China has caught up to the U.S. and Western Europe in great swaths of the economy. Yet China’s schools lag Western counterparts in teaching “design thinking,” or taking the problem-solving process designers use to create products and applying it to the greater tasks of running a business. Many schools still teach design within the framework of fine arts, without a significant nod toward business or other disciplines.
Now the central government is developing a design policy to help China move beyond a manufacturing economy and forward in implementing cross-disciplinary education and bridging left- and right-brained thinking. As in other sectors, schools are beginning to train a new wave of design managers “with Chinese characteristics” who can apply design thinking in a context that fits China’s commercial and political landscape.
“With almost a million students studying design in universities, design education is a national issue,” says Wang Min, dean of the school of design at China’s Central Academy of Fine Arts (CAFA) in Beijing. “Most people don’t really know what design can do for them.” Min, who was formerly the design director for the Beijing 2008 Olympic Games, adds. “In many places, we still need to promote design and design thinking.”
CAFA is overseen by the Ministry of Education, the central government body that regulates state school curriculum. Since 2004, it has offered a Master’s in Design Management and Wang says CAFA is considering forming a partnership with a business school to develop an MBA with a design curriculum. Tsinghua University in Beijing has been working with schools and design organizations around the world to explore innovation, design and management—themes of this year’s Tsinghua International Design Management Symposium.
In south-central China, Hunan University is focusing on research-based design with a focus on human-centered design and design strategy. Also since 2004, Hong Kong Polytechnic University (HKPU) has offered a master’s in design (Design Strategies) that integrates design, business and technology.
Shanghai’s Tongji University, one of China’s top technical schools, tapped experts from schools around the world, including HKPU and IIT, to advise on the launch of the new College of Design & Innovation, which opened in May. The college, which replaces the Art & Design Dept. under the College of Architecture & Urban Planning, hopes to foster innovation in China through design research, design management and education, and will focus on international, interdisciplinary cooperation.
Lorraine Justice, head of HKPU’s design school and member of the advisory group to Tongji’s new college, says the school will offer a research-based program. The university also founded the Tongji-KIC Design Innovation Center in Shanghai to encourage collaboration between industry and academic institutions. “Design education in Tongji is transferring from Bauhaus to D school” and will be more international, inter-disciplinary, and innovative, pledges Lou Yongqi, a professor and deputy head of the new college.
Based on experiences in the developed world, however, the transition might not be quick or easy. Even today in the U.S., “the fact that most design programs are in art schools is problematic,” says John Rousseau, design director at brand design firm Hornall Anderson. Because many schools have focused on the craft of design, with little interaction with business, communications, and computer science, he says, design graduates often are ill-prepared to collaborate with other professionals
As China’s economy continues to shift from its manufacturing roots, experts hope that design can become a respected industry in its own right. In Beijing, the creative industry, which includes disciplines such as art and architecture, tourism, and sports, grew by 18%, to $106 billion in 2007, according to local media reports. Wang says better statistics about the value of the design sector in China are difficult to come by, but he says, “We also need this number to promote the design industry.”
Business is doing its part, too. In 2002, Carnegie Mellon graduate Elaine Ann founded Kaizor Innovation, an innovation consultancy in Hong Kong. Kaizor has worked with the Hong Kong and Huizhou governments and quasi-government entities such as the Hong Kong Design Center, Hong Kong Productivity Council, and Hong Kong Science & Technology Park to teach design thinking and “human-centered design”—a methodology that bases design around the needs and habits of the end user—to business executives and government officials.
Ann has also seen a small number of first-tier, up-and-coming Chinese companies, including Lenovo, Baidu (BIDU), Alibaba, Huawei, Changhong, and BuBuGao, starting to establish user experience design teams, which focus on how people interact with a product or service, and are doing user research overseas. But because designers have varied levels of training and experience and many come from other disciplines, she says, the field is still in its infancy, like the U.S. was 10 to 20 years ago. “Many are stuck at how to convince management to incorporate such methodologies into the entire operation,” she says.
In recent years, Ying Zhang, frog Design’s general manager for Asia, has seen design and education begin to open up to new approaches. Recently, frog Shanghai has received more requests from both large and small Chinese companies for help with product innovation.
Still, Zhang says, most Chinese firms continue to function as design outsourcers, supplementing clients’ teams rather than providing innovative strategy. For now, frog does not face much competition from local companies, but they “are growing fast, so we are always very cautious about things to [maintain] our status,” says Zhang. As exports decrease and labor costs rise, “most companies in China have realized, especially over the past year, that they must begin changing the original manufacture-oriented model to survive.”
Chinese design schools and shops still may be behind, but China has shown, particularly when the central government gets involved, that it can learn quickly.
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Seoul Stakes a Claim on Design
September 30th, 2009 | Posted by innovAs global educators attempt to define the best way to teach the world’s future executives, designers, and innovators, the mayor of Seoul has sponsored an ambitious project to strengthen South Korea’s national design industry.
