Wednesday, June 05, 2013

The Build in America Comeback Diversion


By Chriss Street

 When Presidents Nixon and Clinton got embroiled in serious scandals they both politically triangulated in favor of legislation considered vital by their opponents.  

Nixon passed the Clean Air Act and founded the Environmental Protection Agency.  Clinton ended “Welfare as we know it” by passing the Personal Responsibility and Work Opportunity Act.  With President Obama facing a blizzard of expanding scandals, I expect he is prepared to support conservative legislation that would positively reform America’s corporate income tax and to spur a renaissance in American manufacturing.

The average global corporate income tax rate is 25%.   
But since President Reagan cut tax rates and eliminated deductions to simplify the tax code in 1984, multi-national corporations’ lobbying of Congress resulted in much higher tax rates and new loopholes and deductions that expanded U.S. Tax Code from 26,300 to 73,608 pages.  Companies whose business is solely in the U.S. — food chains, retailers, railroads, and truckers — are exposed to the full 35% corporate income tax rate (5% more counting state and local taxes), whereas companies with extensive foreign operations or transferrable intellectual property such as pharmaceutical patents and software limit the U.S. corporate taxes they actually pay to an average rate of 26%.

In January of 2011, I published a scathing expose in Breitbart’s Big Government blog: “President Obama Empowers Jeffrey Immelt as the Ultimate Crony Capitalist,” about the hypocrisy of appointing the Chairman and CEO of General Electric to head the new President’s Council on Jobs and Competitiveness.  Mr. Immelt had been bragging about the advantages of outsourcing U.S. jobs to China: “The interaction between government and business will change forever.  In a reset economy, the government will be a regulator; and also, an industry policy champion, a financier, and a key partner.”

Just the year before, G.E.’s Tax Department deployed an army of 975 staff and consultants to arrange that G.E. booked its profits outside the U.S. and its losses inside the U.S.  After out-sourcing the bulk of their operations, with worldwide profits of $14.2 billion in 2010, G.E. paid no U.S. corporate income taxes.  From 2010 through 2012, the company only paid U.S. tax at a 3.6% average rate.  With 4,663 stores and 1.3 million American employees, Wal-Mart paid at the average of 33.6% rate over the same period.
Corporations understand that competition drives average profit margins down to about 3.5% of sales.  Manufacturers traditionally have not had much bargaining power with suppliers or vendors in competitive markets.  Consequently, they tended to compete on the net cost of labor, which averaged about 8.5% of sales in the U.S.  Fifteen years ago, Chinese labor costs averaged 5.5%, including transportation to U.S.  With energy costs for OPEC oil about the same at 13.5% of sales, out-sourcing U.S. manufacturing jobs to China enriched profitability from 3.5% to 5.5%, a 60% improvement.

Fifteen years later, the boom in China manufacturing labor demand has driven up Chinese worker wages and driven down U.S. worker wages.  Today labor costs are approximately equal after import costs.  But over that same period, the energy costs for natural gas in the U.S., due to fracking, have plummeted by 75% versus only a 20% decline in China.  This huge U.S. energy cost advantage makes U.S. manufacturing costs substantially cheaper than China and explains why Ford, Michelin Tire Company and Apple are “re-shoring” manufacturing jobs back to the United States.

Last year U.S. Manufacturing jobs rose for the first time in 10 years, due to the combination of labor and energy cost competitiveness.  This trend would be a tsunami, except much of the competitive advantage is wiped out by ludicrously high corporate income tax rates.  If those jobs returned, unemployed workers receiving government benefits would turn into taxpayers and our dual trade and budget deficits would vanish.
President Obama needs to show that he can still lead the country.  I expect him to propose  cutting the top corporate income tax rate from 35% to 28%, in return for Congress eliminating many loopholes.  Such a tax cut would be revenue neutral on the amount of corporate income tax collected, but it would launch the manufacturing tsunami by dramatically improving the competitiveness of “Made in America”

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