US Manufacturing Output is Up, But What About Jobs?
Since 1975, manufacturing output has more than doubled, while employment in the sector has decreased by 31%. While these American job losses are indeed sobering, they are not an indication of declining U.S. competitiveness. In fact, these statistics reveal that the average American manufacturer is over three times more productive today than they were in 1975 – a sure sign of economic progress.
The true cause of dwindling American competitiveness is a tax code that puts domestic firms at a clear disadvantage – not a lack of skill or innovation on the part of the American worker. (Chart after the jump).
In a piece critical of President Obama’s corporate tax policies, Veronique de Rugy explains that U.S. companies are at a disadvantage to their foreign competitors because they are taxed more–and often twice–for the same production:
The U.S. corporate tax rate is simply too high. When you add state corporate taxes to the 35 percent federal rate, you arrive at a whopping 40 percent average corporate tax burden, the second highest among the 30 countries in the Organization for Economic Cooperation and Development (OECD)….Not only is the U.S. rate too high, but the U.S. government also taxes corporations on their worldwide income. That means profits made by an American-owned computer plant are subject to U.S. tax whether the plant is located in Texas or Ireland….
Imagine a French firm competing with a U.S. firm for business in Ireland. The Irish government taxes each subsidiary on its Irish income at the (low) national rate of 10 percent. Fair enough. But unlike the French competitor, the U.S. parent company must also register its Irish affiliate’s dividends back home as income, which is then taxed. If the company can meet certain requirements, it can receive a credit for taxes paid to the Irish treasury. But the firm would still have to pay American taxes at the American rate on the Irish income minus the tax credit. The result is double taxation, costly paperwork, and less competitiveness than the French.
….Because of higher tax costs, U.S.-based firms are losing foreign market share, generating lower returns for American shareholders, and hiring fewer skilled workers back home in the United States. Under these conditions, it’s no surprise that American multinational companies that want to sell their goods abroad try to keep as much cash out of the U.S. as they legally can. It’s a matter of survival.
One way companies avoid these penalties is to become foreign-owned. De Rugy:
This is called corporate inversion: A company switches to the flag of a lower-tax jurisdiction. Such transactions generally have little real effect on U.S. business operations. Firms still pay taxes on all U.S. income, but they no longer pays U.S. tax on foreign income. Companies that can’t afford the costs of inverting probably would have to reduce operations and/or fire workers.
Corporate inversions are just one of many ways in which a U.S. firm can end up being owned by a foreign parent company. A forward-looking American startup may decide to incorporate abroad to enjoy long-term tax savings. That means fewer new jobs in the United States. Foreign acquisitions of U.S. companies have soared from $91 billion in 1997 to $340 billion by 2007.
It’s a global marketplace and other countries have taken steps–including massive corporate subsidization (Airbus)–to ensure they have leg up on their competition. We need to ensure that American companies can compete for their own sake and for the sake of their employees.