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Nonsense as Usual: Bush Contention that Tax Reform Is Key to Manufacturing Competitiveness
AmericanEconomicAlert.org ^ | Wednesday, April 14, 2004 | Alan Tonelson

Posted on 04/15/2004 9:57:36 AM PDT by Willie Green

For education and discussion only. Not for commercial use.

It must have been a genuinely pathetic moment. Leading New York State officials such as Republican Governor George Pataki, Democratic U.S. Senator Charles Schumer, and Democratic Congressman James Walsh had just spent months trying to persuade Carrier Corp. to keep two air conditioner factories in the Syracuse area rather than transfer them to Georgia and Asia. Ultimately, the politicians and the company´s unionized workers offered this United Technologies division a combined $210 million in tax breaks, subsidies, and wage and benefits givebacks.

Last October 28, they got their answer from Carrier: “Thanks, but no thanks.” The explanation: The package “cannot reverse the economic realities that Carrier is facing.” Translation: “We can make much more money by moving to penny-wage manufacturing sites.” And the clear lesson for anyone following globalization issues: Tinkering with the tax code won´t stop or even stem trade-related job flight.

The sharp limits of taxes as globalization policy tools will come as bad news to the (multinational company-dominated) National Association of Manufacturers and the Bush administration. Both have been insisting that high domestic taxes and not outsourcing-focused trade agreements are really to blame for the millions of manufacturing and now service jobs streaming overseas.

Sen. John Kerry, however, won´t welcome straight talk on taxes, either. The presumptive Democratic presidential nominee, a strong supporter of outsourcing-focused trade deals, is also blaming U.S. tax policies for outsourcing – specifically, alleged tax incentives for creating jobs and hiding profits offshore.

Yet this tax reality check shouldn´t come as news at all to Bush, Kerry, or anyone else even minimally informed about global economic and business realities. After all, it´s common knowledge that regardless of its official tax rate, the typical multinational company pays little or even no taxes. That´s what all those pricey accountants and loophole-writing lobbyists are for. So it´s always been hard to imagine that overall tax burdens or specific tax code provisions per se are driving multinationals´ job-creation activities overseas. But as so often happens with subjects raised as globalization issues, almost no one bothers to put two and two together.

A cursory Lexis-Nexis search alone reveals example after example of how stunningly irrelevant tax rates and even tax breaks have been to job flight. Some companies, like Motorola and Maytag in Illinois, have simply taken the money and then run offshore or simply closed down U.S. factories. Others, like Electrolux in Michigan, have mimicked Carrier and brushed off offers of tax breaks and other incentives. And still others, like semiconductor producer LSI Logic in Oregon, seem to have split the difference.

LSI built a chip factory and an R&D center in the state in exchange for hundreds of millions of dollars in property tax breaks. But these considerations have been swamped by continuing uncertainties in the high tech sector, and LSI has balked at building additional Oregon facilities that it and the state had envisaged. Nonetheless, last fall, LSI announced plans to outsource 20 percent of its total production work to Asia immediately, and suggested that a big recovery in semiconductor demand would push the figure up to 50 percent.

Just as important, new systematic evidence of widespread corporate tax avoidance has recently been published by the nonpartisan General Accounting Office, the investigative arm of Congress.  According to the agency, a big majority of all companies operating in America, big and small, reported no tax liabilities at all between 1996 and 2000 – a time when sources ranging from news accounts to their own websites revealed that these firms were outsourcing like crazy.

The GAO reported that big companies – which are likeliest to outsource – actually were more likely than small companies to pay some tax during this period. But 45.3 percent of all large U.S.-owned companies and 37.5 percent of all large foreign-owned companies with U.S. operations reported no tax liabilities during this period. An additional 35 percent of both categories combined paid less than five percent of their total income in taxes from 1996 to 2000. (The basic federal corporate tax rate for large companies is 35 percent.)