Design Seoul Headquarters (DSH) was launched in 2007 to make design a central part of future businesses. The 100-person organization is overseen by Kyung-won Chung, the city’s deputy Mayor and Chief Design Officer, who is also a professor in the industrial design department at the Korea Advanced Institute of Science and Technology. He says the improvement of design education is critical to his mission, as new graduates provide the foundation on which the city’s future prosperity can be built.
Chung, 59, recently spoke to BusinessWeek’s Venessa Wong about the challenges of building a national design education system. He also explained his “Designomics” strategy for Seoul and South Korea. An edited version of the conversation follows.
How does design education in South Korea stack up against other countries in Asia and the West?
The reality is that many institutions still conduct low-quality, technique-based training in design. These institutions lack unique programs, qualified and experienced faculty, well-equipped facilities, an open educational environment, and flexible budgets. This all contributes to poor design education that does not meet international standards. Students graduating from those institutions experience many difficulties with employment. Also, the number of design majors outnumbers the limited spaces for employment.
How can you change this?
To improve design education, universities need to develop and facilitate unique, specialized curricula. Moreover, they need to recruit educators from advanced design nations. The globalization of design education is a major issue. Those institutions that do not conform to this change will be forced out naturally.
To what extent has industry in Seoul embraced design and design thinking?
Top managers of leading corporations in various industries are striving to use design strategically. Corporations such as Samsung Electronics, LG Electronics, Hyundai Kia Automotive Group, and Amore Pacific are providing educational programs in design management for top executives. Several professors, including me, along with executives at design companies, are employed as lecturers to teach how to implement design thinking in business.
Kumho Asiana Group [an industrial conglomerate based in Seoul] opened a two-day design management outreach program in 2006 to educate vice-chairmen and top executives on new understandings about design, design management, corporate identity, and personal identity. The outreach program expanded to senior managers in 2007 and to managers in 2008 to improve the standard of customer service through design thinking.
What is the South Korean’s government’s approach to design?
“Designomics” is Seoul’s new catchphrase. It means expanding the economic role of design to cope with the current depression.
And what does Designomics actually entail?
Mayor Oh announced a comprehensive budget plan of about $100 million for the next three years to improve the design capabilities of small to midsize enterprises. The budget will be spent on building various infrastructures to provide design services, from custom-made design information to the re-education of mid-career designers working in companies or design consulting firms. Seoul has also initiated various design projects to help the poor, the disabled, and the elderly in order to narrow down the social gap.
How will the city government get involved?
There will be a low-interest loan program for businesses that produce highly competitive design products with the latest technologies. Also, we are trying to establish a networking system for design consultancies and freelancers who introduce designs with great potential, linking them to corporations with proper production resources. We will implement an incubating system to provide talented young designers with temporary studios and seed money for necessary equipment and operation.
September 30th, 2009 | Posted by innovIt’s a scary time to be a new graduate. But some seem more optimistic than others.
Around the world, graduates are emerging from interdisciplinary master’s programs that integrate design, technology, and business. These professionals are trained in “design thinking.” Sure, it’s the latest trendy term to sweep the business world, but it’s a technique that designers and executives alike hope may help to provide a solution to some of the world’s serious challenges.
The only problem? There’s no consensus on how to teach it. And there’s no agreement on where these thinkers should spring from. Should design schools create more business-focused creatives, or should business schools foster creative thinking in their MBAs? For now, both approaches to innovating education are rolling out, and both types of programs appear on the 2009 BusinessWeek D-school List.
As departments build on their unique strengths to formulate new programs, varied results have emerged. Some programs are co-taught by professors from design, business, and other departments, such as at Stanford’s Hasso Plattner Institute of Design (d.school). Others, such as a partnership between three schools in Helsinki, bring together students from various universities for cross-disciplinary project work. Another approach: dual degrees in business administration and design, such as the MBA and Master’s in Design program from Illinois Institute of Technology.
Despite the different approaches, the programs have a similar aim: to merge design, business, and technology. Professors urge students to value cross-disciplinary teamwork, to defy inclinations and shatter silos. The theory: Working across functions will offer fresh perspectives on perennial problems and generate more comprehensive and original results. The goal is to combine creative confidence and analytic ability, says David Kelley, founder of Stanford’s d.school and design consultancy IDEO. “The best students are competent in both.”
It’s still early days, and the chasm between business and design yawns. Closer cooperation is necessary. Designers who exhibit business acumen can be involved at a more strategic level within a corporation. Executives who learn to apply design methods such as prototyping or brainstorming have a better shot at building a corporate culture that nurtures innovation—and the business’ bottom line.
According to Roger Martin, dean of the Rotman School of Management at the University of Toronto and one of the early supporters of the discipline, “Every corporation needs a design-thinking type.” That includes industries that may seem like unlikely bedfellows for design, such as banks and law firms.
