Bringing Back Manufacturing Jobs to the U.S.A.: Confronting Tough Realities

Meeting with American corporate CEOs at the White House on the first “working day” of his presidency, Donald Trump warned, “A company that wants to fire all of its people in the United States and build some factory somewhere else, then thinks that product is going to just flow across the border into the United States . . . that’s just not going to happen.”[1] The new president was up against “tectonic forces” in trying to bring back “blue collar” manufacturing jobs to his base using tax policy. Yet the business calculus goes immediately on the basis of financial advantage, and the contours of the “game board” include the various tax and trade policies of countries.

Without an import tax of sufficient amount to render the cost savings of moving a factory abroad, CEOs will naturally succumb to the pressure “to increase earnings at a double-digit rate when the American economy is growing by only 2 percent, and the quickest way to deliver higher profits is by reducing labor costs, whether through automation or moving jobs to cheaper locales like Mexico or China.”[2] The push, in other words, is excessive. The cause, according to the New York Times, “is the drive for bigger returns on 401(k) accounts, pension plans and other retirement vehicles that depend on steadily rising corporate profits and, in turn, a buoyant stock market.”[3] Whereas a U.S. president has a term of four years in which to see his policies realized, no such time-span is permitted where quarterly earnings reports are all the rage. Simply put, CEOs must make sure their policies see results and quick. With many emerging-market economies, as well as China, growing at more than twice the rate of the U.S. at the time Trump took office, global—including American—capital takes flight.

It is not as though the CEO’s of American companies who move factories off-shore are unethical. Scott Paul of the Alliance for American Manufacturing, told the New York Times, “I believe a lot of the C.E.O.s in that room [with Trump] want to do the right thing and create jobs in America, but the realities of Wall Street Pressure and a globalized economy leads [those C.E.O.s] to off-shore a lot of these jobs.”[4] One way to align the patriotic value with the business calculus is to alter the “game board” in such a way that it would be cheaper for the companies to manufacture products geared for domestic sale domestically rather than abroad; products directed to the Chinese consumer could still be manufactured in China. The key lies in raising the tariff or tax high enough and in adequately enforcing it. 

To be sure, automation would still mean that a return to the manufacturing hay-days could not be expected. Herein lies a much more difficult challenge: what to do with the remaining blue-collar workers who are not oriented to moving to white-collar professions and yet cannot find jobs in manufacturing. Behind the legitimacy of a tax on American companies moving factories abroad is the hard truth that significant numbers of people in any geographical region are not going to fit into white-collar jobs, for a variety of reasons not limited to education and upbringing as well as values.

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[1] Nelson D. Schwartz and Alan Rappeport, “Call to Create Jobs, or Else, Tests Trump’s Sway,” The New York Times, January 24, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Apple Owes Back-Taxes in the E.U.: Blame Ireland or Apple?

The European Commission issued a formal decision on August 30, 2016 that the state of Ireland “recoup roughly €13 billion ($14.5 billion) of unpaid taxes accumulated over more than a decade by Apple, Inc.”[1] The decision “shows companies could be on the hook for past behavior and potentially be handed big bills for allegedly unpaid back taxes.”[2] E.U. law “forbid companies from gaining advantages over competitors because of government help.”[3] This applies both the federal government and the state governments, so the law could be better stated as, “No state government shall help companies gain advantages over their competitors.” Presumably Ireland’s government made the offer of help, rather than Apple getting that government to comply with the company’s wishes. If so, the state government rather than the company should be held responsible. Put another way, if Apple’s board and management considered the Irish offer to be legitimate at the time, Apple should not be held to pay the back taxes; rather, the state government should pay a penalty to the Commission.

In the wake of the decision, Tim Cook, CEO of Apple, wrote, “Apple follows the law and we pay all the taxes we owe.”[4] In other words, the company took the Irish offer as legal and thus paid only the taxes owed as per Ireland’s position. To be sure, the arrangement was sweet for the company. According to the Commission, Ireland offered Apple tax arrangements in 1991 and 2007 allowing the company “to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland.”[5] Ireland allowed the company to allocate profit at an Irish-registered unit called Apple Sales International, which purchased Apple goods from its outside manufacturers and sold them at a markup outside North and South America. In 2011, the unit brought in €16 billion in profit, and allocated under €50 million of it to Ireland where it was subject to taxation. The rest was allocated to a “head office” registered in Ireland and thus outside of U.S. jurisdiction.[6] The tax benefit is clearly unfair prime facie, to the U.S., and to other foreign companies doing business in the E.U. It should be noted, however, that the U.S. tax system encouraged “companies to find as low a foreign tax rate as they can, book as much profit as possible outside the U.S. and leave the money overseas.”[7] This is precisely what Apple did.

The principal question before us here is not whether the arrangement was fair, but, rather, whether the state government or the company was to blame, and thus deemed culpable to be fined or taxed. It is significant that the E.U.’s antitrust commissioner, Margrethe Vestager, noted that the commission’s investigation “concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years.”[8] The state government is thus the culprit here in that it granted the illegal benefits. Doubtless Apple’s management and board had no reason to suspect that an offer from a government would be illegal. When a U.S. state government makes an offer to a company so it will build a factory in the state, the company’s management does not have reason to suspect that the offer is against U.S. law.

