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 Recent commentary from National Journal: Political Pulse: Naderites of Convenience (July 13, 2004) Conservatives are trying to hurt John Kerry by working to get Ralph Nader on ballots. By William Schneider. Legal Affairs: Edwards and the Problem with the Trial-Lawyer Lobby (July 13, 2004) You don't have to be a fan of corporate fat cats to be concerned that under a Kerry-Edwards administration, tort rules might become even more damaging to our economy. By Stuart Taylor Jr. Media: A Real Blockbuster (July 13, 2004) Entertainment coverage often feels a lot smarter than our old-fashioned political coverage. By William Powers. Media: Swing Party! (July 6, 2004) The swing vote isn't just a story, it's a fun house, a riddle, with no penalty for guessing wrong. By William Powers. Political Pulse: Maybe It's Not the Economy (July 6, 2004) A bad economy doomed former President Bush. A good economy may not save this President Bush. By William Schneider. Social Studies: For Kerry, It's Not The Economy, Stupid. It's Strength. (July 6, 2004) John F. Kerry should take a page from John F. Kennedy's 1960 playbook and run as a hard-liner on national security issues. By Jonathan Rauch. Legal Affairs: How Bush's Overreaching Hurts the War Against Terrorism (July 6, 2004) The Supreme Court rulings on enemy combatants and the Bush administration's handling of torture guidelines represent a failure of leadership by the president. By Stuart Taylor Jr. More from National Journal. |
Wealth of Nations 
Kerry and Edwards Need to Think Again on Trade and Taxes
For both John Kerry and John Edwards, anxiety about globalization and the foreign threat to American employment are central. by Clive Crook .... Since the Democratic primaries, John Edwards has seemed so perfect a running mate for John Kerry that one wondered why Kerry was taking so long to choose him. Edwards not only helps Kerry in the South, but his moderation, charm, and apparently sincere passion on the issues will most likely broaden the ticket's appeal across the country. Certainly, Edwards was the choice most feared by the White House. Perhaps Kerry vacillated because he was afraid that Edwards might upstage him—not difficult to imagine, in fact—and might be difficult to control. However, one thing that Kerry and Edwards won't be arguing about, if the positions they have adopted up to now are any guide, is economic policy. For both men, anxiety about globalization and the foreign threat to American employment are central. Kerry's most specific proposal in this area—his plan for corporate tax reform—fits very comfortably with the thinking Edwards has laid out in speeches this year. The two men agree that foreign and domestic tax systems discriminate against American companies producing at home and instead favor foreign companies and American multinationals that "export jobs" by moving production abroad. Kerry's tax plan aims to redress the balance. Edwards is all for it. "End tax breaks for shipping jobs overseas," he demanded in a speech in May. Two big things are wrong with this platform: first, the underlying idea, and, second, the specific proposal, which would be counterproductive even if the underlying idea was correct. Admittedly, the trade and tax policies of George W. Bush, as I have argued in previous columns, leave plenty to be desired. In a couple of instances, they have been outrageously bad—worse than anything Kerry or Edwards have so far proposed. Still, the economic mind-set that produced the Kerry corporate tax plan is capable of coming up with bigger and even more-harmful proposals. In the meantime, as one of Kerry's few concrete policies, modest in scope as it may be, this plan deserves to be examined on its merits. Kerry and Edwards both seem to agree with Michael Moore and other commentators that the interests of America and its multinational firms diverge. The reason is the corporations' determination to cut costs. The best way for companies to do that, or so it is assumed, is to move production abroad. Firms can then pay lower wages and lower taxes, and they can also lighten their burden of regulation. That's good for profits, the argument goes, but bad for American workers and for the American economy as a whole. Multinational firms obviously want to lower their costs as much as possible, and one way to do it is by outsourcing production to foreign factories. But the scope for doing this successfully is often much smaller than you might think. It is true that wages abroad, especially in developing countries, are sometimes only a fraction of wages in the United States—but productivity, or output per worker, is nearly always much lower, too. Labor costs, in any case, may be only a small part of total costs of production, regardless of where goods or services are produced. So the economic logic of offshoring is more complicated than simple comparisons of wages suggest. This is illustrated by the jobs figures themselves. According to a recent study by Matthew Slaughter of Dartmouth College, the foreign affiliates of American companies hired an extra 3 million foreign workers between 1991 and 2001, increasing the total from a little under 7 million to a little under 10 million. But over the same period, those affiliates' parent companies added more than 5 million American workers to their payrolls, raising the total from 18 million to more than 23 million. The idea that multinationals are a net drain on jobs at home is simply wrong. Would employment in the United States have grown even faster if not for the option of companies' hiring workers abroad? Probably