Visa (V) launched the Global Innovation Strategy Group in September 2008 to align corporate strategy with consumer needs. “As great as an MBA is, we were looking for something more,” says Scott Sanchez, senior business leader for the group. Earlier in 2009, Sanchez hired Laura Jones, 27, a recent graduate from Stanford’s d.school program.
And a number of corporations such as Procter & Gamble (PG), Samsung, and Steelcase (SCS) are beginning to integrate design thinking and its proponents across operations.
Harley-Davidson (HOG) has hired graduates from Northwestern University’s joint MBA and Master’s in Engineering Management program into its Leadership Development Program and gradually promoted them to all levels of management—from product development and marketing to finance and global manufacturing strategy, says Matt Levatich, president and chief operating officer.
And yet, as design thinking moves to the front burner as an innovation tool of choice, questions remain about how its theories can slot into the framework of the business world. Jones is quick to detail that not all of her classmates have found jobs that call for design thinking. Not all corporations know what it is or how to apply it. “It is a work in progress,” she says.
Some designers also balk at the concept, seeing it as a dilution of an industry and discipline they themselves have studied so hard and for so long. “If you teach design thinking, you’re teaching talking: how to use words to describe design,” says Dev Patnaik, founder and chief executive of San Mateo (Calif.)-based design and innovation consultancy Jump Associates. Patnaik says he looks to hire designers and then trains them in business skills as necessary.
Gadi Amit, founder of San Francisco-based NewDealDesign, also has reservations. “Some people think they graduate with industrial design plus capabilities,” he says. Instead, he says, the graduates lack grounding. Nonetheless, Amit acknowledges things may yet evolve. “I am not precluding that maybe there will be a new type of designer, splitting the profession into all sorts of strands and directions, but we are not there yet.”
At this stage, the true impact of design thinking has yet to be seen in industry, as classes are small and graduates are a mere drop in the ocean of global business. But educators, executives, and public officials around the world are investing in the potential of the technique to provide new insight and enhance innovation in a time that desperately needs both. We may not truly appreciate the fruits of these educational experiments for some time, but if effective, these graduates might just redefine the way the world does business.
How We Came Up With Our D-School List
September 30th, 2009 | Posted by innovFor our annual list of educational establishments looking to produce a generation of design-savvy business leaders (and business-savvy design leaders), BusinessWeek asked academics, designers, consultants, and business managers to recommend master’s and MBA programs that combine design thinking and business administration. About 115 schools were suggested by a group of 42 people that includes managers from Microsoft (MSFT), Steelcase (SCS), and Whirlpool (WHR), as well as the leaders of design firms such as Frog Design, Lunar, and Teague.
We gathered information on every recommended program, interviewing administrators, professors, and graduates to come up with a short list. We then tapped our panel for additional insight. Nominations of affiliated programs or schools were automatically discounted.
The final list of 30 schools presents a diverse mix of international master’s and MBA programs that teach both business and design, emphasize design’s strategic role in business, and significantly bridge disciplines such as design, business, and technology.
The education of future innovators and design thinkers is a huge topic, on which there is little consensus. And it should be noted that comparing programs is far from an exact science. We view our list as a starting point for further discussion and analysis.
Panelists
John Barratt, President and CEO, Teague (U.S.)
Sunny Bates, President and CEO, Sunny Bates Associates (U.S.)
Julio Eugenio Bertola, Manager, Industrial Design Center, Electrolux (Brazil)
Ralf Beuker, Professor, Design Management, University of Applied Sciences (Germany)
Ed Boyd, Vice-President, Consumer Experience Design, Dell (U.S.)
Gordon Bruce, Principal, Gordon Bruce Design (U.S.)
Bill Buxton, Principal Researcher, Microsoft Research (U.S.)
Fred Collopy, Professor and Chair, Information Systems Dept., Weatherhead School of Management, Case Western Reserve University (U.S.)
Tom Dierking, Design Director, Innovation Capability, Procter & Gamble (U.S.)
John Edson, President, Lunar (U.S.)
Brandon Edwards, Associate Creative Director, Frog Design (China)
Hartmut Esslinger, Founder, Frog Design (U.S.)
Dan Formosa, Founding Member, Smart Design (U.S.)
Emilio Genovesi, Director, Domus Academy (Italy)
Gil Gershoni, Creative Director and Founding Partner, Gershoni (U.S.)
Tony Golsby-Smith, Founder and CEO, Second Road (Australia)
Vijay Govindarajan, Professor, Tuck School of Business, Dartmouth College (U.S.)
Lee Green, Vice-President, Brand Experience, IBM (U.S.)
Walter Herbst, Clinical Professor of Marketing, Kellogg School of Management, Northwestern University, and Chairman and Founding Partner, Herbst LaZar Bell (U.S.)
Roland Harwood, Director of Open Innovation, NESTA (U.K.)
