Outside of the anomaly of California, the results of the election two weeks ago showed that people were very concerned about jobs, namely, the lack of jobs in the United States and the loss of jobs due to outsourcing offshore in Asia. Our economy is limping along at monthly average of a 1.5 percent growth rate in our Gross Domestic Product (GDP), which isn’t enough to create the amount of jobs we need.
TV news shows, radio talk shows, newspapers, and magazines are now filled with the opinions of pundits on what we need to do to solve the “jobs” problem and kick-start the economy. Until the majority of these experts face up to the fact that manufacturing is the foundation of our economy and realize that we must save American manufacturing to provide the higher paying jobs we need, their numerous ideas and recommendations will fall short of solving the problem.
There is a broad spectrum of ideas and recommendations on how we can save American manufacturing presented in my book Can American Manufacturing be Saved? Why we should and how we can. These ideas and recommendations range from extreme protectionism to reasonable and realistic recommendations. What can we do right now that will have the most impact on helping American manufacturers and create jobs?
First, we need to stop the bleeding. By this, I mean we need to put an end to tax policies and laws that are hurting businesses and keeping them from hiring people. The lame duck Congress needs to stop talking about “extending the Bush tax cuts” and do something about preventing tax hikes from going in effect January 1, 2011. These tax hikes include raising the capital gains tax, eliminating the R&D tax credit, and raising the Death Tax back up to 55 percent, all of which would be the most harmful to businesses, especially manufacturers. Paying higher taxes leaves companies with less money to hire new people. Paying more taxes keeps people from buying goods they want vs. need, which will stimulate the economy and create jobs.
The National Association of Manufacturers has long recommended that the cost of tax complexity and compliance be reduced, focusing on provisions that are particularly complex for manufacturers, such as depreciation calculating cost of good sold, and the corporate alternative minimum tax.
A 121-page report titled “Approaches to Improve the Competitiveness of the U. S. Business Tax System for the 21st Century” was released on December 20, 2007 by the U. S. Department of the Treasury and could be used to start reforming our tax system.
In the 1980s, the United States had a low corporate tax rate compared to other countries, but now has the second highest. Japan has had the highest corporate tax rate at 39.54 percent, but the new government has proposed reducing Japan’s corporate tax rate down to 25 percent. If this reduction goes through, the United States corporate tax rate would be the highest at 39.1 percent (when combining federal and the average of state taxes.) Other countries are continually changing their tax systems to gain competitive advantage. According to the Organization for Economic Cooperation and Development (OECD), Ireland’s tax is lowest at 12.5 percent while most of the other major industrial nations have corporate tax rates ranging from 19 to 30 percent.
The Treasury Dept says, “As other nations modernize their business tax systems to recognize the realities of the global economy, U. S companies increasingly suffer a competitive disadvantage. The U. S. business tax system imposes a burden on U. S. companies and U. S. workers by raising the cost of investment in the United States and burdening U. S. firms as they compete with other firms in foreign markets.”
The study concludes that the current system of business taxation in the United States is making the country noncompetitive globally and needs to be overhauled. A new tax system aimed at improving the global competitiveness of U. S. companies could raise GDP by 2 percent to 2.5 percent. Rather than present particular recommendations, the report examines the strengths and weaknesses of the three major approaches presented.
The Executive Summary also comments on the importance of the individual income tax rates because roughly 30 percent of all business taxes are paid through the individual income tax on business income earned by owners of flow-through entities (sole proprietorships, partnerships, and S corporations). These businesses and their owners benefited from the 2001 and 2003 income tax rate reductions. This sector has more than doubled its share of all business receipts since the early 1980s and plays a more important role in the U. S. economy, accounting for one-third of salaries and wages.
The Executive Summary concludes, “…now is the time for the United States to re-evaluate its business tax system to ensure that U. S. businesses and U. S. workers are as competitive as possible and Americans continue to enjoy rising living standards.”
At the same time, we need to close a huge tax loophole that multinational corporations are enjoying at the expense of American workers and which is a big incentive for U S. firms to invest abroad in countries with low tax rates. In June 2006, James Kvaal, who had been a policy adviser in the Clinton White House and was then a third-year student at Harvard Law School, published a paper “Shipping Jobs Overseas: How the Tax Code Subsidized Foreign Investment and How to Fix it.” In this well-researched paper, Kvaal points out “American multinationals can defer U. S. taxes indefinitely as long as profits are held in a foreign subsidiary. Taxes are only due when the money is returned to the U. S. parent corporation. The result is like an IRA for multinationals’ foreign investments: foreign profits accumulate tax-free. U. S. taxes are effectively voluntary on foreign investments.”
There’s no rule saying American companies ever have to bring that money home. As long as they reinvest earnings overseas, they pay only the host country’s (usually lower) tax rate. Many companies just put the money they make overseas back into their foreign operations, which means more economic growth for other countries, and less here at home. He wrote “when multinationals choose to return profits to the U. S., they can offset any foreign taxes against their U. S. tax…As a result, the effective tax rate on foreign non-financial income is below 5 percent, well below the statutory rate of 35 percent.”
He recommends changing the tax code to a “partial exemption system” that “would tax foreign income only if a foreign government failed to tax it under a comparable tax system. As a result, all corporate income would be taxed at a reasonable rate once and only once.” He opines that this system would reduce incentives to invest in low-tax countries, simplify the taxation of corporate profits, and reduce tax competition by removing the benefit of tax havens. He urged immediate action “to ensure that our tax code no longer exacerbates incentives to move offshore.”
Taxes play a role in the decision of national and multinational companies about where to invest and create jobs. The present tax system penalizes productivity and cripples manufacturers in our capitalist economy. It’s time we had a system where American companies don’t have an incentive to offshore because our tax laws make it impossible for them to compete in the global economy. Time is running out! Congress must act now! Perhaps if you contact your representative in Congress, it will make a difference.