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.

Something to think About

A friend of mine just emailed me this and I thought it would make a nice addition to my blog:

Every once in a while, someone puts together some interesting, yet true thoughts.


To Whom It May Concern

Who ever this boss is he has it nailed down perfectly........read his entire message and the last 3 paragraphs will make total sense to you....and if you are a left leaning socialistic democrat this type of thinking just may get you to re-evaluate your sense of direction for this country. Cuba is a prime example of where we could be if we keep heading towards thinking that the government can provide for our every need.........but first get clear in your head "WHAT AND WHO IS THE GOVERNMENT'....just what does the government produce, plant and harvest, and sell to earn the money that they so freely give to those that could but do not produce and contribute to the productivity of this country. Don't remember where it came from...BUT...once! everyone is in the wagon there will be no one left to pull it.

A letter from the Boss:

To All My Valued Employees,

There have been some rumblings around the office about the future of this company, and more specifically, your job. As you know, the economy has changed for the worse and presents many challenges. However, the good news is this: The economy doesn't pose a threat to your job. What does threaten your job however, is the changing political landscape in this country.
However, let me tell you some little tidbits of fact which might help you decide what is in your best interests.

First, while it is easy to spew rhetoric that casts employers against employees, you have to understand that for every business owner there is a Back Story. This back story is often neglected and overshadowed by what you see and hear. Sure, you see me park my Mercedes outside. You've seen my big home at last years Christmas party. I'm sure; all these flashy icons of luxury conjure up some idealized thoughts about my life.

However, what you don't see is the BACK STORY :

I started this company 28 years ago. At that time, I lived in a 300 square foot studio apartment for 3 years. My entire living apartment was converted into an office so I could put forth 100% effort into building a company, which by the way, would eventually employ you.

My diet consisted of Ramen Pride noodles because every dollar I spent went back into this company. I drove a rusty Toyota Corolla with a defective transmission. I didn't have time to date. Often times, I stayed home on weekends, while my friends went out drinking and partying. In fact, I was married to my business -- hard work, discipline, and sacrifice.

Meanwhile, my friends got jobs. They worked 40 hours a week and made a modest $50K a year and spent every dime they earned. They drove flashy cars and lived in expensive homes and wore fancy designer clothes. Instead of hitting the Nordstrom's for the latest hot fashion item, I was trolling through the discount store extracting any clothing item that didn't look like it was birthed in the 70's. My friends refinanced their mortgages and lived a life of luxury. I, however, did not. I put my time, my money, and my life into a business with a vision that eventually, some day, I too, will be able to afford these luxuries my friends supposedly had.

So, while you physically arrive at the office at 9 am, mentally check in at about noon, and then leave at 5 pm, I don't. There is no "off" button for me. When you leave the office, you are done and you have a weekend all to yourself. I unfortunately do not have the freedom. I eat, and breathe this company every minute of the day. There is no rest. There is no weekend. There is no happy hour. Every day this business is attached to my hip like a 1 year old special-needs child. You, of course, only see the fruits of that garden -- the nice house, the Mercedes, the vacations... you never realize the Back Story and the sacrifices I've made.

Now, the economy is falling apart and I, the guy that made all the right decisions and saved his money, have to bail-out all the people who didn't. The people that overspent their paychecks suddenly feel entitled to the same luxuries that I earned and sacrificed a decade of my life for.

Yes, business ownership has is benefits but the price I've paid is steep and not without wounds.

Unfortunately, the cost of running this business, and employing you, is starting to eclipse the threshold of marginal benefit and let me tell you why:

I am being taxed to death and the government thinks I don't pay enough. I have state taxes. Federal taxes. Property taxes. Sales and use taxes. Payroll taxes. Workers compensation taxes. Unemployment taxes. Taxes on taxes. I have to hire a tax man to manage all these taxes and then guess what? I have to pay taxes for employing him. Government mandates and regulations and all the accounting that goes with it, now occupy most of my time. On Oct 15th, I wrote a check to the US Treasury for $288,000 for quarterly taxes. You know what my "stimulus" check was? Zero. Nada. Zilch.

