MOORONOMICS:

Kerry and Edwards Need to Think Again on Trade and Taxes (Clive Crook, July 13, 2004, Atlantic Monthly)

Kerry and Edwards both seem to agree with Michael Moore and other commentators that the interests of America and its multinational firms diverge. The reason is the corporations' determination to cut costs. The best way for companies to do that, or so it is assumed, is to move production abroad. Firms can then pay lower wages and lower taxes, and they can also lighten their burden of regulation. That's good for profits, the argument goes, but bad for American workers and for the American economy as a whole.

Multinational firms obviously want to lower their costs as much as possible, and one way to do it is by outsourcing production to foreign factories. But the scope for doing this successfully is often much smaller than you might think. It is true that wages abroad, especially in developing countries, are sometimes only a fraction of wages in the United States—but productivity, or output per worker, is nearly always much lower, too. Labor costs, in any case, may be only a small part of total costs of production, regardless of where goods or services are produced. So the economic logic of offshoring is more complicated than simple comparisons of wages suggest.

This is illustrated by the jobs figures themselves. According to a recent study by Matthew Slaughter of Dartmouth College, the foreign affiliates of American companies hired an extra 3 million foreign workers between 1991 and 2001, increasing the total from a little under 7 million to a little under 10 million. But over the same period, those affiliates' parent companies added more than 5 million American workers to their payrolls, raising the total from 18 million to more than 23 million. The idea that multinationals are a net drain on jobs at home is simply wrong. [...]

However, [Kerry] does have a point when he says that tax systems currently discriminate against domestic production by American companies. This is explained in a recent paper by Gary Clyde Hufbauer and Paul Grieco of the Institute for International Economics (www.iie.com). The authors lay out two issues. One is that profits earned abroad are typically taxed more lightly than profits earned at home. Many foreign countries now have lower rates of corporate income tax than America does. America's effective corporate tax rate is approximately 30 percent; Mexico's is 15 percent; Britain's is 18 percent; France's is a little over 20 percent; Ireland's is less than 10 percent; China's is about 10 percent; and Indonesia's is zero. The second anomaly is that many other countries, notably in Europe, rely heavily on value-added taxes. These taxes are imposed on exports from the United States to the countries concerned, but they are not levied on imports to the U.S. from the same countries. Again, this puts American production at a disadvantage.

Kerry's proposal has two main parts. First, he wants to reduce the U.S. corporate tax rate from 35 percent to 33.25 percent. Second, he proposes to limit the deferral of American corporate tax on profits made abroad in respect of goods and services sold to America. (Profits made abroad on goods and services sold "in country" would continue to get the deferral.) The first part is fine, except that it is quite a timid reduction, too small to significantly narrow the big gaps between American and foreign tax rates. But the second part—increasing the tax on foreign profits—is a downright bad idea that would most likely hurt American workers, not help them. [...]

A simpler and better solution would be for America to cut its corporate tax rate by much more than Kerry is suggesting, to bring it more closely into line with the rates applied by other countries.

Zero seems about right.

Posted by Orrin Judd at July 21, 2004 7:30 AM