Moreover, the share of large U.S.-owned manufacturing companies that paid no taxes rose from 20.3 percent to 34.1 percent from 1996 to 2000, and the share of their foreign-owned counterparts reporting no tax liabilities increased from 25.7 percent to 37.9 percent.

Still skeptical? A 2000 report by the private Institute on Taxation and Economic Policy disclosed that some of the industries with the lowest effective (as opposed to official) tax rates between 1996 and 1998 were among the country´s most robust and fastest growing outsourcers – e.g., electronics and electrical equipment, motor vehicles and parts, and computers, office equipment, and software.

True, these effective tax rates are low in some cases because companies do dodge taxes by parking revenues and job-creating investments overseas. But most tax evasion seems centered around domestic practices, like accelerated depreciation write-offs, research and development tax credits, un-expensed stock options, and the purchase of depreciation rights to public transportation systems.

No one likes taxes and surely U.S. leaders can and should identify ways to cut needless or counterproductive tax burdens for everyone, as well as fix specific wrong-headed tax code provisions. But no tax code changes that would enable Americans to finance essential first-world public services responsibly could come close to offsetting the advantages companies have been enjoying from producing overseas. They flow not only from enduring conditions like poverty-level wages, but from powerful foreign government carrots and sticks developed specifically to attract jobs – including big tax breaks of their own, subsidies for everything from land and fuel to raw materials, and high tariffs and other barriers against imports.

It´s these conditions and practices, combined with trade agreements that enable multinational companies to serve the U.S. market by exploiting them, that would make even a model domestic tax system uncompetitive internationally. Blaming the tax system itself simply confuses cause and effect.

Tax policy is complex and confusing, but here´s a rule of thumb you can count on: The more candidates push tax policy changes as cure-alls for our trade and jobs challenges, the less serious about such challenges they are.

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press)


TOPICS: Business/Economy; Culture/Society; Editorial; Foreign Affairs; Government
KEYWORDS: axixofevil; globalism; taxes; taxreform; thebusheconomy; trade
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To: Willie Green
And the clear lesson for anyone following globalization issues: Tinkering with the tax code won´t stop or even stem trade-related job flight.

Partially correct. "Tinkering" won't do the job. Abolishing the income tax for individuals and businesses will.

The NRST would replace wage withholding for income tax, social security, and medicare, as well as business income taxes and a few others, and replace them with a retail sales tax at the final point of sale.

The NRST would apply to foreign-produced goods as well as American-produced goods. Foreign produced goods currently avoid the markup that must be made on the prices of American products to account for the payroll taxes incurred at every stage of production, transportation, and sale.

Businesses and the "wealthy" would have no need to shelter their earnings offshore, or invest offshore, or send their factories offshore, or solicit the substandard offshore labor, if their income was not targeted by the IRS monster, and their domestic payrolls were not padded by one third to one half to feed that same beast.

The NRST would immediately make American-made products competitive in world markets again.

The NRST would remove the biggest obstacle to self-employment and business start-up we currently have - the IRS and its morass of crippling, threatening tax ciphers and regulations.

21 posted on 04/15/2004 11:57:25 AM PDT by meadsjn
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To: Willie Green
Huh?

Look, I'm not real sophisticated but if the proposal simply taxes purchases, then it's PROgressive, not REgressive--that is, the more one spends the more one pays in tax.

IIRC, the proposal has a 'family-wage' component. What's the big deal, aside from the usual waste and corruption in the Fed Gov--which is going to be there no matter?
22 posted on 04/15/2004 12:01:52 PM PDT by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: Willie Green
or could it be that there's something extremely misleading about the statistics you cite?

ROFL! If you don't like the numbers, just retreat into denial!

23 posted on 04/15/2004 12:03:07 PM PDT by JohnnyZ (Got some dirt on my shoulder -- could you brush it off for me?)
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To: rdb; Poohbah
You guys ought to read the article.

Now we can take taxes out of the equation, too.

Lemmeeeseeee, heah, pilgrim(s): all youse got left is regulation (admittedly onerous) and cost of labor.