The question I have is this: Who is stimulating the economy? Me, the guy who has provided 14 people good paying jobs and serves over 2,200,000 people per year with a flourishing business? Or, the single mother sitting at home pregnant with her fourth child waiting for her next welfare check? Obviously, government feels the latter is the economic stimulus of this country.

The fact is, if I deducted (Read: Stole) 50% of your paycheck you'd quit and you wouldn't work here. I mean, why should you? That's nuts. Who wants to get rewarded only 50% of their hard work? Well, I agree which is why your job is in jeopardy.

Here is what many of you don't understand ... to stimulate the economy you need to stimulate what runs the economy. Had suddenly government mandated to me that I didn't need to pay taxes, guess what? Instead of depositing that $288,000 into the Washington black-hole, I would have spent it, hired more employees, and generated substantial economic growth. My employees would have enjoyed the wealth of that tax cut in the form of promotions and better salaries. But you can forget it now.

When you have a comatose man on the verge of death, you don't defibrillate and shock his thumb thinking that will bring him back to life, do you? Or, do you defibrillate his heart? Business is at the heart of America and always has been. To restart it, you must stimulate it, not kill it. Suddenly, the power brokers in Washington believe the poor of America are the essential drivers of the American economic engine. Nothing could be further from the truth and this is the type of change you can keep.

So where am I going with all this?

It's quite simple.

If any new taxes are levied on me, or my company, my reaction will be swift and simple. I fire you. I fire your co-workers. You can then plead with the government to pay for your mortgage, your SUV, and your child's future. Frankly, it isn't my problem any more.

Then, I will close this company down, move to another country, and retire. You see, I'm done. I'm done with a country that penalizes the productive and gives to the unproductive. My motivation to work and to provide jobs will be destroyed, and with it, will be my citizenship.

So, if you lose your job, it won't be at the hands of the economy; it will be at the hands of a political hurricane that swept through this country, steamrolled the constitution, and will have changed its landscape forever. If that happens, you can find me sitting on a beach, retired, and with no employees to worry about....

Signed, THE BOSS

God Bless America & God Bless Our Troops

------ End of Forwarded Message

The Personal Responsibility Act

Watching this administration and Congress trying to deal with the financial crisis is like watching a fireman trying to put out a fire with Gasoline. He keeps spreading it around and destroying everything in sight and wondering why the flames keep spreading!

What's interesting to me is the fact that none of this is new, we've all played this game before. If you strip Fascism of it's hatred and racism, one of the core beliefs of Fascism was a philosophy called "Corporatism". It was a system where profits could be private, but losses were public. It was a system employed by the Nazi's to have a sort of "guiding hand" of the government in all aspects of major corporations and to a lesser extent it was employed by FDR in the "New Deal". What most people don't realize is that while other countries had a depression for a few years, FDR's "New Deal" helped destroy the U.S. economy to the point to where it became not just a depression, but a GREAT depression. The only thing that saved FDR (and our economy) was WWII.

Let's get to the point, over 99.99% of all companies in the U.S. have in one way or another simply ceased to exist. It happened with Enron, MCI, Numerous Railroads, Auto companies, Computer Companies, Banks, Candlestick Makers, Blubber Producers, Whalers, Semiconductor Manufacturers and many, many, many other institutions. It didn't cause the "ruin" of the U.S. Economy, sure there were some affected and millions have lost their jobs, but for the most part they found jobs in either their own start-ups, others start-ups or other companies.

This notion that somehow if all these banks failed, or if we don't insure deposits over 100K, somehow it would plunge us into another Depression or destroy the economy is absolute BS. Candidates talk about "fairness" all the time, how is it fair to take money out of my pocket, and give it to some fat cat on Wall Street? Or to someone who foolishly left more than 100K in a single bank, knowing full well he was only insured for 100K? This whole mess happened because of Washington
politics and their accomplices on Wall Street and so now middle America has to pay the price? What happened to Personal Responsibility? I guess just like Capitalism, that's simply out of vogue. It's no longer cool to be a "Cowboy",
these days it equates to being arrogant. We here at "NoSocialism" know the answers and it's for people to take responsibility for their own actions, for their own lives and STOP asking government to do more and more and more for us. Here's how I would handle this mess.

