Posted on 12/06/2016 5:17:57 AM PST by MostlyAnti-Lib
Donald Trump’s critics on the left are enraged with his handling of the Carrier Corporation’s intention to move their Indianapolis operation to Mexico. He has possibly been slightly overgenerous in his favors to Carrier in order to get them to reconsider sending 1100 jobs out of the country.
Let us compare the alternative choices of other US companies who consider similar moves in the future:
Cost of an AC unit produced and sold in the US: $4000 approx.
Labor cost to produce (@ 20% average): $800.
Tax savings (under Trump) to produce in US $4000 x (35%-20%): $600.
Note: Current corporate tax rate in US: 35 percent.
Possible proposed tax rate under Trump: 20 percent.
Bottom line to manufacturer:
$4000 – $800 labor + $600 tax savings = $3800!
Cost of an AC unit produced in Mexico and sold in the US: $4000 approx.
Labor cost to produce (@ 20% average): $800 x 5/28 = $142.
Note: Avg. hourly manufacturing wage in Mexico: $5 per hour.
Avg. hourly manufacturing wage in USA: $28 per hour.
(These are ball park numbers, folks, no hair-splitting, if you please.)
Penalty to sell in US if produced in Mexico: $4000 x say 20% = $800.
Note: Trump mentioned a tariff of 35% in his campaign.
He should be able to push 20% through Congress.
Bottom line to manufacturer:
$4000 – $142 labor - $800 tariff = $3058!
$3800 > $3058!
It shouldn’t require a mathematical wizard to make sense of that one!!
Note: Needless to say, there are ancillary costs of doing business that enter into the bottom-line return to the manufacturer: parts, materials, leasing of buildings, cost and maintenance of machinery, etc., but for argument’s sake, let’s assume these costs are approximately equal in the US and Mexico.
Sarah Palin (incidentally, I happen to be one of her biggest fans) has recently erroneously claimed that Donald Trump’s influence in the saving of 1100 US Carrier jobs has been tantamount to “Crony Capitalism”.
To this I say, “Au contraire, Sarah!”:
Obama and Solyndra:
That’s picking winners and losers, i.e., Crony Capitalism.
Trump and Carrier:
That’s smart economics, i.e., NEGOTIATION!!
If whatever breaks Carrier received also apply to other AC manufacturers,then,yes,it’s good economics. Otherwise it is the very definition of cronyism.
The word is out today that Trump didn’t offer them a special deal to keep them in the country. He merely mentioned that he was going to cut corporate taxes and burdensome regulations for everyone and asked them to reconsider.
I do not consider the Carrier deal cronyism at all. Is the owner of Carrier a friend of Trump’s and getting a special deal because he’s a friend of Trump’s? I don’t think so. Isn’t that what cronyism is? When one company, because of who they know, gets special consideration and breaks over the other companies?
The way I see it is this.....
Trump has plans to lower all taxes and rid the country of burdensome regulations so that MANY, MANY businesses will come back to and/or remain in the U.S. Naturally, he has not had the chance to implement any of these changes yet. Seeing as Carrier (and possibly others) are on their way out the door, he has jumped in to negotiate a deal to make them stay. If the changes he proposed for ALL businesses had taken effect several years ago, it’s highly unlikely they’d be leaving in the first place. These few companies who are dealt with individually because they were on their way out and drastic measures had to be taken to get them to stay are exceptions, not the rule. I suspect all he’s done is given them the same lower taxes and less regulation that everyone will see.
This is just smart business on behalf of the country, the company and, most of all, the employees. It’s not Trump rewarding someone because he’s a friend, or because he can cause Trump to personally gain. That’s cronyism.
Fwiw, there is a way to use the corporate income tax to avoid a tarrif. simply provide that the lower tax rates do not apply to income from foreign source products.
If the same deal offered to Carrier is offered to all manufacturers, then it is not crony capitalism. If it isn’t, then it is crony capitalism. Period.
I just posted the same thing. I should have read the posts first.
4 later
Your math is a bit oversimplistic. Corporate tax is applied to profit not gross sales. Using your sale price and assuming a 50% profit margin gives a before-tax profit of $2000. With $800 in labor costs this implies $1200
in non-labor costs. A pre-tax profit of $2000 with a rate of 20% implies a $1600 after tax profit. That would be reduced to $1300 if the rate remains 35%.
In Mexico, assuming the same non-labor costs and a 20% tariff, the pre-tax profit is $4000 - $1200 - $800 - $142 = $1858. Assuming Carrier qualifies as a resident corporation after moving, a 22% tax rate applies giving an after-tax profit of $1449.24 per unit sold.
Obviously, for remaining in Indiana to make economic sense, the US corporate rate would need to be cut, something Trump has promised but it isn’t a certainty. Carrier is betting on Trump to succeed in this regard.
Another point where the “math” of the left makes no sense is their squealing after this was announced that Carrier was bribed to stay by the $7 million in tax breaks it got. Using your values for average labor costs and ignoring other factors, this falls flat on its fave. The difference in average wages is $23 per hour. Multiplying by 40 hrs per week and 52 weeks per year gives a savings of $47,840 per employee per year. With 1,100 employees that’s $52,624,000 per year in potential savings by moving to Mexico. Why would carrier give that up for a one-time tax break that is valued at less than 1/7 of its yearly savings in labor costs?
All states give companies large and small tax breaks. Just go look what Texas has done with less regulation and lower taxes or South Carolina. Trump said leave and I’m going to place tariffs on you but if you stay I promise to roll back regs and Obama care and lower corporate tax rates for EVEYONE
Back when this all came out that Carrier told their employees SOL, I found out that it was new regulations that was the final nail. I’m sure Trump addressed that issue also, and I hope he follows through with his deregulation plan as well as lowering taxes.
Shipping or transportation involved?
There are other considerations to be accounted for in that math. The costs of complying with the overzealous EPA is pretty huge, not to mention all the other alphabet-soup federal agencies that are micromanaging business in the US today. And don’t forget the costs associated with Obamacare, which have skyrocketed.
Trump and company have a lot of work to do to unravel the mess that our government has created for the business world in this country. The cost of compliance has to be outrageous these days, but don’t expect the mainstream media to report on that.
This deal was on the table and rejected by Carrier last March. The Donald sweetened it by promising a better business environment across the board in the USA. Now many Carrier employees will share a merrier Christmas with their loved ones.
Absoluteltly as long as the manufacturers agree to invest $16 million to expand their plants and thus increase jobs for every tax incentive of $7 million, sure, why not.
Look at it this way, if you give me $7.00 and I have to spend $16.00 in your store and hire people who will continue buying in your store for decades to come, wouldn’t you think it’s a good deal?
That’s what I read also. I read that Pence had offered some considerations on a State level. All the hyperbole about Trump from the left and the right I don’t believe happened.
bookmark
Trumps needs to also look at the UNIONS since they have helped push the labor costs high, costs not restricted to just making air conditioners but to every unionized organization and company. Along with excessive government regulations and outrageous union wage demands why would companies not consider moving? Trump has a lot of work to do.
I agree with you completely about unions. Trump always ends his remarks about business by saying that business will be free to move about the States, leaving it to the States to make business better beyond what he does at the federal level. I always believe he is referring to right to work.
I think NLRB should not have the power to try to stop a company from moving to a right to work state and hopefully that could change.
“it is the very definition of cronyism.”
You’re probably right.
My example illustrates the situation for companies that consider moving their operation to foreign countries in the future.
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