How Shared Economic Growth
Builds Middle Class Market Power
The global economy, or more
specifically mobile investment, is hurting a broad group of working Americans.
Given a choice between paying U.S. level wages or paying workers in an emerging
country significantly less, companies will tend to choose the
latter. It doesn’t have to be like this. It is possible
to change the competitive equation that drives corporate investment decisions
so that jobs are attracted to the U.S. again.
First, consider how the market is operating now. If working Americans organized and got higher wages, sooner or later the corporation will be motivated to just shut down the U.S. plant and move the operations to a lower wage (and generally lower tax) environment. Like it or not, most companies will not pay their workers more just to be nice. Even if a company would prefer to hire American workers, they are competing against other companies that will use the cheap foreign labor, and eventually it must fall in line or fail. In fact, any corporation that didn't seek to reduce costs and increase profits would usually lose out to its competitors and would be acquired or go bankrupt. To remain viable, corporations must minimize their overall costs.
In industries that rely heavily on manual labor, this trend of moving to the lower wage locations cannot realistically be reversed. America cannot and should not try to compete for low wage, low skill jobs typically associated with low profit margins. Instead, we must seek to obtain the promised upside of globalization, good new jobs in higher margin businesses that can pay wages sufficient to maintain the living standards of an advanced economy. But those industries are tax sensitive. They earn high profit margins relative to the cost of manufacture, and so tax is a major consideration in where they locate their activities. Does the U.S. tax system attract those activities here? No, exactly the opposite! The U.S. could afford such a system back when we were far ahead of everybody else, with greatly superior technology, an elite workforce, and relatively great wealth. But we can't afford it now. The world has changed and we are no longer able to retain these jobs in the face of foreign comptetion.
To understand the impact of mobility on jobs and wages under our current tax system and the power of the Shared Economic Growth proposal to correct it, let’s consider an example with some simple math. For most corporations, deciding where to put their operations is a matter of arithmetic. To choose between two countries, they consider the cost of manufacturing (or providing service or performing research) in the one versus the other, considering the cost and availability of adequate labor, raw materials, shipping costs, energy, etc. That allows them to compute their profit before tax for each of the competing jurisdictions. They then layer in tax. Whichever jurisdiction yields the highest after-tax profit wins.
First, consider how the market is operating now. If working Americans organized and got higher wages, sooner or later the corporation will be motivated to just shut down the U.S. plant and move the operations to a lower wage (and generally lower tax) environment. Like it or not, most companies will not pay their workers more just to be nice. Even if a company would prefer to hire American workers, they are competing against other companies that will use the cheap foreign labor, and eventually it must fall in line or fail. In fact, any corporation that didn't seek to reduce costs and increase profits would usually lose out to its competitors and would be acquired or go bankrupt. To remain viable, corporations must minimize their overall costs.
In industries that rely heavily on manual labor, this trend of moving to the lower wage locations cannot realistically be reversed. America cannot and should not try to compete for low wage, low skill jobs typically associated with low profit margins. Instead, we must seek to obtain the promised upside of globalization, good new jobs in higher margin businesses that can pay wages sufficient to maintain the living standards of an advanced economy. But those industries are tax sensitive. They earn high profit margins relative to the cost of manufacture, and so tax is a major consideration in where they locate their activities. Does the U.S. tax system attract those activities here? No, exactly the opposite! The U.S. could afford such a system back when we were far ahead of everybody else, with greatly superior technology, an elite workforce, and relatively great wealth. But we can't afford it now. The world has changed and we are no longer able to retain these jobs in the face of foreign comptetion.
To understand the impact of mobility on jobs and wages under our current tax system and the power of the Shared Economic Growth proposal to correct it, let’s consider an example with some simple math. For most corporations, deciding where to put their operations is a matter of arithmetic. To choose between two countries, they consider the cost of manufacturing (or providing service or performing research) in the one versus the other, considering the cost and availability of adequate labor, raw materials, shipping costs, energy, etc. That allows them to compute their profit before tax for each of the competing jurisdictions. They then layer in tax. Whichever jurisdiction yields the highest after-tax profit wins.
