April 1, 2011
A front page story in Sunday’s Des Moines Register addresses the closing of the Electrolux plant in Webster City and the loss of 850 manufacturing jobs which will be moved to Juarez, Mexico. As the article points out, “the four counties in the Webster City area…have experienced a 32.1% drop in manufacturing jobs” since 2000. That mirrors what’s taken place across the U.S. which has lost one-third of its manufacturing jobs during the same period of time. That’s more than 5.6 million good American jobs that have been shipped overseas, outsourced, or simply gone away.
In the words of the late German economist Kurt Richebacher, “Essentially all (U.S.) jobs losses are high-wage manufacturing, and most gains are in low-wage services. In essence the U.S. economy is restructuring downward, while the Chinese economy is restructuring upward.”
This hollowing out of our manufacturing base also results in the United States running massive trade deficits with our trading competitors. We currently have trade deficits with 90 nations. In fact, our manufacturing trade deficit from 2000 to 2008 was $5.4 trillion.
A major cause for this decline is that the United States has the most onerous business tax system in the world with its 35 percent income tax rate and its 6.2 percent employer portion of the payroll tax. Our business tax system rewards private equity moguls for loading up American-based companies with lots of debt (debt is deductible under our current system of business taxation) while punitively taxing employment, capital investment, and savings – the engines of job creation and economic growth. Our existing tax system effectively exports prosperity, and American jobs overseas.
President Barack Obama proposes to fix the problem by “out-innovating” our trading competitors. But, as Andy Grove (a founder of Intel) has pointed out, it’s “hard to innovate if you don’t make.” And the United States is not making much these days.
There is a common-sense solution available that addresses these massive trade deficits and loss of our manufacturing base. Under a proposal known as the Hartman Plan, the onerous corporate tax system would be replaced by a revenue-neutral, 8 percent business-consumption tax that would be border-adjusted.
This new approach to taxing business would raise just as much in revenue as, if not more than, the current system of taxation. All goods and services coming into the United States would pay the 8 percent tax while all exports would receive a comparable tax credit or tax abatement as an offset to its company’s business-consumption tax. Suddenly, the United States would become competitive again with our trading partners. And we would start bringing jobs back home to America.
Most Americans don’t realize that on average we are at an 18 percent tax disadvantage with our trading competitors, most of whom have their own version of a business consumption tax back home. For example, a U.S. manufacturing company trying to export into Germany is hit at the German border with a 19 percent tax while a German manufacturer selling its products in the U.S. gets a 19 percent tax credit or tax abatement back home. Germany has maintained a strong manufacturing sector even with a high-wage cost structure.
Let’s not tinker around the margins. This is the right time to totally eliminate the existing corporate tax structure and replace it with an 8 percent business consumption tax. That would be a real economic stimulus plan that would bring jobs home to America, rebuild our manufacturing, lower our trade deficits and put Main Street producers back in charge of the American economy.
Tom Pauken is Chairman of the Texas Workforce Commission and author of “Bringing America Home.”