Krisztina Holly, Vice-Provost and Executive Director, USC Stevens Institute for Innovation (U.S.)
Daniel Joppert, Marketing and New Business, Objeto Brasil (Brazil)
Joice Joppert Leal, Executive Director, Objeto Brasil (Brazil)
Jaewoo Joo, PhD candidate, Rotman School of Management, University of Toronto (Canada, South Korea)
Lorraine Justice, Director, School of Design, Hong Kong Polytechnic University (China)
Prasad Kaipa, Executive Director, Center for Leadership, Innovation & Change, Indian School of Business (India)
John Kao, Chairman and CEO, Kao & Co. (U.S.)
David Kelley, Founder, d.school, Stanford University and IDEO (U.S.)
Kun Pyo Lee, Professor and Head, Industrial Design Dept., Korea Advanced Institute of Science & Technology (South Korea)
Nick Leon, Director, Design London, Royal College of Art (U.K.)
Sharon Li, Creative Coordinator, ?What If! (China)
James Ludwig, Vice-President, Global Design, Steelcase (U.S.)
Roger Martin, Dean, Rotman School of Management, University of Toronto (Canada)
Stephen Melamed, Clinical Associate Professor, Industrial Design, School of Art, University of Illinois at Chicago, and Design Principal, Tres Design Group (U.S.)
Ken Musgrave, Head of Industrial Design, Dell (U.S.)
Alexandre Neves, Master Industrial Designer, Electrolux (Brazil)
Henrik Otto, Senior Vice-President, Global Design, Electrolux (Sweden)
Fernando Pruner, Industrial Design Manager for Food Stream Solutions, Food Preparation & Air Treatment, Whirlpool (Brazil)
Nathan Shedroff, Chair, MBA in Design Strategy, California College of the Arts (U.S.)
John Thackara, Director, Doors of Perception (France)
Dominic Twyford, Principal, India Insights (U.K.)
Deborah Weber, Advertising & Promotional Manager, Design Indaba (South Africa)
September 28th, 2009 | Posted by innovSimple Shoes (DECK) has always been against something. When the company made its debut in 1991, it was against gaudy, futuristic sneakers and coveted logos. In 2005, it came out against using materials that trash the Earth. Both moves paid off handsomely, lifting sales. Now the subsidiary of Deckers Outdoors is turning against stuff that lasts longer than people do, with a line of biodegradable shoes set for next spring.
Rubber can take up to 1,000 years to decompose. Simple is cutting its lifespan to 20 years with its new EcoPure technology. Licensed from Bio-Tec Environmental, an Albuquerque, N.M., company, EcoPure is an organic compound with tiny microbes that eat away at the bonds that hold rubber, plastic, and EVA (a vinyl/rubber-like material) together. It works only under the hot and humid conditions of typical landfills and leaves behind nothing but dirt.
Simple is adding EcoPure to the soles of most of its shoes and flip flops, starting with a new line that highlights the technology: BIO-D. The company has plenty of reasons to think this will boost revenue. Its last green line—Earth-friendly shoes called Planet Walkers, which came out in 2008—helped push Simple’s sales up by 27.4% last year, to $17.2 million, from $13.5 million in 2007.
National Sales Manager Brad Little hardly thinks Simple’s eco-concern is the company’s only reason for success. He says only 10% to 15% of its customers are green buyers. More important, he says, is designing shoes that are sufficiently good-looking that customers will pull them off a store shelf to begin with. “You have to compete on the same playing field as other companies—with materials and functions,” he says. “If you’re not on that level, sustainability isn’t going to get you there.”
Sales so far this year are flat for Simple, but Little attributes the dip to the sour economy. Traditionally, Simple has focused on lightweight sneakers, shoes, and flip flops, but stores such as Nordstrom (JWN) and Journeys (GCO) are ready to broaden their Simple Shoes selection to include heavier items such as boots. Last year, the shoemaker did well with the TOEest and PesTOE, two women’s foldover boots that slightly resemble another of Deckers Outdoor company’s biggest hits: UGGs.
Simple’s moves come at a time when the entire market for eco-friendly clothing is growing. Both high-fashion designers and companies such as Patagonia and Sears (SHLD) have jumped in, offering products that work at the beach or boardroom. From organic and sustainable to recycled and recyclable, outfits are being constructed from all sorts of materials, even plastic water bottles. Check out some of the greenest, coolest clothes in our slide show looking at the latest in earth-friendly fashion.
American Business’ Future Lies Far From Home
September 28th, 2009 | Posted by innovThere are promising signs that the U.S. economy is on the mend. Over the long term, however, the economy’s strength depends on its ability to innovate. Fortunately, most business leaders know this. They are shifting their energies from managing the present—surviving the financial and economic meltdowns—to creating the future.
But we worry that too few U.S. business leaders have recognized that the future is far from home. Indeed, many of the innovations that propel global economic growth over the next few decades will originate in the developing world.
