The restructuring of the American economy and workforce has only accelerated since Covid-19, and to understand the enormity of the problem, we should look at our past. Throughout history, a company’s profits have directly correlated to the size of its workforce. For instance, the might of Detroit’s auto industry was built by the thousands of men and women working the assembly line. The skyscrapers that dot our cityscapes were built by the many workers willing to get up on the girders.
Things are different today, with the rise of companies like Silicon Valley’s tech giants, where bigger profits don’t necessarily correlate with a larger workforce. But despite the huge number of people these industries employ and the direct impact they have on the communities where they operate, they are inordinately burdened with heavy tax bills relative to the tech giants.
Current tax policy benefits neither the worker nor the state and local communities where transactions take place. As the American economy sits at an inflection point, states need to reclaim their role as laboratories of democracy. Instead of allowing these companies to accumulate profits in a city or state while having few, if any, of its employees in that market, state and local lawmakers should consider a profit-per-employee tax model that would assess a corporate income tax rate based on its profits divided by the number of employees it has in that municipality.
This kind of tax would incentivize companies to increase their workforce while rewarding those who already do so. For example, under a profit-per-employee model, a hypothetical company that earns massive profits but has only a few actual, full-time employees working in that state would be assessed a state corporate income tax rate higher than a large company that has a high number of employees who live in the state and pays property taxes.
Consider how this could work for a state like California, home to Big Tech companies such as Alphabet Inc., Apple Inc., and Meta Platforms Inc. (owner of Facebook) that annually rack up some of the highest profits relative to their employee headcounts. A PPE model that levies an additional fee on these types of companies could potentially unlock significant new revenue for a state facing an uncertain budget future in the short-term, and whose workforce may be uniquely affected by the forces of automation and artificial intelligence in the long-term.
In recent years, research has found that many tech companies have gotten much bigger in terms of valuation and profits, but without the corresponding increase in the number of people they employ. One recent analysis found that newly public companies with multibillion-dollar market values had staff sizes ranging from just 336 employees to a little over 4,000. These numbers are minuscule compared to other sectors of our economy. The retail industry employs an estimated 15.7 million people and generates more than $5.5 trillion in revenue annually. The auto industry employs 1.7 million people and brings in $1.5 trillion.
Tech companies, on the other hand, can take advantage of the current tax structure to maximize their profits by making so-called optimizations that cut out the need for more workers and provide no incentive to invest in the career development of the few full-time employees they hire. This needs to change if we are going to protect our country’s workforce and ensure that it remains the backbone of our economy.
Of course, the devil is always in the details, and policymakers would need to carefully construct PPE models that stand up to legal scrutiny while considering unintended consequences, such as prompting companies to decamp for other states. But it is a to-date unexplored policy idea that should be considered as more companies race to achieve higher and higher revenue with as few workers as possible.
Remodeling our tax system isn’t the only way to counter the shrinking of the American workforce in the face of tech advancements. Public and private leaders, for instance, should be heavily investing in skills training that helps workers find in-demand jobs that are less at risk of automaton. At the same time, we need to prepare workers for the new types of jobs that will actually be created by automation and AI. Investors, policymakers, and thought leaders who are mindful about the rights and responsibilities corporations have in their communities should start factoring these types of ideas into their thinking.
Supporting the American workforce would help communities. A PPE tax could go a long way to doing this and will help make sure that tech corporations are factoring the human cost of business into their plans as much as they are their profits.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Hassan Tyler is a writer in Washington D.C. and a former congressional staffer for Sen. Joe Lieberman (D-Conn).
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