01 July 2012

How the U.S. Tax Code is destroying Manufacturing

Another Abandoned Factory Building in America
We have a Crisis here in America, and while it's something that many are talking about, the solutions that are being proposed will not help and will only exacerbate the situation and make it much, much worse.
Manufacturing in the U.S. is in STEEP decline, but not for the reasons we've been told.  The truth is that most politicians don't want to talk about the real reason, mostly because of how our media here in the U.S. will handle this kind of coverage.

According to The American Prospect, between 2001 through the end of 2009, American Manufacturing has lost over 42,400 factories.  YES that's not a typo,  Factories not jobs.  Each of these factories employed an average of around 400 employees!  While there are no good statistics between 2009 to current, a trip through places like Ohio and Michigan will tell you that the situation has only deteriorated.

Almost every article that you read on this issue will tell you that the reason manufacturers are leaving the U.S. is because labor costs are cheaper in China.  While this may be true for low cost, low tech products, the truth is that U.S. manufacturers enjoy a MASSIVE edge in efficiency that translates to lower total manufacturing costs in the U.S. vs overseas counterparts.  A look at the Steel industry confirms this.  The Chinese use over 10X the man hours to produce a ton of steel vs. the U.S. and similar comparisons can be made everywhere.  If the issue was simply labor costs being cheaper in China, you would see the Ship building industry in Norway decimated, since they have some of the highest cost of labor in the world.  Same for the Japanese and the Germans.  They are not what you would call "Low Cost Labor".  Yet their Manufacturing sectors remain extremely robust.
Royal Caribbean Cruise Lines provides a fantastic reference point for this.  They recently purchased 2 ships in Norway costing upwards of 1.5 Billion Dollars each.  Think about this, the average U.S. Dock worker gets a total compensation of around $80K a year, including benefits.  They are considered one of the most efficient in the world, requiring less man hours for production than almost any laborers in the world.  Why then would the ship building company not have these ships built in the U.S., considering that in Norway similar workers cost a total of around $120K per employee in total compensation and in U.S. Dollars?  It's very simple, it has to do with our expensive and extremely complicated Tax code.  Norway actually has one of the highest individual tax rates in the world.  Most middle class families pay between 40 to 60% of their income in taxes (Including SS).  However, not wanting to kill the Golden Goose, Norway keeps Corporate taxes fairly low at an average of 28%.  Additionally, capital expenditures and interest payments are fully tax deductible.  What does this mean?  Well, Let's say that there's a ship builder here in the State of NY.  Between City, Local and Federal taxes, that ship builder will have to pay around 45% in taxes.  Additionally, capital expenses must be depreciated over a 5 year period.  This means that if the manufacturer has to upgrade their facilities every year in order to stay competitive, that company STILL must pay taxes on 80% of the money used in the capital expenditure.  This is a HUGE competitive DISADVATAGE that our companies have to bear here in the U.S.  Not only are we telling our companies that they have to pay taxes on improvements to their facilities, but additionally we're going to charge them more than just about any other country in the world.
Why Nothing Is Done
The reason why we don't see anyone doing anything with this is very simple.  Instead of talking about the real reason why manufacturing is declining in the U.S. Politicians would rather paint enemies and talk about how this person or that company is "exporting" jobs.  If anyone dares talk about reducing tax rates on Corporations, they are considered a "Shill" for the rich and the "Right Wing Extremist" and dismissed as idiots.  If we can't, as Americans face reality and realize that we're giving away the store, by keeping manufacturing tax rates so high here in the U.S.  We're going to continue losing more and more jobs to countries overseas that have much friendlier policies towards Corporations.  For those of you who say that it's still more patriotic to keep the jobs here and not to be so "Greedy", I'm sorry but in the world of manufacturing simply does not cut it.  When Sony or HTC or Samsung upgrades their product line every 6 months, the ONLY way that a U.S. company can stay competitive is to at least match the same upgrade schedule.  If Japan, China or Korea allow these companies to fully deduct those capital expenditures, yet here in the U.S. we won't, then guess what.  Zenith, Motorola and RCA end up having to shut down their U.S. Operations because they simply CANNOT compete.
A Plan like 9, 9, 9 would definitely go a long way towards fixing a lot of these issues, but with Cain out of the race, the truth is that his plan is a long shot for anyone to pick up.  Not because it's a bad plan, but because most Politicans don't want to be seen as ripping off someone else's idea.  Well, here's an idea that any politican can rip off from me and I won't say a word.  The 10, 10, 10 Plan with no national sales tax:
  • 10% Flat Corporate Tax Rate
  • 10% Flat Personal Income Tax
  • 10% Flat Import Tax
It has all the advantages of Cain's plan, without the disadvantage of the National Sales Tax, while giving our manufacturers a slight edge over imports, while at the same time eliminating the taxation barriers they previously had to overcome.

3 comments:

ariadne etienne said...

Taxes in the USA haven't been high enough in decades. Infrastructure and education are sorelacking. The health care sector is behind not only countries like Italy and Greece, but also Iran: it cannot provide health care services to ensure the work force is healthy and productive. Mostly is the problem of conservatives in government cutting tarrifs and helping to relocate jobs to China, for which they receive fat bribes. The New Fascism that is destroying America is something that even the most recent president cannot seem to stop. America is done unless we nationalize major industries, implement a rigid tax system, a minimum US content requirement on goods sold in the USA, and end trade with nations like India and China. Just 22 years ago China was a bad guy and corporations told us to go to war, now they're fucking one another and reeping huge profits at the expense of Americans.

NoSocialism.com said...

Germany, Holland, Mexico, India and numerous other countries have no capital gains taxes. Many others, including Canada, China and Japan, have rates much lower than 30 percent.
Little more than a year ago, as the president was approving an extension of the Bush-era tax cuts, he agreed that increasing taxes in the midst of a fragile recovery was a bad idea.

First of all you have to understand what Capital Gains is. Let's say you earn some money, you've ALREADY paid taxes on that money. You then take that money and lend it to someone who then builds a factory with that cash. The Lending vehicle is either a Mutual fund, Direct loans or a purchase of Stock. Either way your money is now FUELING the economy and creating new jobs. In places like Germany, they've realized that they NEED this fuel to keep jobs and exports high, so they DO NOT TAX this activity. Others like Russia and China, who have growth rates that are DOUBLE ours have extremely low rates of 12% or less, again because they realize the VALUE of Job creation. Our economy has both the HIGHEST capital Gains taxes in the world and the SECOND HIGHEST Corporate Income tax rate in the world. Why do you think Clinton was able to Balance the Budget after cutting Capital Gains taxes?

NoSocialism.com said...

Your first point, that U.S. taxes are not high enough. You could tax not the top 2%, as the President says, but the top 5% at 100% of their income and it wouldn't come close to the 1.8 Trillion Dollar deficit we have this year alone!
As for Health Care, you mentioned Greece. Are you kidding me? Would you rather have Health Care than food? Same with Iran. In Greece you lose your entitlement after a year of unemployment http://n.pr/SKcOUm No, what people need is the ability to have a good stable job, so they can afford things like health care, not simply have it handed to them by the Government.

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