That’s a radical shift. For several decades corporations headquartered in the U.S. have focused their innovation energies on solving problems in their own backyards and then exported their offerings around the globe, perhaps customizing products a bit to fit local conditions. It has worked well, and this pattern of innovation will remain important. But U.S.-based corporations will miss out on giant opportunities unless they become equally skilled at reverse innovation—solving problems in low-GDP-per-capita nations like China and India and then bringing those innovations home.
The need for reverse innovation is, admittedly, counterintuitive. After all, isn’t the U.S. still one of the richest and most technologically advanced nations in the world? And if so, doesn’t it stand to reason that the U.S. will be the first to adopt the next wave of innovations? Won’t the developing world adopt those innovations only when they have “caught up” economically?
No—and here’s why: Developing nations do not look ever more like the U.S. as they develop. They do not follow the same path of economic development as the U.S. did. In fact, they can easily jump ahead. How? There are three basic storylines, and they begin when:
• Developing nations take advantage of modern technology. On the basis of GDP per capita, India today is where the U.S. was in the late 19th century. But India is in an enviable position by comparison. It will not solve its problems with 19th century science and technology; it will do so with 21st century science and technology. India and other developing nations are eager to adopt new technologies that deliver decent performance at an ultra-low cost—a 50% solution at a 5% price. Rich countries may not find such technological breakthroughs attractive today—for them, nothing less than a 90% solution will suffice—but new technologies rather predictably get better each year and eventually become attractive in the rich world.
• Developing nations build infrastructure from the ground up. China and India are unlikely to duplicate the infrastructures of the rich world. They are more likely to build backbones for communications, energy, and transportation that fit today’s realities, such as unpredictable oil prices and ubiquitous wireless technologies. Meanwhile, the evolution of related industries in the rich world will be constrained by choices made decades ago. New infrastructure will not be installed until old infrastructure needs to be replaced. This gives low-GDP-per-capita countries the opportunity to jump ahead.
• Developing nations tackle sustainability challenges. There are far more people on the planet today than there were a century ago, when today’s rich countries were poor. As a result, developing nations will be forced to solve sustainability problems much earlier in their development trajectory. They will tackle many of the globe’s sustainability problems long before the rich world finally acts.
Because of these possibilities, the developing world can no longer be viewed as just a high-growth market for existing products or just a destination for offshoring to reduce costs. These countries must also be viewed as the global economy’s pressure cooker for innovation.
Too many American multinationals are failing to engage them on this level. Some have set up research-and-development centers in places such as China and India, but they have done so only to take advantage of the opportunities to hire talented scientists and engineers and save on costs. So they have kept these distant facilities focused on rich-world problems and under the direct control of headquarters.
That approach must stop. If U.S.-based multinationals do not innovate to solve problems far from home, new competitors, especially those rooted in the developing world, will seize those opportunities. They will take the lead in innovation—and not just in their own countries but worldwide. And if they do, the U.S. will pull out of the Great Recession only to find itself in the Great Stagnation.
Will The Players Please Take The Field For The Next Round Of M&A
September 25th, 2009 | Posted by stockPosted by: Howard Silverblatt on September 25, 2009
A long long time ago, in May of 2007 when the S&P was 46% higher, there were $461 billion in deals sitting on the 500’s table, including 13 private offers worth $255 billion. Monday mornings were for merger announcements and target company prices to jump. But that was then. Since then profits, liquidity, sales, home prices, and stocks have all gone done, while unemployment, risk, uncertainty and fear have gone up. M&A, along with most of the IPO market went into hibernation. But now the environment is warming and there are signs of a thaw.
The weapons of mass M&A are cash and shares, with institutions liking cash and individuals typically preferring stock, since most stock deals are tax deferred. Cash for the S&P industrials are now at an all time high. The cut backs, lack of spending, and desire to build up reserves to see them through the recession has resulted in companies, on aggregate, having over 10% of their market value in cash, with Health Care and Technology having over 15%. Common shares from all those record buybacks that sit in the company’s treasury account, to which companies would love to be able to justify the higher purchase price for, are now worth over 14% of their market value, with the recent market gains adding $300 billion. The props are that when you add the cash and shares together you get a war chest worth over 22% of market value, to which I find nothing matching it in recent history.
The setting for these props is earnings. Sales for the S&P 500 have declined 18% or $860 billion over the last two quarters, but companies have been able to limit the bottom line damage through cost cuttings. The current quarter is expected to be the same. But you can only cut so much and for so long, before you need to increase your top line in order to increase your bottom line. To which there are two ways to increase sales – slowly by building product and customer base, or quickly through M&A.
Given their resources, their need to quickly catch a returning consumer whose loyalty is now is in conflict with price, I believe that M&A will be the choice of many. The question is when will the companies come out and play. The simple answer is when they believe that their product and their business model are stable, and that the recession is behind them. The more realistic answer however is when they think they can add to sales quickly, even at a premium price, and take advantage of higher margins that can quickly increase their bottom line. That should make for a different type of M&A market, and at the very least reduce the use of the dreaded word synergy, since the time schedule to show bottom line results will be shortened.
