Yeah, Virex has a point. If the USA is so dependant on unskilled jobs that can be outsourced to other countries, you've got a problem regardless. Additionally, if your workforce is so unskilled that you can't create a workable mainstream economy that doesn't rely on unskilled manufacturing/telemarketing/corporate admin jobs that can be outsourced (y'know, like every other first world country was managing before the GFC), then you probably have a whole set of other problems and are still screwed in the end.
It's not just low skill labor that's being outsourced anymore; an increasing portion of high education jobs are leaving America for India and China, as they pump out qualified college grads and build modern infrastructure (and manipulate their currency structure to favor foreign investment). The natural American response to this is to slash education and infrastructure funding to dole out more tax credits. Snide aside, there's no getting around the fact that America's position as a dominant force of major manufacturing and technology is and will weaken over time as more countries catch up to it in development. I for one simply don't think the way to make American labor competitive to China is to pay American workers Chinese wages.
So let's talk about American tax structure encouraging outsourcing. It's worth stating right up front that while America's corporate tax rate is among the highest in the world
on paper at 35% or so, about 2/3s of American corporations (
including most of the biggest)
qualify for more tax deductions than they owe. It's kind of hard to incentivize corporations beyond offering them more deductions than due payment, which I think makes the "crushing tax burden" idea ludicrous, but I'll get back to that.
There's way more out there to talk about than any of us are particularly qualified for, but I think one of the main culprits is the combination of foreign tax credits and a legal construction called "transfer pricing". That old Forbes article hints at the idea, which lies in the fact that foreign subsidiary corporations and their American parents have a lot of ways to move money around and deflate their taxable earnings. Basically, the corporate income tax code deducts taxes from a company for any taxes paid on earnings in another country, and even credits the company a sort of "excess" tax credits for the rare cases when a foreign subsidiary winds up paying higher taxes. But the way the tax accounting for foreign subsidiaries works, it's entirely possible to credit earnings from a subsidiary in one country as part of a different subsidiary - for instance, moving income from a country with a low tax rate to one with a high tax rate, exempting it from a large portion of American taxes while in reality only paying the low taxes of the origin country.
The "transfer pricing" is a different facet but it works much the same way. A company's total bottom line accounts for all gains and expenditures, but it differentiates between parents and subsidiaries. The simple story is that when two divisions of a company transfer things other than money between them - "goods", including immaterial stuff like licenses - they can set their prices on what everything is worth. In practice, an American parent can underprice (or under-report) what it "sells" to its foreign subsidiary, and overpay (or over-report) what it "buys" from same. That's part of why, in that article, GE Capital is able to keep doing gangbusters all the time, even though on paper the American arm of the company bleeds cash every year. The reality is that it doesn't matter to investors or the company itself what numbers a particular arm of a multinational entity reports to the IRS, so long as the whole apparatus is run with one voice. And because the IRS has little authority and much less ability to judge what internal trades are actually worth, there's basically nothing it can do about this.
And if any of this sounds like highfalutin terms for money laundering, you're pretty much right. And if your next thought is "if the law is complicated enough to make this legal, why even bother", there's no small amount of outright fraud and non-payment in the corporate tax world, which especially for foreign earnings the IRS is basically powerless to do anything about. As some astute economists have pointed out, every dollar spent on the IRS generates ten dollars in revenue, since they have never been manned and equipped enough to make actual collected revenue match what the math says it should be. Naturally, the IRS finds itself on the chopping block in almost every Republican budget proposal, since they know nobody (except stalwart technocrats like me) like the IRS, so punishing them is easy.
So let's get to domestic corporate taxes, also know as payroll tax. The vast majority of that is the company matching rates for Social Security and Medicare taxes - mathematically, that basically means a one for one comparison to employment, and comparing that to any other country is definitely a case-by-case basis of the totality of doing business elsewhere. The only two options for lowing this are A) massively lowering American wages (which the government can't do), or cutting the rate (whole or matching) - as matching taxes account for about a third of federal revenue, this either explodes government debt or demands massive cuts in expenditures. I'm perfectly aware that the conservative viewpoint sees none of the possibilities as particularly unattractive. I'm not here to support that argument.
By the way, it's worth noting that the Democratic congress has addressed these issues as recently as last year, when they put through a few bills that would have exempted manufacturing companies from various payroll taxes as an incentive to operate in America, in exchange for fudging around the law of foreign corporate income deferral (basically, making it more expensive for companies to "hold" income overseas, which is a can of worms in itself). In every case, it was
blocked in the Senate by Republican filibuster, leading to this pearl of Republican doublethink courtesy of Orrin Hatch:
Raising taxes on companies’ overseas profits will just incentivize them to move their domestic facilities to another country.
As long as I'm rambling and throwing stones, how about I offer my own proposal? Here's Aqizzar's debt-reducing, job attracting tax plan.
- Count the employer-provided cost of pension plans, retirement packages, insurance plans and other employee benefits as credit against the payroll taxes. If America is going to be committed to employer-based life planning, then so be it. Employers will either provide for their employees through social insurance taxes, or through paying for long-term benefits.
- To pay for it on the government's end, remove the income cap on personal Social Security taxes. As is, only income below about $106,000 is counted for the 6.2% of Social Security tax. For what I'm getting at, consider: in 2007, the 400 wealthiest Americans made a combined $23billion income. Provided they paid all SS tax on all income (doubtful), they contributed about $2.5million (cap was a little lower then); without the cap, it would have been about $1.4billion. Remove the income cap, and
voilą the Social Security trust fund is solvent until the end of time, without so much as touching businesses or anyone below the top 15% of earning households.
- Eliminate the "double tax" credits in foreign corporate income. Your subsidiary's profits pay the host company its taxes, and then money sent back to the American is taxed at the full rate too. Suddenly, it's not so attractive to operate in other countries, if you still want to have a presence in America, as companies will want to so long as we are still the standard-bearer of industrial capitalism.
I'm no economist and there's tons of room to add specific numbers in there, but at least I have a coherent policy proposal, which is more than can be said for most of the actual politicians in this debate.
Author
Topic: The debt ceilling (Read 40267 times)