Facebook vs Medical Device Companies

As the head engineer at a medical device company, I groaned with chagrin when the government put a 2.3% tax on all medical device sales "to help pay for the PPACA." In addition to what I outlined there, here's the sad bottom line: we'll just increase our price to offset the tax. Don't blame us. We have to make ends meet. We don't have a free 2.3% margin (on gross revenue, not net profit...don't get me started) to give away.

Meanwhile, Facebook appears to be on the other end of the Federal tax table, as they should get a $429 million dollar refund from the government for 2012. I'm not joking. They reported $1.1 billion in pre-tax profits. Which means their effective tax rate for 2012 is -40%. My company gets to pay an extra 2.3% tax, and Facebook pays -40%. What is really baffling about this is that in order for the government to recoup the $429 million it is handing out to Facebook, it would need to tax medical devices companies on revenue of the order of $18.65 billion dollars. Facebook makes $1.1 billion and gets a $429 million rebate check. Medical device companies will have to make $18.65 billion dollars to balance Facebook's little bonus.

Here's the thing: I don't begrudge Facebook for playing fast and loose with their taxes. Everyone would do the exact same thing...in fact we all do. The annual game to get the biggest tax refund possible is as much a part of American culture as baseball. Companies move assets to the Cayman Islands, farmers buy a bunch of new tractors, people dump money into their HSA...everyone has their devices for hedging the smallest possible tax burden to Uncle Sam.
What fills me with rage is that Facebook and its ilk do not produce stable, lasting jobs, nor do they produce strong, lasting economic gains. And the benefit of their 'product' to society is debatable. Whereas small medical device companies are job creators, are producing an obvious good for society, and are working in a high-risk, low reward field that takes intestinal fortitude, cunning, and the ability to successfully complete a very-long-term plan.
If everything, and I mean everything, were to go flawlessly for the company where I work, by 2018 we might have about 20 new medical devices on the market. My engineers would have slogged, day after day for five years, against the impediments of short-sighted investors, an anti-science state government, the FDA, and the extremely adept competition rushing alongside us. And at the end of the day the tax system is actually rigged against us and makes it harder for us to save lives. But Facebook gets a huge tax rebate.

Imagine, for a moment, you are me (lucky you). You're trying to convince a software engineer of appreciable talent to join the company. She also has interviews with Google, Facebook, and some app developer. If she joins our company, she can be a part of producing novel, life-altering medical devices. In five years a few of her projects will be in the market. Or she can go to the app-developer company and make apps. In 3 months, she'll have 2 or more apps. She'll produce an app a month for a couple years, and probably make a decent profit on one or two of them. It is extremely hard for medical device companies to attract talent when you are competing against tax-sheltering social fluffware companies that can produce instant profits.

Imagine, once again, that you are me. You're trying to convince an investor to put in $2 million towards a medical device, in exchange for 25% equity. You tell the investor that they won't get a dime back for 3 years at best, and more likely it'll 5. Then the next guy comes in and pitches to the investor a new cloud-based app that allows facebook-integrated file swapping. Basically its your Facebook Friends List + Dropbox*. For $150,000 the investor will get 25% equity and the ROI will start in 3 months and they'll probably make back 5X their initial buy-in in the first year. How can my medical device company possibly recruit investment when these flash in the pan apps are so profitable?

Now, it is good and right that I acknowledge that this is much more meta than just Facebook. The American Innovation System has become intrinsically skewed towards short-term gains and quick thrills. On the one hand, I understand. Only a fool would forego quick profit for a higher risk long-term profit. But on the other hand, consider this:
In 2010, Instagram, a popular app that applied filters to photos taken on smartphones and then allowed the users to upload them to Facebook, Myspace, Google+ etc, raised $500,000 in seed funding. In 2011 they secured $7 million in Series A venture capital investment. In 2012, they secured $50 million in investment. Later in 2012, they sold to Facebook for $1 billion dollars in cash and stock options. At the largest, Instagram had 13 employees. 
What did Instagram do? What was their product? Their product was a FREE app that applied a  hazy filter that made otherwise clear photos look awful. And VC money rained in. It poured in. Do you know how hard I would have to work to get $57 million in Series A venture capital? The answer is I would have to work infinitely hard; I will never be able to raise that kind of money for cutting edge medical devices that can positively change lives. Why would they? They can make way more money, way faster, on some stupid app. Greed and the desire for quick returns has effectively strangled innovation.

Social networking, (most) apps, its all nonsense. There's no long term value. Few, if any, jobs are created. All we're doing is robbing stable industry of talented engineers and programmers.

Let's give a massive tax refund to Facebook, raise taxes on medical devices, and cut Medicare. America has gone insane.



*This is a good idea, why isn't someone doing this?
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