Thursday, December 17, 2015

“An Unlikely Source of Capital for Minority Business Investment” by Dr. Fred McKinney

The following is excerpted from the most recent Tuck MBE Programs e-Newsletter. I thought it was worth an extra boost. This is the kind of critical thinking we need in order to advance opportunities for minority and women business enterprises. Thank you Dr Fred. What do you think?

"I recently gave a talk at the Chicago Minority Supplier Development Council Annual meeting. The focus of the talk was about capital markets and MBE investment. The primary message was that in order to effectively address the issue of MBE access to capital, MBEs needed a better understanding of how capital markets work. But in addition to focusing on what MBEs and corporate members need to do, I also introduced an idea that I think has considerable merit on what the federal government can do to encourage capital formation in minority communities.

Two non-profit groups, Citizens for Tax Justice and the U.S. Public Interest Research Group Education Fund in a recent report estimated that the 500 largest U.S. corporations have a combined $2.1 trillion in offshore retained earnings. The money, according to the authors, is sitting offshore to avoid paying taxes; an estimated $620 billion in taxes.

I think there is a way to encourage U.S. firms to bring these resources home and for the Federal government to get its share while at the same time supporting the development of MBEs. Congress recently passed the $305 billion highway construction bill that included a number of changes in corporate tax law. (In the perverse way that Congress works, this transportation infrastructure bill included things completely unrelated to transportation like the reauthorization of the Export-Import Bank and agricultural price supports.) Congress is not unaccustomed to being creative on corporate taxes. But what is needed are legislative champions. Here is something for Congress to consider:

Congress should allow U.S. corporations to repatriate up to 20 percent of their foreign retained earnings tax free, IF they invest those funds in minority and women owned businesses. This could generate approximately $400 billion in new funds for minority and women entrepreneurs. This new capital could stimulate diverse entrepreneurs to acquire companies, invest in new technologies and hire minority workers, radically transforming depressed minority communities across the country.

The federal government wins by encouraging the balance of those funds to return to the U.S. at a reduced effective rate and encouraging employment in communities with high unemployment rates.

Taxpayers win by having some of these tax revenues come home compared to the current situation of having none of the tax revenues associated with those offshore retained earnings in federal coffers. Large U.S. Corporations win because these new funds would stimulate demand for corporate assets from minority and women entrepreneurs who now would have the capital to execute deals. There are billions of dollars worth of corporate subsidiaries that would and could be sold to minority and women entrepreneurs if capital were available. Corporations also benefit as (minority) owners in MBE and WBE enterprises that could be more profitable under MBE/WBE control compared to their current status as non-minority firms. Joint ventures between corporations and minority entrepreneurs should be designed such that the JVs remain MBE/WBE majority owned and controlled and certifiable. MBEs and WBEs win by having real opportunities to acquire, develop and manage more significant businesses, with in some cases, corporate partners. Minority communities win by reducing unemployment, encouraging more investment and increasing minority wealth. And to complete the virtuous circle, the federal government wins as minority communities grow and become less reliant on federal aid and contribute more in taxes.

In Congress when it comes to legislation, they like to say, “The devil is in the details.” While true, what I am proposing might fail because it makes too much sense, the details might be new, innovative and even messy, but the benefits are crystal clear.

In your service,

Dr. Fred Minority Executive Education Progams at Tuck School of Business