Tags: Hans Baumann | Corporate | Tax Rates | Profits

Hans Baumann: Lower Corporate Tax Rates to Bring Profits Home

By    |   Tuesday, 30 April 2013 02:07 PM

The problem with the U.S. economy and the resultant double-digit unemployment isn’t that there is insufficient “stimulus,” but that in the 1990s we switched to a consuming economy from a producing one.

This was the unintended result of massive corporate outsourcing of capital and productive labor.

Here are some numbers: In 1965, of all employed people, 26 percent worked in manufacturing. This sector plunged to 7 percent in 2012. In contrast, employment in the service sector increased to 81 percent from about 60 percent.

Looking at it the other way, consumer spending reached 71 percent of our gross domestic product (GDP). This is fine and good, as long as someone pays for the goods we consume.

Luckily, we have paymasters like China, Japan and Germany who kept buying our IOUs (U.S. government bonds).

At this time, we owe foreign countries a total of $7 trillion, to which we still add about $400 billion each year (current account deficit). If you add the $7 trillion to the more than $9 trillion Congress has overspent, you get more than $16 trillion of our national debt.

All this can be traced to corporate outsourcing. At the beginning, the reason for this was explained to be caused by low foreign wages. This is partly true and applies mainly to labor-intensive industries such as for garments and shoes. However, it rarely applies to the manufacture of cars or machinery, employing skilled labor and highly automated equipment.

However, one of the main reasons is that the Internal Revenue Service (IRS) allows corporations such as IBM Corp. to keep profit generated by foreign subsidiaries abroad and untaxed, even though such profit is added to their U.S. balance sheets.

According to The Huffington Post, General Electric alone had $108 billion abroad in 2011, when it paid only 11.3 percent of its profit in U.S. corporate income taxes. GE wasn’t alone, according to The Greenlining Institute: Apple paid 9.8 percent, Google 11.9 percent and Amazon 3.5 percent in the same year.

The total money untaxed by the IRS and located abroad is estimated to be $1.2 trillion.

In the spring of 2012, GE CEO Jeffrey Immelt defended his company by stating that his company paid a tax rate of 29 percent. What he didn’t say was that these taxes included state, local and real estate taxes. Regardless, it is substantially less than the official 35 percent rate.

One may wonder what happened with all that idle money in the Bahamas or the Cayman Islands. Well, according to The Wall Street Journal, companies found a way to make use of it. It appears that the IRS has a rule that a company can use this money in the form of a “short-term” loan, as long as the term of the loan is less than six months.

This way, for example, a company can repatriate $500 million from its Chinese subsidiary and use the money to pay dividends to its U.S. shareholders. After 5 ¾ months, the company then repays the Chinese company by taking another 5 ¾-month loan, this time from its European subsidiary. Such a shell game can go on forever.

What can be done about it?

There is a simple solution: implore Congress to reduce the U.S. corporate income tax from the current 35 percent to 20 percent, or even 18 percent. (Note: The average collected corporate income tax only averages 20 percent).

This would eliminate the incentive to invest capital and facilities abroad for simple tax reasons.

Even such a beneficiary of the current system as Mr. Immelt agreed that with a lower corporate tax, there would be less of an incentive for outsourcing.

The stated difference in wages is reducing rapidly, due to the steady decline in effective U.S. wages and due to the rapid rises of labor costs in the developing countries. Various media reports have estimated that the wages of skilled Chinese employees will match those of their U.S. rivals by the year 2015. India too isn’t far behind.

As a start, lowering the corporate income tax would be a win-win situation for everybody.
Corporations would make up for their loss in foreign tax loopholes by a reduction in the U.S. tax rate (They still could expense their foreign taxes from income).

Unemployment would be reduced by at least 4 million people.

The U.S. budget deficit could be eliminated by increased payroll taxes on the one hand, and reduced unemployment outlays on the other.

Finally, domestic manufacturing could replace most of the imported goods, thereby finally bringing our substantial foreign trade deficit down.

Let’s start “resourcing,” or bringing back manufacturing to the United States. Our country desperately needs it.

Hans D. Baumann is a former Fortune 500 executive, management consultant and author.

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The problem with the U.S. economy and the resultant double-digit unemployment isn’t that there is insufficient “stimulus,” but that in the 1990s we switched to a consuming economy from a producing one.
Hans Baumann,Corporate,Tax Rates,Profits
Tuesday, 30 April 2013 02:07 PM
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