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The Big Three automakers came to Washington last week, begging for $25 billion in loans. The Detroit automakers can’t say why they need so much, how they would spend it, or that they won’t be back again, asking for more.
After the bungled handling of the banking bailout, many lawmakers are reluctant to give the automakers what they want. As of now, there’s no deal, but the danger hasn’t passed. Proponents of a bailout argue that without it, the money will instead be spent on unemployment checks and income tax losses when one or more of the Detroit Three file for reorganization under the bankruptcy laws.
So why not just go ahead and do the bailout? Let’s start with a few startling facts:
The United States has the second-highest corporate tax rate in the developed world according to the taxfoundation.org. We’re losing the worldwide tax-rate competition. Eliminating corporate taxes would attract businesses and create jobs.
U.S. businesses spent $148 billion in 2005 complying with a complicated and inefficient tax code. Meanwhile, revenue from the corporate tax was only $272 billion. Some companies spend millions trying to find tax loopholes. This is money that could go to create products, services, and jobs.
In 2008, the combined cost of corporate taxes and tax compliance is likely to be about half a trillion dollars. Why would we impose $500 billion dollars in costs on businesses to raise only about $300 billion in tax revenue and then spend a trillion to prop them up?
We could accomplish a real positive result with dramatic tax changes and allowing companies to declare Chapter 11. These companies would then have the opportunity to restructure into rejuvenated productive businesses while at the same time injecting $500 billion a year back into the economy.
Bankruptcy isn’t the end of the world. Many large businesses, from retailers to airlines to steel companies, have gone bankrupt, but are still in business through reorganization and consolidation. Bankruptcy actually saves many businesses.
The Big Three’s problems are self-inflicted, from signing extravagant union contracts to building gas-guzzling SUVs. Foreign-owned automakers who build cars in the U.S. aren’t facing the same difficulties. So why should taxpayers have to subsidize the incompetence of the Big Three, when reorganization under the bankruptcy laws would allow them to correct their errors at little cost to innocent bystanders?
Eliminating the corporate tax would inject half a trillion dollars a year into the productive economy while lowering the cost of goods and services and cost us taxpayers much less than their boondoggle bailouts.
David L. Cox
Grand Junction
Let Big Three go bankrupt
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14 Responses to “Let Big Three go bankrupt”
Posted November 26th, 2008 at 7:27 pm Login to Send PM Report this comment
The vast majority of large companies that enter banruptcy proceedings are never as successful in the future as they were in the past. Many end up repeatedly using bankruptcy proceedings in the future. The large company that enters bankruptcy and emerges with long term success is the rare entity.
I fail to understand your reasoning on how bankruptcy woould increase tax revenues. Avoiding paying corporate taxes is a corporate philosophy that is not even discussed in bankruptcy proceedings.
I find it ironic that the current adminstration made it more difficult for consumers to file personal bankruptcy (even though the vast majority of those are brought on by medical costs) and yet the same adminstration seems to think it is acceptable, even ideal, for large corporations to use bankruptcy proceedings.
Posted November 27th, 2008 at 8:58 am Login to Send PM Report this comment
Corporations count, people don’t. We’ve learned a lot in the last eight years and that is at, or lose to, the top of the list.
Posted November 27th, 2008 at 8:59 am Login to Send PM Report this comment
That should be ClOSE to the top of the list.
Posted November 27th, 2008 at 9:59 am Login to Send PM Report this comment
The writer wants to write about tax issues, which is fine, but it has little to do with the problems faced by the big 3.
Let’s be clear. The big 3 are NOT in trouble because they have been building “gas guzzlers”. “Gas guzzlers” were built because that is what their customers demanded. Little fuel efficient cars do not have a high enough margin to allow the cost bloated big 3 to make a profit on them.
Honda, Toyota, and Nissan do not have the bloated labor costs so they can make a profit on small cars built in the US. As a matter of fact, the big 3 can make small cars at a profit in foreign plants where they do not have excessively high labor costs.
The main advantage of forcing the big 3 into bankruptcy is that it will allow them to redo labor contracts and reduce their bloated dealer network. In other words, allow them to become efficient.
Posted November 27th, 2008 at 10:23 am Login to Send PM Report this comment
I agree Bullishfrog.
Posted November 27th, 2008 at 10:26 am Login to Send PM Report this comment
By pulling the tax issue into the mix I was simply trying to make a connection between the automakers business problems and our tax structure. Not that our tax structure is fully responsible for the problem, obviously it isn’t, but it adds to the overall systemic inefficiency we suffer from in our economy.
Posted November 27th, 2008 at 11:06 am Login to Send PM Report this comment
Obviously we are all in for a rough year and we will all have to tighten our belts, but one thing that would help the auto makers and the rest of us in universal health care.
And investments in more green cars and renewable energy will be beneficial for everyone.
