job now is to create a new truth and that is exactly what we are doing.”

Perhaps the most interesting part of Jones response was what he said to his marketing leadership team earlier, as related in his LinkedIn post. The work that lies ahead of them will be difficult, but the meeting the challenge will be the most interesting and challenging work of their careers.

“If you don’t believe this, if you are not reinvigorated at this very important moment in time, if you are too tired or too cynical for this work, please leave.”

Tax Burdens Really Can Get People to Move

Posted by: Lee Schafer Updated: May 2, 2014 - 12:11 PM

There’s been plenty of chatter the last year about how Minnesotans are planning to flee the state due to its heavier tax burden, particularly since income tax rates on the highest earners were raised last year.

Most of the talk is simply, “A friend said his neighbor’s uncle would be moving to Florida.” But it echoes in business, media and political circles.

Now comes a Gallup poll that could flip the conversation. It turns out Minnesota was very high on the list of states people didn’t want to leave even if they could.

The new poll, released this week, said that 25 percent of Minnesotans would leave the state if they could. Montana, Maine and Hawaii led the list with just 23 percent saying they would leave if they could.

A separate question, how likely it is someone would move, revealed that Minnesotans are largely planning to stay put. Only 9 percent said they were at least somewhat likely to move in the next 12 months. And the only three states ahead of Minnesota on this list were at 8 percent.

In contrast, fully half the residents of Illinois said they would leave if they could, and one in five reported that it was at least somewhat likely that they would. The residents of states like Connecticut and Maryland were only slightly less eager to leave.

Gallup also asked why someone wanted to move, and tax burden generally wasn’t the top reason given. It was the top factor for 8 percent of the people from Illinois, for instance.

Of course, this survey data says nothing about the demographic profile of those most inclined to leave, such as whether the small number of Minnesotans who told pollsters they may move turned out to be mostly high income earners nearing retirement age.

But another perspective on the impact of tax burdens in intrastate migration was offered this week by Bill Bergman of Truth in Accounting, a Chicago-based nonprofit trying to improve transparency and accuracy of government finances.

One of the exercises his group does is prepare of ranking of states for taxpayer burden, and by that he does not mean the taxes paid in a year. His “taxpayer burden” ranking adds up the net effect of all of the state government liabilities, including underfunded public employee pension programs.

The worst on his list, with per capita “taxpayer burden” of $49,000, was Connecticut. And it was second on Gallup’s list of states people want to leave. Illinois was fourth, at $31,600.

Minnesota actually fared well on this ranking, at about 38th in terms of “taxpayer burden.”

Bergman also consulted the most recent data from United Van Lines, which publishes an annual report on migration patterns between the states.

Of the 15 states with the highest tax burden, meaning state and local taxes paid as a percentage of income, and taxpayer burden as Bergman defined it, they were all near the top of United’s list of states with the most outmigration.

Of the top five on the United list of people moving out last year -- New Jersey, Illinois, New York, West Virginia and Connecticut -- only New York isn’t in the top 10 of Bergman’s list of worst states for taxpayer burden.

Now, reaching too sweeping of a conclusion here is clearly unwise. Gallup pointed out that family and friend considerations and new jobs are by far the two most frequent reasons given for moving.

Yet it’s hard to dismiss Bergman’s conclusion that high state and local tax burdens really do cause people to pack up and leave.

Sixth District Demographic Profile, Part II

Posted by: Lee Schafer Updated: April 28, 2014 - 1:23 PM

Several responses to a recent column about Minnesota’s Sixth Congressional District and income inequality suggested that the obvious answer to why it leans Republican is that it’s predominantly a white district.

It is certainly true that the Sixth district is predominantly white, at about 92 percent as of the most recent U.S. Census Bureau data.

But it is not the Minnesota district with the highest percentage of white residents. In fact, the First, Seventh and Eighth districts all have a higher percentage of white residents than the Sixth. Each of those districts is represented in Congress by a Democrat.

What’s interesting is that of the four districts, the Sixth easily has the least amount of income inequality, as measured with something called the Gini index. Its Gini index is 0.385, and as noted in the column, it’s the lowest of all the congressional districts in the land.

That’s what made it noteworthy, a very low level of income inequality, not its percentage of residents who identified themselves as white.

It’s also important to note that Minnesota as a whole does not have the same level of income inequality as the rest of the country. The other three districts in the state with a higher percentage of white residents than the Sixth all have a Gini index that is lower than the national average.  

Middle Class Canadians Pulled Ahead of Americans, But Are Still Debating

Posted by: Lee Schafer Updated: April 25, 2014 - 11:16 AM

News earlier this week that the Canadian middle class has moved ahead of the American middle class in income was not exactly welcome to everyone north of the border. 

As reported by The New York Times, median income rose about 20 percent in Canada between 2000 and 2010, to the equivalent of $18,700. In the United States over the same period, the median income was virtually flat, and gains since 2010 likely mean the Canadians have pulled ahead.

It seems that Canadians, much like Americans, have been debating income inequality and the economic status of middle-class people. Opponents to the party in power, the Conservatives, have been trying to make it an issue.

Prime Minister Stephen Harper’s employment minister saw the political value and promptly jumped on the news. If the Liberal Party’s leader “is interested in evidence-based policy on the middle class,” then he only needs to read the newspaper, the minister said. The Conservatives also promptly sent out a fundraising letter.

But the data may not show as much of a clear-cut economic success story as the Conservatives would hope.

The national collector of data on all things Canadian, Statistics Canada, reported that during the 2000s, there have been gains in all Canadian income demographics.

The income of the poorest grew by 1.7 per cent per year from 2000 to 2010, and the income of the richest grew by 1.52 per cent per year, but the income of the middle class grew by only 1.29 per cent per year.  

In a spirited conversation on the CBC news program “Power & Politics,” a left-leaning think tank policy director named Trish Hennessy said what seems to me to be the most depressing thing of the whole Canadian debate: Measuring the success of the Canadian middle class against the Americans, she said, "it's cold comfort, because it's like comparing ourselves to a sinking stone.”


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