When UNIX ports can be done by remote-control from China, rdb, things are gonna look grim...
24 posted on 04/15/2004 12:03:54 PM PDT by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: ninenot; hchutch; rdb3
You like to describe other people's impending doom with onanistic glee.
25 posted on 04/15/2004 12:09:07 PM PDT by Poohbah (Darkdrake Lives!)
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To: JohnnyZ; Willie Green
Actually, while the numbers for manufacturing (NY State, Philly Fed, Virginia Fed, KC Fed, and PMA) all look VERY good (thank God...)

There's a bit more to the story.

China's industrial sector has been having double-digit gains straight through 'the recession' and yesterday's newspaper advises that they are running out of capital to support the growth.

NOW we begin to see increases in activity in the USA.

2+2=4???

Occurs to me that the USA may be the "marginal producer;" our factories gear up only when China's factories run out of capacity. IOW, we are the high-cost production plant, which is shuttered except for cases of dire need.

Hmmmmm?
26 posted on 04/15/2004 12:10:22 PM PDT by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: meadsjn
Businesses and the "wealthy" would have no need to shelter their earnings offshore, or invest offshore, or send their factories offshore, or solicit the substandard offshore labor, if their income was not targeted by the IRS monster, and their domestic payrolls were not padded by one third to one half to feed that same beast.

You'd better read the article at the head of the thread again.

The gist of it is that many of the large corp's do NOT pay US income tax as it is--or that the effective rate is FAR less than the 35% nominal rate due.

They are not offshoring for tax purposes (unless they are extremely stupid.) They are offshoring for LABOR cost purposes.

27 posted on 04/15/2004 12:14:06 PM PDT by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: kaktuskid
GO TO A NAT'L SALES TAX

And your research shows that the VAT has worked out oh-so-well in Europe?
28 posted on 04/15/2004 12:17:49 PM PDT by gipper81
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To: Willie Green
GO TO A NAT'L SALES TAX
CUT REGULATIONS
KILL THE TORT LAWYERS!

Problem Solved!


Exactly, unlike the "make every American an economic serf to uncompetative American businesses and out of control Labor unions" plans of the "fair trade" loonies. Unlike the what the "Fair trade" loonies scream MORE Goverment interference in the market is NOT a workable solution. IT has NEVER worked at ANY time in history, why do they think they can make it work now?
29 posted on 04/15/2004 12:19:28 PM PDT by MNJohnnie (Vote Bush 2004-We have the solutions, Kerry Democrats? Nothing but slogans)
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To: Poohbah
I have a delightful wife.

YOU have Onanism.
30 posted on 04/15/2004 12:29:28 PM PDT by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: ninenot
our factories gear up only when China's factories run out of capacity. IOW, we are the high-cost production plant, which is shuttered except for cases of dire need.

No, when our factories are "shuttered", they're generally shut-down permanently and dismantled.
The stats merely reflect the activity of the diminishing number that have remained open.
It is to be expected that they'd experience some "increase" by picking-up the business formerly performed by the domestic competition that has closed. But the overall trend of outsourcing our industrial infrastructure (including high-tech manufacturing) remains.

31 posted on 04/15/2004 12:36:27 PM PDT by Willie Green (Go Pat Go!!!)
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To: MNJohnnie
an economic serf to uncompetative American businesses and out of control Labor unions"

Right. It's both the fat, lazy businessmen AND the fat, lazy Union types.

Earth calling Minnesota!!

Unions only hold 13% of factory positions in the USA. "Uncompetitive" businesses? Name one, aside from baseball!!

32 posted on 04/15/2004 12:38:31 PM PDT by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: gipper81
A nat'l sales tax is paid ONCE (at retail), VATs are paid throughout the manufacture-distribution-sales cycle!
33 posted on 04/15/2004 12:44:35 PM PDT by kaktuskid
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To: ninenot
They are offshoring for LABOR cost purposes.

