Pie-slicers vs. pie-enlargers.

• Author: Reich, Robert
• Position: Making America Work

This piece appeared in 1980.

Look around you, and you can see the rearrangers hard at work, prospering. They are the accountants who manipulate tax laws and depreciation rules to produce glowing-or at least presentable-annual reports. They are the financiers who think up new varieties of mutual funds. They are the corporate executives, trained in law and finance, who hire all of the above, and the lawyers whose briefcases bulge with the statutes, opinions, depositions, interrogatories, motions, and prospecti necessary to carry out their strategies.

Whom you hear less and less of are the pieenlargers-the engineers and inventors who create better products at less cost, and the entrepreneurs and workers who translate those ideas into new factories, new jobs, and ultimately into goods and services that people want to buy.

The most obvious example is the continuing rage of mergers. In the past three years some $100 billion of corporate cash resources have been used to acquire existing corporate assets through tender offers. This money otherwise could have been spent on new factories and other productive uses. Some of it may eventually find its way into the hands of investors willing to take such risks-but just as surely, much of it does not. Instead of generating future economic expansion, the money circulates among companies like the stakes in a floating dice game.

How are we to break out of the downward spiral of asset rearranging? We could start with the tax system. Why not limit tax breaks to corporate earnings that are reinvested in new production, equipment, or research and development? A corporation's earnings could be immediately taxed as income to shareholders (without the capital gains break) unless the earnings were "rolled over" by the corporation into new investment. The same incentives could be given to individual shareholders themselves.

Likewise, in other areas the tax laws could target the tax breaks to apply only to fresh investments. The most obvious offender here is the congeries of loopholes-mortgage interest deductions, homeowner's exemptions, and...