Are Your Taxes Too High?

Many business owners and investors stand squarely on the side of tax cuts. Their belief is that taxes are too high and should be reduced to encourage economic activity. And yet many of them fail to apply the argument to their own nations.

“Wait–taxes?” you say. “I don’t levy taxes.”

With the invention of capitalism, economists re-branded feudal taxation as “harvesting excess value.” But wages can also be seen as a reverse tax on the value produced by workers: where a feudal lord might take a certain amount or percentage, the capitalist allows an employee to keep a certain amount.

This reverse tax was an important invention when capitalism was conceived. It allowed people who didn’t create revenue directly (in the form of crops, manufactured goods, etc.) to create new kinds of value, particularly value that could only be created in concert with other specialists. In turn, workers were given a stable wage and economic and seasonal fluctuations were (in theory) absorbed by the capitalist. So a business became a kind of micro-socialist system within the larger context of capitalism.

Employees are, by and large, grateful for this micro-socialism: generally speaking, employees prefer to have stable paychecks, benefits, and job security–and if they don’t, they can always start their own businesses. But trying to squeeze every cost-saving measure you can out of your employees can be counter-productive, in the same way that increasing taxes can be counter-productive when there aren’t meaningful benefits to match.

While many entrepreneurs face the problem of not paying themselves enough, there are some who pay themselves far too much. And as the size of the company slides upward, owners and executives tend more and more frequently to be out of touch with how much they are taxing their employees–and the cost to their businesses.

This brings up two relevant issues from the world of economics and policy:

  1. What is the appropriate level of taxation to maximize revenue?
  2. What social programs are meaningful enough to justify taxation?

The appropriate level of taxation to maximize revenue follows what is known as the Laffer Curve (although the idea goes back to Arthur Pigou). The basic idea is that tax revenues at 0% and tax revenues at 100% are both zero (which is not entirely accurate, but close enough to be useful). That means that somewhere in between 0% and 100%, there’s a point at which you would receive less revenue if you either increased or decreased taxes, because increasing taxes would discourage revenue-earning activity and decreasing taxes wouldn’t result in substantively more revenue-earning activity.

The second question belies the fact that the peak of the curve can be shifted by many variables–and in fact is always shifting. One of the ways you can create a positive shift–that is, justify increased taxes while also increasing tax revenue–is by implementing meaningful social programs. In the politics, these social programs can be controversial, but in the operation of a business, they are relatively standard: health benefits, flexible hours, etc. They generally fall under the HR umbrella, but can also fit into support departments like printing, IT, and so on.

By this point you may be thinking this over-complicates the issue. The conventional wisdom is that labor is labor, and you compensate people based on the work they do and how well they do it–a simple transaction of value for money.

However, conventional economics has this one wrong. The emerging field of behavioral economics recognizes that not just incentives and disincentives, but context, internal motivations, values, ethics, biases, and other factors affect behavior. When you hire someone, an hour isn’t always an hour. The amount their work is taxed, the context in which they operate, and their emotions toward their work and employer will affect their behavior.

Given this knowledge, you could go with a more libertarian approach–give as much back to your employees as possible–or you could choose to go full socialist.

Lately, many organizations are going full socialist, including The Container Store and Wegmans Food Markets. In addition to providing great benefits, they’ve absorbed nearly all possibility of layoffs, and almost exclusively promote from within rather than recruiting experienced hires.

Netflix employes a different model of socialism: They pay literally top dollar–as much as they would offer to keep you if you got a job offer somewhere else. Management helps you if you’re in a slump, and if your skills just don’t fit the needs of the organization anymore they offer a generous severance package, including placement assistance.

There are two interesting traits in these socialist models: they all experience an increase in revenue that more than makes up for the reduction in employee taxes, and none of them offers the outrageous benefits offered by Google or other Silicon Valley heavyweights.

Which brings us to the question: What makes a meaningful social program (a.k.a. benefit)? Google is famous for having extravagant campuses with free meals, on-site massages, and a host of other benefits. But these only provide minor incremental value because they are simply “free stuff.” The same is true if you give your employees gift cards or tickets to a sports game. These aren’t really fostering a better environment, they’re just “free stuff.”

Meaningful social programs remove obstacles and increase feelings of security and freedom. They promote stability and peace-of-mind, they remove distractions or red tape, and they let you know that if something happens–if you have a child or have to take care of an elderly parent, if you have a bad quarter or even a bad year, etc.–your organization has your back. Each program must have a specific intent behind it that removes worries and stigma, provides a safe environment, or better enables problem solving and innovation. Especially for those who are budgeting a start-up, let these criteria be your guide.

For a lot of people reading this, extravagant social programs won’t be within the realm of possibility anyway. You might already be paying your employees less than they could get somewhere else. But it’s not so much an issue of whether you’re paying them less–so long as they’re able to cover their cost of living–but whether you’re taxing them fairly and giving them the tools they need to close the gap with what they could earn elsewhere. Help them–or sometimes just free them–to create new value and bring in new business. Not every potential employee will be excited about the idea, but the good ones will see the opportunity and jump for it.

There’s a lot more to be learned from macroeconomics and tax theory if you have a large business or your business is growing, but I’d love to hear your thoughts and answer any questions in the comments.

Can We Open-Source the Law?

Here’s a wild idea for you.

When the United States was formed as the first modern democracy, its founders had some pretty crazy ideas about how the democratic system would work. People would be elected and leave their jobs to become lawmakers for several years, and then return to their jobs and let someone else take a stab at it. It was an efficient approach to getting the perspectives of the people who made up the nation to collaborate on laws.

But how would they have written the Constitution if they had today’s technologies and insights? Would it have been different?