Possible tax credit cuts worry educators
September 24th, 2009 | Posted by taxBy Jan Murphy and David Dunkle The Patriot-News, Harrisburg, Pa.
Publication: The Patriot-News (Harrisburg, Pennsylvania)
Sep. 24–The future for the Nativity School of Harrisburg and its 34 students looks bleak if funding for the state’s education tax credit program gets cut too deeply.
In fact, this nonpublic middle school that serves low-income boys from the city might have to close, said Executive Director and Principal Jairee
Counterman.
“We’re really nervous about the proposed cuts,” she said.
Through the 8-year-old Educational Improvement Tax Credit program, businesses receive up to a 90-cent break on certain state taxes for contributions of up to $300,000 to approved education organizations to fund scholarships or public education programs. Tax credits are made available on a first-come, first-serve basis and generally are scooped up quickly after the July 1 start of the fiscal year.
According to the state Department of Community and Economic Development, businesses already have applied for all but $4.8 million of $75 million in tax credits that were expected to be available this year.
But that level of funding now seems unlikely.
The $27.9 billion budget deal struck on Friday by Gov. Ed Rendell and legislative leaders of three of the four caucuses includes $39 million in cuts to the state’s $400 million roster of tax-credit programs this year. The deal also calls for $75 million in cuts to the programs next year.
Discussions continue as to how those cuts will be divided up among the tax-credit programs during the two years, according to caucus and administration sources.
Counterman said, “If the proposed cuts go through and we are unable to replace EITC dollars with private contributions from individuals, foundations and corporations, we will not be able to keep our doors open.”
About $200,000 of her school’s nearly $500,000 budget is funded from tax-credit-fueled scholarships it receives.
The city’s Gamut Theatre Group, which runs Popcorn Hat Players and other theater schools and activities for youngsters, also relies on the tax program. Gamut Theater faces an uncertain future if the 10 percent, or $30,000, of business donations spurred by the tax credit go away, artistic director J. Clark Nicholson said.
Businesses, too, have come to rely on the program to help fulfill their corporate charitable giving mission.
“Candidly, I believe that there would be less contributions from businesses” from a smaller tax credit program, said Donald Nikolaus, president of Donegal Mutual Insurance Co. of Marietta.
His company uses the tax-credit program to fund private school scholarships.
Senate Republicans and lobbyists said Rendell was pushing for a $20 million cut in the education tax credit program for this year so the cut in the state’s film tax credit would not be as severe. They rejected that. A Rendell spokesman said Wednesday it’s their understanding that the education and film tax credit programs would be cut equally.
Still, the Rev. Edward Quinlan, secretary of education for the Roman Catholic Diocese of Harrisburg, said he was puzzled that Rendell would allow the education tax credit program to be cut at all, given his insistence on $300 million more for public schools.
“We say children are so important we’re going to increase the funds, and yet for some children, they don’t count as much or at least they don’t seem to count as much,” Quinlan said.
He also is puzzled that any state funding for film tax credits would be preserved while the education tax credit program gets cut.
“I just find it difficult to understand how anyone who is saying they are in support of children and education would cut a program serving schoolchildren as opposed to a program for tax credits for Hollywood,” Quinlan said.
Penn National Insurance in Harrisburg, a business supporter of Harrisburg School District, has contributed $2.2 million to education organizations since 2002 through the tax credit program, said vice president for corporate communications Christopher D. Markley. Much of that has benefited the district, with a smaller portion going to private school scholarships.
“The EITC program has allowed us to give more than ever before because of the incredibly generous tax advantages,” Markley said. “We would view it to be unfortunate if the tax credits were cut.”
To see more of The Patriot-News, or to subscribe to the newspaper, go to http://www.patriot-news.com . Copyright (c) 2009, The Patriot-News, Harrisburg, Pa. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com , call 800-374-7985 or 847-635-6550 b, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
Innovation and Its Army of Opponents
September 23rd, 2009 | Posted by innovMore than 50 years ago, noted economist Joseph Schumpeter wrote, “The resistance which comes from interests threatened by an innovation in the productive process is not likely to die out as long as the capitalist order persists.” He might have been more prescient if he had said that such resistance would actually strengthen over time.
A growing array of neo-Luddites (they get their name from Englishman Ned Ludd, whose followers sabotaged textile factories at the beginning of the Industrial Revolution) views new technology as a threat, not as progress. A host of organizations—ranging from liberal groups such as the ACLU to conservative ones such as the Eagle Forum—is fighting innovations like mobile commerce, smart IDs, behavioral targeting on the Internet, and the use of IT in health care, decrying them as threats to privacy and civil liberties.