So, say the choice is between a Chinese
factory and an American one, and that the company would have to pay 25% tax in
China (the full statutory rate) and 35% in the U.S. Say it sells bowling
balls for $20 in the U.S., and that it would cost $8 to make them in China and
ship them here, but $10 to make them in the U.S. The cost of labor associated
with making each bowling ball is $5 in China and $7 in the U.S., but
all other costs are the same, $3. What's the math? Under current law
the decision is obvious. If they choose China, they make $12 per ball ($20
sales price less $8 cost), pay tax of 25% on that or $3, and clear 12-3=
$9. If they choose the U.S., they make $10 per ball ($20 sales price less
$10 cost), pay tax of 35% on that or $3.50, and clear $10-3.50=$6.50. Obviously
theymake the bowling balls in China, and China gets the jobs.
If U.S. workers accepted a pay-cut to secure the jobs, how much of a pay-cut would they have to accept to attract the investment to the U.S. instead of China? Answer: U.S. workers would have to accept a pay-cut greater than 55% or about $3.85 per ball to secure the jobs. Again, let’s look at the numbers. Assuming a $20 sales price less U.S. wages of $3.15 and $3 for other costs, an investor in the U.S. would make $13.85 before taxes. Then, the investor would pay U.S. tax at 35% on the $13.85 or $4.85, and clear $9, the same as in China. Because of our current tax system, the pay-cut required to attract the jobs to the U.S., at least $3.85 ($7-$3.15), is nearly double the $2 wage differential between the U.S. and China.
If U.S. workers accepted a pay-cut to secure the jobs, how much of a pay-cut would they have to accept to attract the investment to the U.S. instead of China? Answer: U.S. workers would have to accept a pay-cut greater than 55% or about $3.85 per ball to secure the jobs. Again, let’s look at the numbers. Assuming a $20 sales price less U.S. wages of $3.15 and $3 for other costs, an investor in the U.S. would make $13.85 before taxes. Then, the investor would pay U.S. tax at 35% on the $13.85 or $4.85, and clear $9, the same as in China. Because of our current tax system, the pay-cut required to attract the jobs to the U.S., at least $3.85 ($7-$3.15), is nearly double the $2 wage differential between the U.S. and China.
China
|
U.S.
|
|||||||
Description
|
Without
|
With
|
%
|
|||||
Paycut
|
Paycut
|
Change
|
||||||
Unit Sale Price
|
$20.00
|
$20.00
|
$20.00
|
|||||
Less: Unit Labor Cost
|
-$5.00
|
-$7.00
|
-$3.15
|
-55%
|
||||
Less: Unit Other Cost
|
-$3.00
|
-$3.00
|
-$3.00
|
|||||
Pre-tax Profit per Unit
|
$12.00
|
$10.00
|
$13.85
|
|||||
Less:Corporate Income Tax
|
-$3.00
|
-$3.50
|
-$4.85
|
|||||
After Tax Profit per Unit
|
$9.00
|
$6.50
|
$9.00
|
|||||
Sometimes working
Americans are openly offered pay and/or benefit cuts to remain
employed. Sometimes jobs simply disappear and the displaced workers,
particularly in the manufacturing sector, must accept significant pay and
benefit cuts at new jobs. And sometimes the jobs are never created here in
the first place. Whatever the case, the fact is that pay and benefits in
the U.S. are limited because investment is mobile and it is moving to lower
wage and lower tax locations abroad. Less U.S. investment (whether from
domestic sources or from abroad) means that there are simply fewer good jobs
around, leaving many working Americans with limited market power to negotiate
better wages.
The impact of this trend is not limited to unskilled or semi-skilled workers in the manufacturing sector either. As emerging countries develop highly skilled labor and adopt technology, the same scenario is playing out for highly- skilled workers in the U.S. Ultimately, this process affects all working Americans, eventhose whose jobs are not mobile including skilled service providers such as doctors, electricians, lawyers, plumbers and so on because the displaced labor eventually creates an oversupply of candidates for those jobs.
In a global economy where capital investment is highly mobile but workers are not, domestic workers are bearing a greater proportion of the corporate income tax burden in the form of limited job opportunities and reduced wages. In fact, recent estimates suggest that approximately 70% of the corporate income tax actually falls on domestic workers. Through the corporation, shareholders can effectively escape the corporate income tax burden by simply allocating or reallocating their investment to lower cost locations abroad. Additional corporate profits derived from investing in lower cost countries flow to shareholders, many of whom do not have to compete with foreign labor (including semi-skilled factory workers and increasing numbers of skilled graduates from top universities in India or China) for jobs. By encouraging foreign investment over U.S. investment, the corporate income tax is effectively exporting good jobs and subsidizing foreign workers at the expense of working Americans. This is why the great majority of Americans who rely upon wages rather than capital as their primary source of income have experienced income stagnation and have failed to benefit from the growth in the U.S. economy over the past three decades. The corporate income tax has become a ball and chain secured to the ankle of every working American. This is the last thing working Americans need as they confront fierce global competition from low wage countries abroad.