Enter Jos de Blok, CEO of Buurtzorg, a nursing organization that turned the business of home-care on its head. Unlike traditional leadership that does extensive strategizing and change planning, de Blok has a blog. When he’s planning a change in operations–usually a small, incremental change rather than a massive treatise–he posts it on the blog and allows 24 hours for response from an organization of nearly 8,000. Based on feedback, he proceeds, amends, throws out, or gathers a task force to hammer out the details.

The specifics of Buurtzorg’s approach will not apply for every organization, but the concept is sound: Centralized (non-hierarchical) management of an open-sourced approach.

Open-sourcing has provided not just stable software but some of the most secure software in the world, despite the early concerns over its transparency and malleability. Yet the approach has yet to make much of a leap to other fields, despite being at its core a knowledge method and not a software-specific method. (Wikipedia is among the few notable examples.)

There’s a lot to be learned from the way open-source groups guide development. Many have small development teams that are able to invest and focus on key features that aren’t getting as much attention on the outside. Some companies identify features that have to be developed in a closed environment in order to be valuable, and embed them within a different version of the product. But there are often so many eyes on every line of the source code that it’s difficult to deliberately sabotage the effort, and developers who comb through the code before a final release are typically able to pull out unnecessary operations and tie up loose ends.

These open-source software projects are at work in the wild, accessible to billions of people, and many of the developers working on them have very little personal stake in the outcome except their own excitement about and investment in the project.

Suppose these same techniques were used to guide your organization, every member of which is deeply invested in your policies and decisions. Instead of investing in a complex analysis of the state of your company, you’d get immediate feedback from the people who know it best. Instead of deciding on a change plan and having to get buy-in from every last member of your organization, you’d already have a good chunk of your organization on board. Instead of having to course-correct in the middle of an enormous project, your incremental changes would correct themselves.

If it sounds idealistic, that’s because it is. Don’t misunderstand: It’s a completely practical approach, and may even become a necessary approach to managing large organizations in ten or twenty years. But it’s also idealistic because it requires leaders to relinquish power, and perhaps just as importantly it puts them on uncertain footing. Leaders not only want power for its own sake, they want power because they don’t trust their people, and this approach to an organization’s policy and strategy relies absolutely on trust.

Fortunately there are ways to develop that trust, some of which I’ve already written about. You can treat your employees as partners. You can remove the stigma of failure. You can establish shared values. And as always, you should approach it in the way that works best for your specific organization. But as with any change, at some point you will have to make a leap without knowing exactly where you will land. It can be terrifying, but it’s the only way we accomplish any meaningful change.

Perhaps the Founding Fathers wouldn’t have open-sourced America’s laws even if they’d had the tools. But on the whole they were the kind of people who were always trying to improve upon the work of others. We’d be doing them a disservice if we didn’t try to improve upon theirs, even if it’s only within our own small organizations.

I’m looking forward to discussing your insights and concerns in the comments below.

Rethinking Your Government

Corporate governments don’t often look to the past to see the evolution in tribal and national governments, and consider whether the next step in management will follow along the same lines. In fact, in the business writing and discussions that I’ve encountered, very rarely if ever have I noticed even the suggestion that a corporate “governance model” and a national government might have deep and important similarities.

In fact, the true genius of capitalism from a human-development standpoint was that it decoupled and abstracted political and economic realities. What were formerly struggles between nation-states (consider Machiavelli’s Italy) could now be struggles between nation-corporations, with the toll counted in jobs lost instead of lives lost.

Another impact it had was to more effectively hybridize government, i.e., I am subject to the government of the United States, the particular state and city where I live, and the business for which I work, as well as any other organizations in which I participate. This hybridization makes the world more efficient because each organization can seek the most effective form of government for its activities.

So when I say that most businesses’ governments are totalitarian, oligarchic, and/or socialist, I don’t mean these are negatives. They are simply characteristics that can be properly aligned or misaligned with your organization’s values.

Consider how your organization’s government works. Is it a top-down affair, like a monarchy or an oligarchy? Are there democratic features, and are they really democratic or are you just pacifying the people to keep them from revolting? Who wields the practical power within your organization? And how is your Constitution holding up? Have you added features (like an Innovation Department or a Chief Happiness Officer) instead of revamping your system to fit your present values?

Forward-looking businesses will have to leapfrog the development of world governments in order to keep pace with the future. They will have to skip from where they are (perhaps a little ahead of feudalism) to a post-democratic solution.

Fortunately, we’re starting to get a handle on how such governments work. Frederic Laloux has a great lecture (with Q&A) on the priorities and operations of forward-looking organizations. I have a few things to add, as you will see later this week, but please speak up in the comments about your own experiences with forward-looking governments.

Your Organization Is a Nation

Your organization is a nation.

It isn’t like a nation. It doesn’t have the properties of a nation. It is a nation.

Your organization starts with territory. For countries, the territory is geographical: the southern boundary of much of Canada is the 49th Parallel, and Mayalsia is bounded in part by the Golok River. For most businesses, the territory is intellectual: Amazon’s territory is its online retail site, Johnson & Johnson’s territory is its products, etc. The territory may have physical properties–offices, factories, warehouses, etc.–but it is intellectual in nature.

Your organization has sovereignty within its intellectual territory, which means it can conduct its business more or less the way it wants. Your organization has governance, a.k.a. “government,” to guide and regulate the actions within its territory. And of course, your organization has its own culture, with its own language, beliefs, and customs.

Because your organization is its own nation, there are a number of lessons to be derived from public policy and economics. It also faces dangers similar to those faced by world governments, even if it’s at a much smaller scale and the results look different: a revolt may look like an internal power struggle, but it may also be a mass exodus. And if your organization is large enough, it has its own subcultures that have to work with one another.

This week, I’ll be discussing some of the practical ramifications of this idea that your organization is a nation.