Tonelson blasts use of tax code to stop job hemorrhage

http://www.americaneconomicalert.org/view_art.asp?Prod_ID=1089

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

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.

"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."

Kerry does not assert this.

Kerry does assert that giving tax incentives as a reward for going off shore or outsourcing is stupid. He wants to end that stupidity.

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