The solution is simple: If it moves, don’t tax it! Let’s go back to the example above and see what happens if we implement Shared Economic Growth so that U.S. corporate tax effectively drops to zero. The company still would make $12 pretax in China versus $10 in the U.S., but now look at the after tax results. If they go to China they still clear $9, but if they make the balls in the U.S. they clear $10. Obviously they now make the bowling balls in the U.S., and the U.S. gets the jobs. It is worth $1 per ball for it to do so. Now the company needs to hire workers for the factory. But the U.S. has a high rate of employment - we have lots of jobs, they just aren't the same kind of relatively high paying jobs that we used to have. So, the factory will have to lure employees away from another company by offering higher pay, better benefits or better conditions. It will thus bid up wages by up to 99 cents per ball or about 14% if it needs to in order to get the necessary workers. Suddenly, instead of trying to hold on to their jobs in the face of competition from low wage foreign competition, working Americans would be in a position to make competing employers bid for their services. In many cases, there would be substantial room for wage growth.
The impact of this trend is not limited to unskilled or semi-skilled workers in the manufacturing sector either. As emerging countries develop highly skilled labor and adopt technology, the same scenario is playing out for highly- skilled workers in the U.S. Ultimately, this process affects all working Americans, eventhose whose jobs are not mobile including skilled service providers such as doctors, electricians, lawyers, plumbers and so on because the displaced labor eventually creates an oversupply of candidates for those jobs.
In a global economy where capital investment is highly mobile but workers are not, domestic workers are bearing a greater proportion of the corporate income tax burden in the form of limited job opportunities and reduced wages. In fact, recent estimates suggest that approximately 70% of the corporate income tax actually falls on domestic workers. Through the corporation, shareholders can effectively escape the corporate income tax burden by simply allocating or reallocating their investment to lower cost locations abroad. Additional corporate profits derived from investing in lower cost countries flow to shareholders, many of whom do not have to compete with foreign labor (including semi-skilled factory workers and increasing numbers of skilled graduates from top universities in India or China) for jobs. By encouraging foreign investment over U.S. investment, the corporate income tax is effectively exporting good jobs and subsidizing foreign workers at the expense of working Americans. This is why the great majority of Americans who rely upon wages rather than capital as their primary source of income have experienced income stagnation and have failed to benefit from the growth in the U.S. economy over the past three decades. The corporate income tax has become a ball and chain secured to the ankle of every working American. This is the last thing working Americans need as they confront fierce global competition from low wage countries abroad.
The solution is simple: If it moves, don’t tax it! Let’s go back to the example above and see what happens if we implement Shared Economic Growth so that U.S. corporate tax effectively drops to zero. The company still would make $12 pretax in China versus $10 in the U.S., but now look at the after tax results. If they go to China they still clear $9, but if they make the balls in the U.S. they clear $10. Obviously they now make the bowling balls in the U.S., and the U.S. gets the jobs. It is worth $1 per ball for it to do so. Now the company needs to hire workers for the factory. But the U.S. has a high rate of employment - we have lots of jobs, they just aren't the same kind of relatively high paying jobs that we used to have. So, the factory will have to lure employees away from another company by offering higher pay, better benefits or better conditions. It will thus bid up wages by up to 99 cents per ball or about 14% if it needs to in order to get the necessary workers. Suddenly, instead of trying to hold on to their jobs in the face of competition from low wage foreign competition, working Americans would be in a position to make competing employers bid for their services. In many cases, there would be substantial room for wage growth.
