How the Late Sen. Lautenberg Made Fortune Off of a Complex Tax Code
Ira Stoll of FutureofCapitalism.com has a great piece over at TIME magazine's website which makes an interesting observation about the late U.S. Senator Frank Lautenberg (D-N.J.), who died from complications from viral pneumonia this morning.
In his 30 years prior to first entering the Senate, Lautenberg made a fortune with a company that is now called Automatic Data Processing, Inc. or ADP. Along with Paychex, ADP is one of the nation's top payroll contract firms. Although Stoll didn't quite put it this way, it seems Lautenberg's fortune earned at ADP was made in no small part possible by the mind-numbing complexity of the U.S. tax code which drove millions of businesses to pay ADP to take care of the hassle for them:
Others will remember Frank Lautenberg, the Democratic senator from New Jersey who died today at age 89, for his career in government. To me the more fascinating story is his career in business.
Because the company where Lautenberg spent the 30 years from 1952 to 1982 — longer than the time he spent in the Senate — is a classic example that manages to encapsulate both the genius and the risks of a certain kind of American business.
It was the success of that company — now Automatic Data Processing, Inc., or ADP — that made Lautenberg the fortune recently estimated at between $55 million and $116 million. That money is what made him a player in politics to begin with as a donor and as a self-financed candidate.
The growth of the company is a tribute to what is possible in America. The company was founded in 1949 as Automatic Payrolls, Inc. by brothers Henry and Joseph Taub, who worked, according to a 2011 New York Times obituary of Henry Taub, first in an office above a Paterson, N.J., ice cream parlor, then in a hotel basement. Lautenberg, the son of what the Times describes as Jewish immigrants from Poland and Russia joined as the fifth employee and recalled “lots of seven-day workweeks, lots of 12-hour days.” The Times obituary of Taub describes him as cleaning his own office at night and delivering payrolls by bus. Now the company — Lautenberg eventually became the CEO — has 57,000 employees, $10 billion in annual revenues, and says it pays one in six American workers.
It all adds up to what sounds like a great capitalist success story — hard work, efficiency, globalization, mutually beneficial voluntary exchange, growth. What’s the downside?
The downside is that the rise of ADP coincided, in America at least, with the rise of the payroll taxes and deductions — for income tax withholding, for Medicare, for Social Security, and for an employee’s pretax contributions to retirement accounts and to employer-paid health-insurance. ADP makes managing these programs more simple for employers and employees, in much the same way that TurboTax makes filing your annual taxes easier. That simplification, though, is something of an illusion; by reducing the burden of compliance for businesses into a payroll processing fee, ADP allows employers just pay the fee and deal with ADP rather than confront directly the mind-boggling morass of paperwork that goes into complying with the various state and federal regulations and bureaucracies governing unemployment insurance, withholding taxes, and the like. Without all that complexity, there’s not much of a business for ADP; businesses could pay their employees the same way they pay their rent, or the electric bill, simply by cutting a check (or sending an electronic payment).
So make no mistake about it, the firm that made Lautenberg his fortune and that in turn, in some sense, helped to elect him to the Senate, is an American entrepreneurial success story worth celebrating. But if America had a smaller and less intrusive government that imposed fewer and more simple taxes and regulations on employers and employees, the Taub brothers and Frank Lautenberg might have applied their formidable business skills to innovation in some other field than making it easier for job creators to comply with rules that are ridiculously complex. The risk is that more and more of America’s entrepreneurial energy is devoted to helping businesses navigate around obstacles that don’t really need to be there in the first place.
Even without an incredibly complex tax code, ADP would still thrive because the outsourcing of payroll just makes a lot of economic sense for many companies.
But Stoll makes an excellent point. While the sheer entrepreneurial talent of Americans has risen to the challenge to mitigate the costs of boneheaded government regulation and insanely complicated tax policy, how much better off would the country be if those energies were not expended on an avoidable problem in the first place?
The media would do well to consider that point of view when it comes to coverage of bills like the Marketplace Fairness Act (MFA), which would require online merchants to assess and collect sales taxes for their customers based on the customer's state of residence. Just because the software market can rise to the challenge and meet the increased demand for such software in light of new legislation doesn't mean that the MFA is pro-business or even good for the consumer.