Hence, a spokeswoman for the U.S. federal treasury observed that “retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules” of the E.U. state governments.[9] Apple’s benefits may be quite unfair, yet so too are retroactive tax assessments when the company had no reason to call into question Ireland’s tax rules. I suspect that the unfairness in the former biased E.U. federal officials against viewing the state government rather than the company as culpable. If the issue is that of a state government violating federal law, then the federal executive should hold the state government to account, and thus fine it rather than the company.

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[1] Natalia Drozdiak and Sam Schechner, “$14.5 Billion Irish Tax Bill,” The Wall Street Journal, August 31, 2016.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Richard Rubin, “EU Decision Upsets Treasury, Congress,” The Wall Street Journal, August 31, 2016.

“Companies based in the U.S. owe the full 35% corporate tax rate on their global profits. They get tax credits for payments to foreign governments, and they don't pay the residual U.S. tax until they bring the money home.”

[8] Drozdiak and Schechner, “$14.5 Billion Irish Tax Bill,”, italics added.

[9] Ibid.

Going Off-Shore, Dodging Sanctions, and Laundering Money: The World of the Richest of the Rich

On April 3, 2016, 2.6 terabytes of data—more than 11.5 million documents—leaked from Panama’s law firm, Mossack Fonseca. The documents show that the firm “helped heads of state, oligarchs and celebrities launder money, dodge sanctions and avoid taxes.”[1] Over 40 years, 214,000 offshore shell companies in 200 countries implicate individuals including the family of Syrian President Bashar Assad, and that of British Prime Minister David Cameron, several friends of Russian President Vladimir Putin, and Icelandic Prime Minister Sigmunder Gunnlaugsson; financial institutions implicated include UBS, HSBC, and Société Générale.[2] I contend that the markets themselves had been tilted in the interest of the greater power (i.e., the rich), so systemic rather than incremental or piecemeal efforts would be necessary to solve the problem.

To be sure, offshore accounts were not at the time illegal, yet even so, the ethical dimension is stinging. Peter Atwater, a behavior economist, points to the 1% being able to “move anywhere they want and profit handsomely from the relocation” whereas “the 99% are left with the aftermath—the empty buildings of a deserted Detroit, the toxic waste from chemical plants in West Virginai or the unsustainable tax liabilities of Puerto Rico.”[3] In short, the richest of the rich had for years gotten away with minimizing their taxes in ways that are not open to anyone else. Simply put, this is not fair; no social contract with any sort of equitable basis would have such an “out.”

Global Financial Integrity found at the time of the leak that “developing and emerging economies lost $7.8 trillion in cash from 2004 to 2013 because of maneuvers like those allegedly perfected by Mossack.”[4] In 2016, illicit outflows were increasing at the rate of 6.5% a year, twice the rate of global GDP growth.[5] As most emerging economies were slowing in the first quarter of 2016, the outflows could have tipped the global economy into recession.

Clearly, a cultural mentality of self-aggrandizement at the expense of the general economic good (not to mention ethics) had gripped the richest of the rich, with a slanted (i.e., unfair) economic “game-board” resulting. Such a dynamic is the antithesis of a social contract. Put another way, the mentality undercuts the de facto social contracts by which people agree to live within societies and accept even their basic frameworks. Were the 99% organized, we might have seen an effort to re-evaluate how the market mechanism works. As it was, incremental rule-changes by governments was the response. For instance, “new rules released by the U.S. Treasury on April 4 crack down on American corporations that allow themselves to be acquired by foreign firms to avoid U.S. taxes.”[6] Yet if the Panama Papers are any indication, the problem goes well beyond the acquisition of U.S. firms by foreign ones. For instance, a company need only establish operations in a tax-haven to shield taxation at higher rates. Furthermore, what was being done to stop companies from dodging sanctions to do business with certain countries? What of the money laundering? Even answering these questions one by one misses the more fundamental point that the global market-system itself is flawed—and in a way that is convenient only for the rich. Attention to the system itself is needed, yet without the organized pressure of the 99 percent, wholesale political efforts are unlikely.

Abstractly speaking, a system is not a system if certain internal variables can maximize themselves without stopping at the contours of the system. Put another way, a system that restricts the vast majority of people yet is semipermeable to the maximizing few is inherently as well as ethically compromised. Yet efforts to level the board would seem to require lessor power to overrule a greater power unless the power of the vast majority is organized and activated such that it becomes the greater power.

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[1] Rana Foroohar and Matt Vella, “The Panama Papers Expose the Secret World of the 1%,” Time, April 18, 2016, pp. 11-12.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

Reforming U.S. Corporate Taxation: On the Virtue of Simplification

As the Republican Party assumed control of the U.S. Senate, and thus of Congress itself, since they would continue in the majority in the U.S. House, Republican Congressional  leaders and President Obama all emphasized policy areas where common ground could be found. Suddenly, the day after the midterm election of 2014, talk of bipartisanship was in the air. In this essay, I discuss the domain of corporate taxation in order to suggest that the common ground can be deeper than typically thought.