The Personal Responsibility Act.

1. Burn all 60,000 pages of the Tax Code. It's a tax code that was designed specifically to give members of Congress powers to bestow upon special interests in an attempt to keep them in power. Eliminate all taxes, including Social Security, Medicare, Unemployment, Death Taxes, Import Taxes and so forth. Eliminate all Payroll Taxes. The only responsibility that Employers have is to keep their business in business. While providing jobs is a nice side effect, it's not their responsibility to provide for things like Retirement, Health care, Unemployment Insurance and so forth. These are things that should be purchased by employees, and they should be fully aware of the full cost of such benefits.
2. Replace current revenue with a 10% Sales Tax on ALL Goods and Services except for Cash Transfers (such as Bank Deposits) and a 10% Import tax with ZERO Exemptions. The U.S. Economy is currently running at around 13 Trillion and we import about 1.5 Trillion in goods alone. Current income taxes collect 1.1 Trillion and current Duties (Import Taxes) collect 26 Billion. This new model would collect 1.3 Trillion (assuming zero growth) in Sales taxes and 150 Billion in Import Taxes, almost 6X more than current levels (again assuming zero growth).
3. Give Employees their FULL pay. Now that the Employer no longer has to pay all these taxes, he should go ahead and give that money directly to the employees. On average an employer spends approximately 10% on Social Security, Medicare and unemployment taxes and an additional 15% on Health Insurance. Your typical family salary is currently around $51,000.00, but once you take out all the Taxes and Social Security, that family only takes home about $39,000.00, not including their share of 401K's and Insurances, which on average reduces it another $3300.00 a year, but let's just keep the Original $39000.00 since not everyone has insurance today. This typical family would now see their take home pay increase to $63,750, a 61% increase without costing the employer a dime. He simply shifted the money he was ALREADY spending on Taxes and Insurance back to the employee.
   Think about this for a moment, what kind of life would your family have if you had a 61% increase in your level of income. All of a sudden, things like Health insurance is affordable. Retirement Savings isn't an issue. Heck you could even get by without the Government paying for your kids lunch!
4. Double the current Minimum Wage. Now that employers no longer have to comply with a crushing level of government mandates, he can afford to pay his employees more. He should pass on the savings to his employees.
5. Give Employees a choice, but make retirement mandatory. Now that employees are flush with cash, the only responsibility that Employers now have is to offer an SS401K, (Social Security 401K) where they must put a minimum of 10% of their pay into. In addition, employers need to offer insurance, but all insurance premiums would be fully deducted from the employee's pay, again so he knows the FULL cost of these products.
   Let's cover the SS401K's first. These special SS401K's will be Government certified to only invest into Grade A Commercial Paper, Midcap to Largecap growth companies and Home loans (NOT SubPrime Garbage). Every year employees must update the year they plan to retire, and at least half of their account must be moved out of the stock market no later than 5 years from retirement to reduce exposure to volatility.
6. Issue Bonds to pay for the current crop of Social Security recipients. Currently, the U.S. will have to pay about 17 Trillion over the next 30 years to the people who are currently enrolled in Social Security and Medicare. The U.S. should monetize this obligation and place it in each tax payers SS401K plan on a pro-rated basis, dependent upon how much they've paid into Social Security so far, in the form of U.S. Interest Bearing Bonds (instead of the non interest bearing type they're currently filling Social Security with). Chile has already set a precedence for this and their average retirees are actually worth more than your average retiree here in the richest country in the world. These bonds will require an additional 5% sales tax, but the good news is that once they're paid off (in about 30 years) that extra 5% drag on the economy will be gone.
7. Make Employees take responsibility for their Health Care. Pre-existing conditions clauses would be eliminated. Age indexing would be eliminated, all policy holders will pay the same price, regardless of age, sex or condition. While you would think that this would cause rates to rise, in reality it won't because it will balance out with healthy people that currently choose NOT to buy insurance injecting cash into the system. HMO Type policies will also be eliminated because they mask true costs of health care from the general populace, which is why the health care industry is able to get away with increase that are usually 2 or 3X the level of inflation. All employees will have the choice of going with one of 3 policies, a modified Medical Savings Account which has a $5000.00 Cash allotment to be used for medical expenses on a special Credit Card), after which the company pays for all expenses (This would be the closest thing to an HMO, but at least the employee is AWARE of the TRUE cost of services). The second type of policy will be a Catastrophic policy that only pays after a $5000.00 deductible (this will be the cheapest, probably around 2 to $400.00 a month). The third option will be a standard indemnity policy with around a $250.00 deductible and 80/20 coverage, where you file paperwork with the insurance company and they reimburse you 80% of what you paid (usually to 5 or 10K then it covers 100%). All policies will have to cover up to 2 Million. Since Doctors and hospitals will no longer have to hire battalions of Billing Specialist to fight the HMO's for reimbursement, all Doctors that currently take insurance (yeah some don't) will be required to reduce their current prices by 25%. This price control will be in effect for 5 years to give the market time to adjust to the new realities.
8. All those who chose to ignore the law (such as illegal Immigrants and the self employed who didn't buy policies) will be transferred to special Government run hospitals if they end up needing care, where they can receive Canadian Style wait for years to get treatment service. This way Hospitals can't use the uninsured as an excuse to charge us $100.00 for a Tylenol.
   