U.S.
|
China
|
|
Description
|
SEG
|
25%
|
No
Corporate Tax
|
Corporate
Tax Rate
|
|
Unit Sale Price
|
$20.00
|
$20.00
|
Less: Unit Labor Cost
|
-$7.00
|
-$5.00
|
Less: Unit Other Cost
|
-$3.00
|
-$3.00
|
Pre-tax Profit per Unit
|
$10.00
|
$12.00
|
Less: Corporate Income Tax
|
$0.00
|
-$3.00
|
After Tax Profit per Unit
|
$10.00
|
$9.00
|
Because U.S. (and
foreign) companies have had dramatic increases in productivity over the last 30
years, the labor cost per unit of product produced has fallen
greatly. If the labor cost associated with producing a given product
is relatively small as compared to other costs, working Americans will be able
to demand a greater percentage increase in their wages and still attract the
investment for a plant here rather than in China. Assuming the labor
costs in our example were reduced by $3 and other costs were increased by $3,
yielding the same profit for the company under Shared Economic Growth,
U.S. labor could demand a 25% increase in wages and still attract the
investment and jobs here rather than China.
Of course, a single example cannot convey the fact that different kinds of operations will come out differently. If a product has a high labor cost and a low profit margin, it will still go to China. But products with a high margin - usually innovative, high tech products - will come to the U.S. The role of tax in the analysis is magnified for such products. The point is that for years we have been told that globalization would make life better for everyone by creating more low skill jobs in developing countries while creating more high skill jobs in the U.S. But we haven't seen that play out, and the reason is largely that our tax policy has interfered by pushing companies to shift BOTH low margin, low skill operations (for cost reasons) AND high margin, high skill operations (for tax reasons) to other countries. That has caused globalization to result in a race to the bottom, where corporations follow low wages and taxes but leave working Americans effectively underemployed. We need to bring developing countries up, not have them drag us down.
We cannot change the fact that investment is mobile or the fact that most Americans are competing for jobs with lower wage people all over the world. Unless we adapt to these developments, the standard of living of the majority of Americans will fall as investment and jobs continue to migrate to lower-cost locations abroad. As individuals and as a nation, we will not have the resources to address the problems of retirement and health care, nor will we be able to provide our children with the very education and skills they need to succeed in this new age. To adapt, we must change our tax system so that the jobs that either move abroad or are suppressed because of low wages abroad are replaced with better jobs in high-margin knowledge based activities in the U.S.
By effectively eliminating the corporate income tax, Shared Economic Growth dramatically increases the attractiveness of the U.S. as a manufacturing and services location, encourages economic growth and allows working Americans to negotiate for a bigger piece of a growing pie. Globalization really could work for everyone's benefit. Developing nations would continue to attract investment and jobs and develop their own innovative industries but working Americans would be able to compete for good jobs and pay as well. Shared Economic Growth is about enabling working Americans to compete, not about protecting working Americans from competition abroad. Working Americans can compete and prosper if we just cut through the corporate income tax chain that holds them down.
Click for recent article on the middle class plight
Of course, a single example cannot convey the fact that different kinds of operations will come out differently. If a product has a high labor cost and a low profit margin, it will still go to China. But products with a high margin - usually innovative, high tech products - will come to the U.S. The role of tax in the analysis is magnified for such products. The point is that for years we have been told that globalization would make life better for everyone by creating more low skill jobs in developing countries while creating more high skill jobs in the U.S. But we haven't seen that play out, and the reason is largely that our tax policy has interfered by pushing companies to shift BOTH low margin, low skill operations (for cost reasons) AND high margin, high skill operations (for tax reasons) to other countries. That has caused globalization to result in a race to the bottom, where corporations follow low wages and taxes but leave working Americans effectively underemployed. We need to bring developing countries up, not have them drag us down.
We cannot change the fact that investment is mobile or the fact that most Americans are competing for jobs with lower wage people all over the world. Unless we adapt to these developments, the standard of living of the majority of Americans will fall as investment and jobs continue to migrate to lower-cost locations abroad. As individuals and as a nation, we will not have the resources to address the problems of retirement and health care, nor will we be able to provide our children with the very education and skills they need to succeed in this new age. To adapt, we must change our tax system so that the jobs that either move abroad or are suppressed because of low wages abroad are replaced with better jobs in high-margin knowledge based activities in the U.S.
By effectively eliminating the corporate income tax, Shared Economic Growth dramatically increases the attractiveness of the U.S. as a manufacturing and services location, encourages economic growth and allows working Americans to negotiate for a bigger piece of a growing pie. Globalization really could work for everyone's benefit. Developing nations would continue to attract investment and jobs and develop their own innovative industries but working Americans would be able to compete for good jobs and pay as well. Shared Economic Growth is about enabling working Americans to compete, not about protecting working Americans from competition abroad. Working Americans can compete and prosper if we just cut through the corporate income tax chain that holds them down.
Click for recent article on the middle class plight
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