Archive for November, 2010

Congress — It’s Jobs, Stupid!

Tuesday, November 16th, 2010

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.

Reviving American Manufacturing

Tuesday, November 2nd, 2010

The manufacturing industry is like the seat of a three-legged stool.  One leg is manufacturers and what they can do to “save themselves.”  The second leg is people and what they can do as entrepreneurs, business owners, employees, consumers, and voters.  The third leg is what government at all levels can do by means of tax policies, regulation, incentives, and national trade policies.  This stool has been toppled over because only manufacturers have been trying to “save themselves.”  It will take the cooperative effort on the part of all three “legs” to save American manufacturing.

People are starting to wake up to the importance of manufacturing to the American economy.  They have already woken up to the fact that we’ve lost too many manufacturing jobs and that is causing our unemployment rate to stay so high.  They are waking up to the need to revitalize, rebuild, re-invent American manufacturing to “save” it.

On September 28, 2010, a Conference for the Renaissance of American Manufacturing was held in Washington D. C. attended by more than 200 manufacturing executives, legislators, union leaders, trade policy experts, and state and federal officials.   At this conference, Sen. Don Riegle Jr. of Michigan warned that the U. S. economy is on a “downhill trajectory” and “going at a velocity that is very dangerous… The people are screaming to the elected officials that they think we are on the wrong path – because we are on the wrong path.”

Gilbert Kaplan, president of the Committee to Support U. S. Trade Laws, said, “The decline of American manufacturing happened not because of some inevitable shift to a post-manufacturing economy as some argue, but because the United States has picked the wrong policies and not paid attention to preserving and growing manufacturing.  American urgently needs unequivocal and bi-partisan policies in support of reviving manufacturing, with clear performance goals and timelines for action.”

After the Conference, the Committee to Support U. S. Trade Laws, the Economic Strategy Institute, the New American’s Foundation’s U. S. Economy/Smart Globalization Initiative, and other groups released a Statement of Principles, recommendations for major reforms to the U. S. trade system, and recommendations for five specific legislative initiatives to revive American manufacturing.

The Statement of Principles included:

  • Changing tax policies so that manufacturing in the United States is encouraged, not discouraged, and making sure that imports pay their fair share of taxes
  • Creating tax policies that foster manufacturing investment by strengthening R&D and capital investment, and allowing for accelerated depreciation
  • Providing grand and low-interest loans to companies that manufacture in the U. S. (as long as other countries’ governments are providing assistance to their industries)
  • Encouraging a change in corporate culture so that manufacturing in the U. S. becomes a primary objective, and moving plants off-shore is discouraged.

Some of the recommendations for reforms to the U. S. trade system are:

  • A “plus jobs and plus factories” requirement for all existing trade agreements and future agreements, in which it can be shown that the agreement on a net basis has created or will create jobs and factory builds in the U. S.
  • A commitment to balance trade in the U. S. by a date certain in the future
  • Stronger, sustained trade action against foreign subsidization of manufacturing
  • Creation of an unfair trade strike force within the U. S. government
  • Addressing the fact that many imported products are not bearing environmental and health care costs

The five specific legislative initiatives recommended are:

  • Legislation to countervail currency undervaluations and enhance enforcement of trade case orders
  • Rewriting U. S. trade laws in the next session to bring them up to date, deal with the realities of the 21st century, and make sure they are effective in preserving and reviving U. S. manufacturing
  • Rewriting tax laws to encourage manufacturing in the U. S. to ensure that imports pay their fair share of taxes and encourage R&D and capital formation for manufacturing
  • Altering the governmental policy apparatus to provide a voice for manufacturing at senior levels
  • Passage of a Manufacturing Education Act that will develop target vocational and technical training programs at both the secondary and post-secondary level in order to strengthen manufacturing education, and funding programs and institutions to improve the skills of career-changing adults interested in manufacturing jobs.

The first thing needed to solve a problem is to recognize that you have a problem.  Now that key leaders in industry and government recognize that we have a serious problem, we need to work together to solve it.  As Andy Grove, senior advisor to Intel and CEO/Chairman from 1987 until 2005), said, “…the imperative for change is real and the choice is simple.  If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”

Intel has made their choice and announced it will build a new R&D wafer fab in Hillsboro, Oregon and upgrade other existing U. S. facilities for a total investment of between $6 billion and $8 billion.  What will your choice be – reviving American manufacturing or enhancing China’s dominance?