With the stars aligned, previously untouched proposals were poised to see the light of day. According to The New York Times, “The Treasury Department under Mr. Obama . . .  [had] proposed a detailed plan to broadly overhaul the corporate tax code and bring down the corporate income tax rate to 28 percent from 35 percent. Mr. Obama [also] proposed a novel deal to Republicans: simplify the corporate tax code and allow multinational corporations a one-time low tax rate to bring home billions of dollars in profits parked overseas, but use the windfall from that ‘tax holiday’ for infrastructure spending.”[1] To be sure, a lower tax rate does not translate into a lower tax bill if loopholes are removed in the simplification. Furthermore, a one-time low tax rate could be seen as a gimmick—to insignificant in itself to move corporations back to the U.S. that have fled for tax purposes. That the new president of the European Commission, Jean Claude Juncker, had been the prime minister of the tax-haven Luxembourg suggests that corporations would still have enticing alternatives.

For their parts, the newly re-elected House Speaker and the presumptive majority leader in the U.S. Senate, Mitch McConnell, wrote at the time of “the insanely complex tax code that is driving American jobs overseas.”[2] Of course, the complexity also translates into loopholes that cadres of corporate lawyers have been able to use to minimize the U.S. taxes that corporations actually pay. Would a simpler tax code bring them back if it meant higher taxes (i.e., fewer loopholes)—especially if the tax rate changes by only 7 percent? 

Moreover—and my point is precisely moreover—would incremental tax reform be worth all the legislative fuss? In other words, would minor adjustments trigger major corporate moves that would make a dent in the structural unemployment, keep capital in the U.S., and significantly contribute to lowering the U.S. Government's deficits? The incremental approach itself is vulnerable to the onslaught of corporate lobbyists, each of whom can slip in a very specific provision as the legislation is tweaked as a myriad of clauses are adjusted. That many points of access exist in the Congressional system of lawmaking makes this all the more likely.  To be solid, tax reform must be bold enough to have a positive impact above and beyond the inevitable imprint of the vested interests that offer huge sums to lawmakers in exchange for favors, which one by one undermine the point of the reform.

For example, rather than dropping the corporate tax rate 7 percent and only moderately simplifying the tax code, members of Congress could write legislation putting the rate at, say, 10 percent and allowing only basic expenses as deductions. Better yet, re-frame the tax as one based on revenue and forget about deductions. The same approach could be applied to individuals’ income tax. Any income could be taxed at, say 10 percent, without deductions and thus tax returns. I submit that in both cases, the U.S. Treasury would collect more tax revenue.

As a starker example to make my point, the U.S. Government could do away with corporate taxation altogether. Corporate earnings that are paid to stockholders as dividends would of course be taxed as personal income. Taxing such funds as corporate income would be to tax them twice. Corporate income that is reinvested rather than distributed can be viewed as merely one part of a seamless cycle of capital investment; selecting a point at which to tax would be rather artificial in this sense. Furthermore, at no point in the cycle do human beings use the funds for consumption and thus pleasure. In short, corporate income taxation can be viewed as arbitrary and artificial in nature. Companies would have a disincentive to go off-shore, and foreign companies would be inclined to invest in the States.[3] My point is that the paradigm of the status quo need not be the limit to the common ground between the Democratic and Republican parties; such ground goes deeper than superficial incrementalism.

To be sure, the powerful interests are wealthy as things are, and so the gravity of the status quo would have to be countered as we drill. Tax reform can be painted with a broad brush, however, without intricacies that can be exploited by lobbyists together with the members of Congress who are already thinking ahead to their next election.  “We are all dirty,” Barak Obama admitted to the press a month or so before the 2014 midterm election. Campaigns cost so much that "we have to take the money," and “that obligates us,” he said. Hence, in spite of being unpopular in Kentucky, Sen. Mitch McConnell (who stood to assume the powerful position of majority leader and thus "repay" contributors) handily defeated his opponent. This is a tough nut to crack.

However, Congress (i.e., collective action within each chamber) can effectively make a policy domain difficult for favors. Reform as incremental change is like thick grass to the python snakes in Florida’s Everglades. If the tall grass is cut incredibly short to begin with, those sneaky, slithering snakes would be seen and perhaps captured, so they would naturally avoid that area. Similarly, even the corporations that have “bought” members of Congress or the president would be hard pressed to ask for a favored tax exemption or deduction if there is no corporate income tax! Even a tax rate of 10 percent with no deductions would have little shade wherein the snakes could lay their eggs. 

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[1] Jonathan Weisman, “As Power Shifts in Washington, Some See Chance for Tax and Fiscal Deals,” The New York Times, November 6, 2014.

[2] John Boehner and Mitch McConnell, “Now We Can Get Congress Going,” The Wall Street Journal, November 5, 2014.
[3] I am assuming that foreign companies would not be allowed to simply have a scant presence in the U.S. in order to avoid taxes in their respective home countries. The U.S. would not have many allies otherwise.