The U.S. manufacturing base has eroded during the last decade as corporations have taken advantage of the cost and tax savings from manufacturing or remanufacturing product overseas. The United States has transitioned from being the largest worldwide manufacturer to a net importer of finished products. This has resulted in a concurrent trade imbalance, currency pressures, and a diminished economic base.
U.S. -based multinationals have shifted manufacturing to low-cost and low-tax rate countries. This shift has been encouraged by the globalization of technology, improved education and skills outside the United States, and "free trade" economic policies. The authors believe that this shift has also been motivated by U.S. tax policy. The discussion below will cover possible changes in tax policy that would incentivize U.S. economic interests, create jobs, and improve the U.S. fiscal and trade balances.
According to the U.S. Department of Labor, more than 6 million manufacturing jobs have been lost in the United States since the early 1990s. In many cases, these jobs moved overseas, motivated by current U.S. tax policy, which allows companies to defer or avoid taxes on earnings outside the United States but does not permit the same thing for earnings generated domestically.
The Obama administration has initiated proposals to eliminate this preferential tax treatment, but businesses responded that the elimination of tax deferral on international earnings would result in a loss of U.S. jobs. Some companies threatened to shift their incorporation from the United States to a more tax-preferential jurisdiction. The Obama administration argued that it is counterintuitive to have a U.S. tax system that rewards the addition of a job in Bangalore, India, more than the addition of a job in Buffalo, N. Y. The debate was tabled, but the lack of resolution reinforces the need to revisit the entire corporate tax structure and the behaviors and incentives reflected by the current U.S. tax code.
U.S. corporations complain that the United States has a higher statutory tax rate than many countries, some of which have established low rates to encourage companies to relocate within their borders. Countries such as Ireland have rates in the low teens. Some countries such as China make it difficult or impossible to enter their markets without also establishing manufacturing operations there.
When U.S. corporations argue about high U.S. taxes, they tend to focus on the statutory rate of 35%, but little discussion or debate occurs about the actual effective tax rate paid. Evidence is building that most large corporations do not actually pay the "high" official statutory tax rate. In fact, a recent article found that most large corporations were paying around 27% in 2006 ("Corporate Taxes: The Coming Struggle Over Who Pays What," BusinessWeek, January 2009). Some notable companies had dramatically lower rates: General Electric and Goldman Sachs had 2008 effective rates of 5.5% and 0.6%, respectively. A 2007 Organisation for Economic Co-operation and Development (OECD) study found that U.S. corporate taxes are only 8.7% of total U.S. tax revenues, below the average of 9.6% for all OECD countries. The United States had a lower overall tax rate as a percentage of GDP than other OECD countries, where personal income taxes represented the largest component of tax receipts. The facts are inconsistent with the rhetoric.
On the other hand, whether you look at the statutory rate or the effective rate, high U.S. tax rates would result in a lower after-tax cost than if the tax rate were low. The after-tax cost is the (before-tax cost ? [1 - tax rate]). The U.S. tax rate is currently 35%, so the U.S. government is effectively sharing 35% of the cost. This raises the question: Why are U.S. companies so anxious to shift manufacturing jobs and technology overseas?
The tax incentive to transfer technology and manufacturing overseas stems from the ability of U. …