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The problem with the U.S. economy and the resulting double-digit unemployment rate is not that there is insufficient “stimulus,” but, that starting in the 1990s, we switched from a producing to a consuming economy. 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 number shrank to 7 percent in 2012! In contrast, employment in the service sector increased from about 60 percent to 81 percent.
Look at it another way: Consumer spending reached 71 percent of our gross national 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 (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 this $7 trillion to the more than $9 trillion Congress 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 as caused by the 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.
No, one of the main reason is that the IRS allows corporations, such as IBM, 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 was not alone, according to Greenline 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, Mr. Jeffrey Immelt defended his company by stating that GE paid actually 29 percent. What he did not say was that these taxes included state, local and real-estate taxes. And still, it is substantially less than the official 35 percent rate.
One may wonder, what happened with all that idle money laying around 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 a company can repatriate say, $500 million, from its Chinese subsidiary and use the money to pay dividends to its U.S. shareholders. After 5 months, it then repays the Chinese company by taking another 5 months 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, chief executive officer of GE, agreed that with a lower corporate tax, there would be less incentive for outsourcing.
The stated difference in wages is reducing rapidly, due to the steady decline in effective U.S. wages and the rapid rise of labor costs in the developing countries. The Wall Street Journal estimated that the wages of skilled Chinese employees will match those in the United States by 2015. India, too, is not far behind.
Lowering the corporate income tax as a start 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 persons.
The U.S. budget deficit could be eliminated by increased payroll taxes on 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,” i.e. bringing back manufacturing to the United States. Our country needs it badly.
Hans D. Baumann of Rye is a German-American inventor, engineer and writer who has registered more than 200 patents and produced 105 publications.
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Source Article from http://www.seacoastonline.com/articles/20130524-OPINION-305240383