9. Make Employees take responsibility for Mishaps. Mishaps happen, unemployment happens and so employees will have to take responsibility and buy their own unemployment insurance and Accident insurance. Policies like AFLAC pay a certain amount of CASH for every day that someone is in the hospital so they can pay their bills. Unemployment insurance should be offered by private companies with the risk rating relative to how many times someone has applied for unemployment. As an employer, I was keenly aware of employees who would work the minimum of 6 months to qualify for unemployment, they would then get themselves fired and then applied and "took 3 months off". Then went back to work for the next stooge.
   Employees that show this pattern of behavior should be charged more for their unemployment insurance. Again, people will be required to buy these kinds of policies, but they shouldn't consume any more than about 1 to 3% of their pay. All of These insurance Policies, Retirement accounts and even savings accounts should be offered as a direct deduction to employees, but none of it should be subsidized by the employer. If the employer wishes to subsidize something, they should simply pay the employee more money and let the employee decide what to do with the cash.
10. Move more responsibility towards the States. Things like Welfare and other social programs should be administered by the States. With their constituents flush with cash, they will see a MASSIVE increase in sales tax revenue. Remember, even though the average person has to pay 15% more for their products (between the 10% sales Tax and the 5% special Assessment for Social Security Bonds) they will still have between 25 to 61% more money to spend. The average family won't be spending any more than about 15% to 25% of their pay on Retirement and Insurance, so that should leave PLENTY of extra cash for buying more stuff. The states can use this revenue to increase their
    responsibility.
11. Reap the rewards. Small Business owners who inherited the business from their parents will no longer have to pay crushing death taxes and sell off parts of the business. With Oil imports permanently costing 10% more than the home grown variety, companies will have more incentives to both drill at home and develop alternatives, such as Wind and Solar. This alone will help to provide Millions of new jobs. The same goes for a variety of other businesses where imports are only marginally lower than the home grown variety. Businesses that relocated to other parts of the world will be flocking back to the U.S. totake advantage of the elimination of the Capital Gains tax. EVERY Multinational Company in the world will relocate their headquarters to the U.S. With 100% of Profits (instead of 65% under the old system) being reinvested in companies, the U.S. will see the most powerful boom in economic activity since the start of WWII, far eclipsing and surpassing any economic boom that we've ever had.
    

The only reason I feel that this plan will not work, is because it would never be implemented. The current congress would have way too much power to lose if the tax code were eliminated, and special interest groups would no longer have a need for them. Congressmen would lose MILLIONS in donations. The only way something like this would happen is if the people demanded it, and so here's thefirst voice, demanding that we do this.

Sorry Guys, I've changed my Comment Engine, if you'd like to post a comment on this article, you can go to an updated version I have here.