What is especially troubling is that in contrast to a generation ago, when neo-Luddites were largely consigned to the fringes of political debate, today they are accorded more widespread legitimacy. Twenty years ago, a person who wrote that the government plans to forcibly implant radio frequency identification (RFID) chips under the skin of Americans, akin to the mark of the beast as prophesied in the Book of Revelation, would have been dismissed as a crackpot. Yet today Katherine Albrecht, the person who makes this claim in her book Spychips, is widely quoted by the mainstream media, is invited to testify at government hearings, and even gets published in Scientific American, a journal that used to stand for objectivity.
Passionate activists are not the only digital Luddites. Businesses threatened by technology-based competition have sought to enlist government protection. The list is long and troubling. Car dealers have succeeded in getting laws passed in all 50 states making it illegal for automobile manufacturers to sell vehicles directly to the consumer, including over the Internet. Realtors have colluded to try to shut out Internet-based brokers to protect their 6% sales commissions. Brick-and-mortar pharmacies have fought to make it illegal for pharmacy benefit manager programs to impose lower co-pays for drugs purchased from pharmacies but through mail order and Web orders. Optometrists have conspired with contact lens manufacturers to prevent e-commerce lens sellers from getting products.
Unions and their allies also get in the game fighting against new technologies, fearing job loss. One industry that has long been a battleground is food retailing, where grocery unions have opposed consumer-friendly innovations. For example, in the mid-1970s when grocery stores began to widely use bar codes on food products, unions convinced several states, including California, to pass mandatory price-marking legislation that required stores to place individual price labels on all products. In other words, stores had to waste money putting individual price labels on all products.
Now California is poised to act again. Legislation introduced on behalf of the United Food & Commercial Workers (UFCW) union and its allies would restrict self-service checkout in grocery stores, making it harder for companies to give consumers the choice to use technology to avoid long checkout lines.
Opponents of innovation seldom are so crass or politically naive as to say, “Stop this innovation, it is hurting us (costing jobs, reducing profits, etc).” Rather, they couch their Luddite claims in the veil of protecting the public interest. Car dealers only wanted to protect the consumer from unscrupulous manufacturers. Travel agents, in seeking to enlist the U.S. Justice Dept. against the airlines forming online travel site Orbitz (OWW), were doing it only because they “act as the public’s representatives and help keep prices low.” Optometrists were only trying to protect consumers from eye damage.
Opposition to grocery-store technology is no different. As University of Illinois sociologist John Walsh writes, “Unions would likely less successfully oppose scanning based on the increased front-end productivity—their loss is consumers’ as well as companies’ gain.” Instead, Walsh notes that in order to more effectively convince legislators to oppose these technologies, unions align with powerful consumer groups to claim that they are only acting in the interest of consumers.
The UFCW and its allies have latched onto a novel rationale in opposing self-checkout: They are trying to protect youth from underage drinking. To help make that argument, the labor-allied Los Angeles Alliance for a New Economy (an advocacy organization committed to “growing industries which cannot be exported, including those in the fast-growing service sector”) and UCLA’s Community Economic Development Clinic (whose mission is to train “law students to represent community-based organizations in projects designed to create jobs, build affordable housing, and provide critical services in low-income neighborhoods”) published a study, replete with the pictures of drunken teens, claiming that self-checkout is not reliable in stopping underage alcohol purchases.
But both the facts and background belie these claims. Self-service checkout systems already provide significant controls to protect against illegal alcohol purchases. The systems can automatically alert the retail clerk when a customer scans alcohol, requiring the clerk to check the customer’s identification and verify that he or she is at least 21 years old before the sale can be completed. Moreover, analysis of the bill by the Senate Governmental Organization Committee reports that the staff of the California Alcoholic Beverage Control Dept. “notes that they have no evidence of any problems associated with minors purchasing alcoholic beverages through self-service checkouts in California.”
The real purpose of the legislation is to thwart the newest entrant to the California grocery market—Tesco’s (TESO) Fresh & Easy chain. One anti-blog (yes, someone actually has written more than 600 blog posts attacking the company) referred to the bill as the “Tesco Fresh & Easy Law.” Why target Fresh & Easy? First, unlike Safeway (SWY) and Kroger (KR), it is a nonunion retailer. And just as troubling from the union’s perspective, it is hyperefficient, employing fewer checkout workers due to the ubiquitous use of self-checkout systems.
While it’s not reasonable to expect Luddites to become full-throated technology advocates, it is reasonable to expect policymakers not to fall for their claims of protecting the public interest, when what is really going on are efforts to protect the narrow interests of a select few in business or labor over the broader interests of American consumers. Policymakers need to side with Americans in general and resist the pressure from those who oppose innovation.
September 22nd, 2009 | Posted by taxPublication: Investors Chronicle – magazine and web content
Byline: Moira O’Neill
PORTFOLIO: The wide disparity between income and capital gains taxmeans many tax experts have been working on ways to turn income intocapital gains
Converting income into capital gains has become the tax planner’s favourite strategy for high earners with the top rate of income tax set to rise to 50 per cent in April 2010. But some experts are warningthat capital gains tax may also be set to rise, and investors who can crystallise gains now should do so.
