Chief Economic Advisor to Trump: “The most excited group out there are big CEOs, about our tax plan.” A CEO’s Perspective

Hello.  I have never written here about any topics outside of professional matters, but as members of my network here on LinkedIn may know, I stepped down from my position as CEO of Brightcove a little over 3 months ago.  I am occupying myself thinking about a next big thing, as well as in some volunteer and nonprofit work (and, family) but, like many, I am very concerned about the state of our country and our politics and I thought I might take moment to share some thoughts.  

In particular, I was inspired (provoked?) by a comment I read today from an interview with Gary Cohn, Chief Economic Advisor to Donald Trump, “The most excited group out there are big CEOs, about our tax plan.”  I may not be a “big CEO” by Gary Cohn’s standards, but as a CEO I thought I would share some real world perspective from an actual CEO on the tax cut plan he is pushing. (For perspective: Brightcove had about $150M in annual revenue, and around 500 employees, and has been a public company traded on the NASDAQ for about 5 years when I stepped down this summer.  Prior to that I was in the senior leadership of Adobe--yes, Adobe is “big”, with over $5B in revenue and close to a $100B market capitalization.) I am not an economist or an expert on tax policy--but if the claim is going to be made that CEOs are excited about this tax plan, than perhaps some perspective from a CEO can help the conversation.

The fundamental spin at the heart of the Trump tax plan pitch is as follows: “the big thing we're trying to do is we're trying to solve for middle income, hardworking families.” Sarah Huckabee Sanders, Press Secretary for the Trump Administration has tweeted: “The average American family would get a $4,000 raise under the President’s tax cut plan.” The Trump team is arguing that massively cutting taxes for corporations will somehow translate into significant wage increases for working people. This argument fundamentally disregards everything we know about how companies actually decide to hire and how much to pay their employees. As a CEO (and in prior roles) I was involved in hiring and determining salaries for 1000s of people over 25 years. From real world experience I can tell you that tax rates literally never came up in any discussion about hiring or pay levels. Customers (demand) and markets determine when we hire, how much we hire, and how much we pay. Let me make three points about how we thought about how many people to hire, how we decided how much to pay them, and what (most) companies will do if their tax rates are cut:

1. When our business grew, or when we looked ahead and saw new markets or opportunities where we could grow, we hired to meet that demand: more salespeople, more customer service representatives, more HR and finance professionals, more engineers, etc. We had clear metrics we followed in most areas--for every additional $ in sales growth we committed to, we could hire a roughly fixed ratio of addition sales reps.  For every increase in call volume, we would hire a roughly fixed ratio of customer service reps. For new product ideas, we would expect management to sign up for significant and specific revenue goals. It is a simple but true concept, customers drive business growth, not tax rates, not mythical “job creators.”  Tax rates impact profitability, but are only very indirectly tied to hiring.
2. Labor markets determine salaries, not tax rates.  The idea that cuts in corporate tax rates will lead directly to an average wage increase for all working people of $4000 is bonkers. (It is also obviously manipulative and misleading to use “average” this way.  If one family on my block of 10 houses wins the lottery and gets $10M, our average wealth on this block may be up $1M, but 9 of us gained exactly $0.) Again, simple concept: the market for labor determines what CEOs/management/investors pay employees. Tax rates are not a factor. If I want to hire an engineer with experience in machine learning, the demand in the market right now is tremendous and the supply of people with that experience is limited. Salaries are going through the roof. If I want to hire a young person out of college for a junior sales or customer service job, it is a buyer’s market and wages are moderate.  Neither of those realities change if my tax rate changes. My company was a successful tech firm in high cost markets (eg Boston, Phoenix, Seattle) with a lot of competition for talent, so we paid well and we budgeted for salary increases on an annual basis well above averages in the US. I believe we were a good employer, with a great working environment, culture, opportunities for advancement, and fair policies and pay. Since demand was high and supply of talent tight in tech, our employees were paid very well compared to national averages and benefited from much larger and more frequent increases as well. Indeed, we won multiple awards for Best Places to Work in Boston. But we didn’t pay people more (or less) because of anything other than what we thought we had to pay to hire and retain great people. As CEO, if I had a windfall from a sudden decrease in tax rates, that would not impact salaries--we would still pay what we thought it took to hire and retain great people.
3. So if cutting corporate taxes doesn’t lead to an automatic increase in wages as the Trump administration (and congressional Republicans) argue, who does benefit? What would I have done as a CEO if I had a sudden increase in profitability due to a decrease in tax rates? (Note: Brightcove was a young company that was not yet consistently profitable, so taxes were not a major factor for our financial planning, but prior to that I was in the leadership of company where it was significant.) First of all, Occam’s Razor suggests that cutting corporate taxes will benefit the owners of corporations--the investor class. It it is pretty simple and obvious concept.  The leap of faith required to argue the the goal is not that, but to benefit the working class, is such a stretch that it really can not be taken seriously. We know this because we have already tested this proposition and seen the results.  Broadly in the US economy, we have seen a massive increase in corporate profits at the same time as we have seen stagnant wages. That increase in corporate profits has lead to a record stock market and a dramatic increase in wealth for investors, not to significant increases in wages for working people. A tax cut for corporations will increase their profitability. Why we should believe that this increase in profitability will lead to wage increases when we have already seen that increases in profitability over the last 10 years did not, but rather went to stock buybacks and dividend increases that benefitted the investors? As a CEO and member of the Board of Directors at a public company, I can tell you that if we had an increase in profitability we would have been delighted but it would not lead in and of itself to more hiring or an increase in wages.  Again, we would hire more people if we saw growing demand for our products and services.  We would raise salaries if that is what it took to hire and retain great people. But if we had a tax cut that led to higher profits absent those factors, we would “pocket it” for our investors. (Good news at my former company and in most tech companies is that most or all employees are also compensated with stock and thus are investors in the company as well.  But that is by no means common across sectors.)

So, when you hear Gary Cohn and other members of the Republican leadership say that the tax plan is all about solving for middle income, hardworking families and then try to argue that somehow the corporate tax cut serves this aim, please recognize that for pure bamboozlement. When he says that say that “big CEOs” are the most excited group….well, that perhaps you can believe, but not for the reasons he claims.

I hope more CEOs, executives and investors will speak out. The proposed tax plan might leave more $$ in our pockets and if you want to make that case I suppose it is your right, but trying to fool people that it is all about the middle class---that is just wrong. I believe that I (and the many other CEOs and top executives I know) have already done incredibly well in this economy and putting more dollars in our pockets right now is not a priority for our society.  Personally, I am pledging that I will donate 100% of any tax cut I get to causes and groups that are fighting to make our society more equal, to strengthen our community, and to fight for the rights of people who have had fewer advantages. Please join me in that pledge.