And the cost of payroll deductions and compliance push the cost of American labor far beyond the actual take-home dollars the laborer ever sees. These costs are multiplied for all the labor required for every step of the production process, from the mining of raw materials, to the cash register.

It matters little who is technically required to "pay" which portion of the taxes on labor -- the costs are transferred to both the customers in the final price, or to the workers in lower wages.

And no, I wouldn't expect many corporate managers to share their tax relief with their customers or their employees. They will charge what the market will bear for their products and services, and they will purchase their labor and materials to minimize their overall cost of goods sold. Only competition will force them to reduce their prices, and with the IRS and its tax ciphers removed from the equation, competition will be much more fierce.

Removing the payroll taxes on US labor will reduce both the cost of American labor and the cost of acquiring American materials, because the costs of American materials are also artificially inflated to compensate for the payroll taxes involved in all that labor and all the labor required to transport the materials.

Taxation based on income is a slave tax for individual workers, and it is a drag on the engine of our economy.

34 posted on 04/15/2004 1:16:45 PM PDT by meadsjn
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To: meadsjn
Until the 16th was ratified (still in question...) we did quite well with a telephone-use tax and TARIFFS!!!

Imagine that!
35 posted on 04/15/2004 1:20:49 PM PDT by ninenot (Minister of Membership, TomasTorquemadaGentlemen'sClub)
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To: kaktuskid
From a macro perspective, the consumer gets hit in the end regardless how how it is technically administered. I am tired of getting hit.

My point about sales taxes and VATs is that they always go up over time. Always. Started out low in Europe and climbed and climbed. Politicians love these taxes because they are so very close to the revenue faucet.
36 posted on 04/15/2004 1:21:30 PM PDT by gipper81
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To: ninenot; Poohbah
When UNIX ports can be done by remote-control from China, rdb, things are gonna look grim...

Not for me they won't. What? Do you think that my IT career is the only iron I have in the fire?

Hardly.

I have used and will continue to use what I have to grab the world by the ankles and shake the paper out.

rdb2 raised and taught me well, and that's season-in, season-out.


Show 'em my motto!

37 posted on 04/15/2004 1:27:45 PM PDT by rdb3 (Diamond in the back, sunroof top, diggin' the scene with a gangsta lean...)
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To: EternalVigilance
I see you have not yet shed your class-concious blinders.

What? I thought I was the only one who saw things this way.


Show 'em my motto!

38 posted on 04/15/2004 1:38:52 PM PDT by rdb3 (Diamond in the back, sunroof top, diggin' the scene with a gangsta lean...)
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To: gipper81
My point about sales taxes and VATs is that they always go up over time. Always. Started out low in Europe and climbed and climbed. Politicians love these taxes because they are so very close to the revenue faucet.

VATs suck even worse than income taxes. Why? Because they are even more hidden. No sane conservative would give an ounce of support to one.

At least with the National RETAIL Sales Tax, EVERYTHING would be out in the open.

With just this one tax, ALL Americans would then be united in one interest: lowering the rate. It would be the only tax debate left out on the political table.

This is the only way to create a political climate that is conducive to putting the fed guv back within its constitutional limits.

Visibility is the key.

39 posted on 04/15/2004 1:44:32 PM PDT by EternalVigilance
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To: gipper81
My point about sales taxes and VATs is that they always go up over time. Always. Started out low in Europe and climbed and climbed. Politicians love these taxes because they are so very close to the revenue faucet.

Both the House and Senate versions of the NRST stipulate that a two thirds majority is needed to raise the tax rate; a simple majority can decrease the tax rate.

Unlike the current income tax, SS tax, and Medicare tax, the NRST will be visible to every consumer and every voter. Politicians will be more pressured to reduce spending than to raise the tax.

The NRST is the only solution to offshoring, yet proposed, that will reduce the level of government interference in the economy.

40 posted on 04/15/2004 1:52:30 PM PDT by meadsjn
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