Investors who take capital gains, rather than income, can take advantage of the more generous 18 per cent capital gains tax rate that was introduced in April 2008, and the GBP10,100 tax-free capital gainsallowance. In contrast, income tax is much higher, with a top rate of 40 per cent, rising to 50 per cent next year, and the annual tax-free income allowance is smaller at just GBP6,475 for under 65s, risingto GBP9,490 for those aged 65-74 and to GBP9,640 for anyone aged 75and over.
People earning over GBP150,000 a year will see tax rise to 50 per cent from April 2010. From 2010-2011 the basic personal allowance forincome tax will be gradually reduced to nil for individuals with ‘adjusted net incomes’ above GBP100,000 a year.
In the light of a shifting fiscal climate, investors should consider whether it is more advantageous from a tax perspective to positiontheir portfolios to capture capital gains or income. Jane Sydenham, investment director at Rathbone Investment Management, says: “The increasingly wide gap between the top income tax rate and capital gains tax rate has been influencing our investment thinking, encouraging usto generate capital growth rather than income.”
This is simply good tax planning. David Austin, managing director head of financial planning at Cazenove Capital, says: “I haven’t heard anything specifically that HM Revenue takes a dim view of turning income into capital gains.”
However, wealth managers warn that the disparity between income tax and capital gains tax rates may not last long. Prior to April 2008,CGT was 40 per cent and some experts think it could swiftly rise back to this level.
Ms Sydenham says: “Speculating on a number is very difficult but the gap between the top rate of income tax at 50 per cent and capital gains tax at 18 per cent is enormous. It seems like an anomalous gap given that government is keen to cut spending and raise taxes.
“We are of the view that the gap is probably too wide and seems likely to be reduced, given the vast levels of government debt and reduced tax receipts, as capital gains tax is an easier target for governments looking to raise revenue than income tax.
“CGT doesn’t raise an awful lot of money but seems vulnerable.”
Mr Austin says: “The slight concern is: does one believe the dislocation of rates is sustainable? It simply encourages people to issue products for the CGT regime.
“However, if CGT went up to 40-50 per cent it would catch the natural entrepreneur which presumably the government wants to avoid. The previous CGT regime – with business asset taper relief – was quite a good system.”
Meanwhile, Ms Sydenham warns that recent tax changes have often been introduced retrospectively and investors need to consider that risk. “It may be worthwhile thinking about taking some capital gains early, if appropriate on investment grounds. A rate of 18 per cent is still pretty attractive by historical standards.”
How to take advantage
Here are some products that have been attracting the attention of tax planners seeking to restructure portfolios for capital gains rather than income. However, financial advisers generally caution against allowing the tax tail to wag the investment dog.
Ucits III funds:
The implementation of Ucits III fund rules allows onshore funds touse derivatives, which enable them to take short positions. These funds can use absolute return hedge fund strategies and can apply a range of techniques to provide the absolute return hedge fund strategy exposure. They are taxed to capital but the older style of offshore hedge fund (with non-distributor status) had gains and income taxed atthe investor’s rate of income tax.
Structured products:
Structured products incorporate some form of capital protection combined with defined returns calculated by reference to the change in an underlying asset, for example the FTSE 100 Index. Structured products are normally created so as to ensure the proceeds returned at maturity are categorized as capital gains rather than income. It is important to note that tax treatment is subject to change, however, and cannot be guaranteed to remain the same during the term of the product.
Zero-dividend preference shares:
High earners are buying into the new zero-dividend preference shares being issued by investment trusts as they seek more tax-efficient ways to generate lump sums for future needs. Much of this demand is being driven by zeros’ increased tax advantages, following the announcement of higher income tax for high earners. Zeros pay no income, but return a defined capital sum provided it can be fully covered by the trust’s assets. As a result, holders of zeros are liable only to capital gains tax at 18 per cent, rather than income tax, which rises to 50 per cent for those earning GBP150,000 or more from April 2010.
Qualifying life policies:
The rules for a policy to be qualifying are complex, but require the policy to be run for a minimum time and to include a certain amount of life-assurance cover. The advantage of qualifying life policies is that you do not pay any income or capital gains tax when they mature. Mr Austin says: “It’s an older style product and has typically been a high commission product with large penalties for early encashment. But we’re talking to providers to try to change this.”
Offshore investment bonds:
The bond’s income and gains can be tax-free if the life assurance company is based overseas. The key tax benefit is that investors can withdraw up to 5 per cent of their initial capital from the bond eachyear without triggering a tax liability.
Individual savings accounts:
Any capital gains within an Isa wrapper are free of tax. However, Mr Austin says: “Lots of people forget that the income from an Isa istax free too.”
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