I don’t know if the big three should go bankrupt or not. I’m just not that smart. I know even Grand Junction has manufacturing jobs that depend on American auto makers, and we will all feel much pain if they go under unless there are some smart, lean, innovative companies ready to take their place.
Posted November 27th, 2008 at 11:25 am Login to Send PM Report this comment
Yep, let’s do away with those darn unions. While we’re at it, do away with the whole middle class. If we can just lower our standard of living enough, maybe we can do away with those darn taxes and be able to compete with the world market. Heck, maybe living in a grass hut won’t be so bad, either.
Posted November 27th, 2008 at 12:14 pm Login to Send PM Report this comment
bullish, what has the “bloated” dealer network have to do with it? Dealers are independent businessmen. The manufacturers have to have people to maintain contact with the dealers and reducing the number of dealers would mean a negligible personnel reduction. The number of personnel overall is related to the production and sales volume, not the number of dealers. Parts supply and warranty matters are also related to sales volume and vehicle population and only slightly to the number of dealers. So why the importance of the dealer body? If dealers suffer loss of sales volume they go out of business. If the manufacturer terminates a dealers sales and service agreement he is in for a long legal battle and probably a big monetary settlement.
Posted November 27th, 2008 at 12:24 pm Login to Send PM Report this comment
John, the big three need to reduce the number of models they offer. And that also means reducing the number of dealers. I am not an expert on this, but I heard a number of times that there are certain state regulations that would prevent auto companies from closing downn dealerships. Bankruptcy would allow the automakers to somehow get around the problem.
Posted November 27th, 2008 at 1:14 pm Login to Send PM Report this comment
bullish, reducing the number of models won’t necessarily reduce the need for dealers. Weak dealers my expire on their own but the dealers are there for geographical coverage to achieve maximum market penetration. Bankruptcy may allow thenm to shed some dealers without a problem but I’m not sure they would want to. I spent 35 years working for manufaturers in sales and marketing in the industry.
Posted November 27th, 2008 at 2:32 pm Login to Send PM Report this comment
John, I was just repeating what I have often heard. During the Senate hearing the Big 3 CEOS were asked how many models they had in order to point out one of the problems. I believe GM has over 60. I have often heard in the past that GM needed to shed at least two of their lines.
The implants each have two principal lines. Toyota/Lexus, Honda/Accura and Nissan/Infiniti. Why does GM need Cadillac, Buick, Pontiac, Chevrolet, GMC, Hummer, and Saturn?
Posted November 27th, 2008 at 4:13 pm Login to Send PM Report this comment
bullish, the GM lines are a holdover from the Alfred Sloan days when he wanted people to stay with GM from the cheapest cars to the most expensive and have a distinct car line appropriate for different periods in a persons life. Each line is still meant to appeal to a particular type customer but they have gotten confused over the years with overlap. They did away with Oldsmobile because it’s focus was confused as to who they were tying to attract. They’re trying to get rid of Hummer but it doesn’t appear that they’re having any luck. Chevrolet, Pontiac and Saturn could be candidates for rationalization. Buick is for old farts as it’s always been and Cadillac is now much better focused and is coming closer to BMW and Mercedes. GMC provides trucks for non-Chevrolet GM dealers. They also have Saab which should be spun off to somebody else as Ford did with Jaguar, Aston Martin and Land Rover. Ford still has Volvo which they need to spin off. The number of models these days are not too hard to handle but the market targets are confused with some overlapping lines . They have to decide who their targets are and design them accordingly. In the past they had many lines that cannibalized customers from each other. They are well under way to more precisely target models now but they have to get past the curent credit crisis. All the talk about cleaning house with management is old business. They have the message and their products are much better in every way. Wagoner has done a good job at GM but he had a huge mess to clean up when he got there. Mullaly (sp?) at Ford is relatively new there from Boeing. The Chrysler non-public deal is fairly recent and the most likely to fail or be taken over. GM expressed some interest but I think that is a no-go but I think Nissan/Renault is interested but Carlos Ghosn, their CEO, is cagey and he’s waiting until he can steal it.
The business and the industry is extremely complex and far reaching and most of the comments I’ve seen about what to do are simplistic, ignorant or way behind the times in what the current state of the US industry is about. I’m an import guy with only two of my years spent with a domestic, Ford, so you’d think I would say let them die but the country needs the manufacturing base and their situation is nowhere near what it is depicted to be in most quarters except that they are heavily reliant on credit –not a hand-out — and they need it from the government because all the billions provided to the financial industry they’re sitting on.
Posted November 28th, 2008 at 8:30 am Login to Send PM Report this comment
Good analysis John.
What I have not heard in the recent discussions is the fact that cars have to be produced to meet demand. If it’s not GM, or Ford,, or Chrysler, it will be someone else. The key to the US economy is keeping the production in this country.
That did not happen in the 70s to much of our manufacturing base because unions chose not to budge and native manufacturers had no way to compete with foreign production. Hopefully it will be different this time.
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