not. Those figures are consistent with other studies showing that foreign and domestic jobs in American multinationals tend to grow in tandem—and the reason is that as foreign affiliates expand, they increase their demand for exports from the parent companies. Slower growth in employment at foreign affiliates would probably have coincided with slower growth in employment at the parent companies. Far from exporting jobs, American multinationals, as they grow, are net creators of jobs at home. There will be exceptions, but on the whole, the growth of foreign employment by American multinationals is not a problem for American workers—it's just the opposite. Kerry's suspicions on this matter are therefore not justified. However, he does have a point when he says that tax systems currently discriminate against domestic production by American companies. This is explained in a recent paper by Gary Clyde Hufbauer and Paul Grieco of the Institute for International Economics (www.iie.com). The authors lay out two issues. One is that profits earned abroad are typically taxed more lightly than profits earned at home. Many foreign countries now have lower rates of corporate income tax than America does. America's effective corporate tax rate is approximately 30 percent; Mexico's is 15 percent; Britain's is 18 percent; France's is a little over 20 percent; Ireland's is less than 10 percent; China's is about 10 percent; and Indonesia's is zero. The second anomaly is that many other countries, notably in Europe, rely heavily on value-added taxes. These taxes are imposed on exports from the United States to the countries concerned, but they are not levied on imports to the U.S. from the same countries. Again, this puts American production at a disadvantage. Kerry's proposal has two main parts. First, he wants to reduce the U.S. corporate tax rate from 35 percent to 33.25 percent. Second, he proposes to limit the deferral of American corporate tax on profits made abroad in respect of goods and services sold to America. (Profits made abroad on goods and services sold "in country" would continue to get the deferral.) The first part is fine, except that it is quite a timid reduction, too small to significantly narrow the big gaps between American and foreign tax rates. But the second part—increasing the tax on foreign profits—is a downright bad idea that would most likely hurt American workers, not help them. As Hufbauer and Grieco explain, firms could respond to a higher tax on their foreign profits in one of four ways. They might, of course, bring some production home, or perhaps curb their future expansion abroad. This is what Kerry intends. But corporations could choose three other plausible responses that would be much less to Kerry's liking. Foreign affiliates could simply evade the new rule by selling their goods or services to locally owned companies (which could then sell them to the United States); the affiliates' profits would then be "in country" and would qualify for the deferral, as they are now. Alternatively, a company could sell part of its foreign affiliate to a foreign partner, or sell out entirely to a foreign competitor. This approach, according to the evidence cited earlier, would probably slow the growth of employment in the American parent company. Finally, the multinational might simply absorb the increase in taxes on its foreign profits by raising prices or accepting lower returns—but this implies a falling share of the world market and/or a decline in the value of the company that would be widely felt (though the price of stocks and the value of pension funds) around the American economy. Hufbauer and Grieco reckon that, taken together, these bad consequences would outweigh any benefit of the kind for which Kerry is hoping. A simpler and better solution would be for America to cut its corporate tax rate by much more than Kerry is suggesting, to bring it more closely into line with the rates applied by other countries. But one can see the difficulties with doing that. Kerry's puny cut in the rate would add about $12 billion a year to the budget deficit. A more meaningful cut of 10 percentage points would cost some $70 billion a year in forgone revenue. And more important, an unadorned tax cut for business lacks political appeal. Kerry's plan purports to be a tax cut for business in America combined with a tax increase for business abroad: The economic logic of that plan may be flawed, but the political logic is unassailable. Seen this way, Kerry's key economic proposal is undeniably shrewd. He can present himself as pro-business and pro-America, while gratifying the desire to blame unfair competition and footloose multinationals for unemployment and economic insecurity. But stirring up unwarranted fears about global competition and encouraging self-defeating hostility to multinationals is no way to make good policy. Do Kerry and Edwards want to think intelligently about trade and taxes, and to govern well if elected? Then they need to temper their enthusiasm for blaming America's economic problems (such as they are) on treacherous foreigners and the quest for profit.
What do you think? Discuss this article in the Politics & Society conference of Post & Riposte. More from National Journal. More on politics and society in Atlantic Unbound and The Atlantic Monthly. Clive Crook is a columnist for National Journal and the deputy editor of The Economist. This column appears every week in National Journal, a weekly magazine covering politics and government published in Washington, D.C. For information on National Journal Group publications, see NationalJournal.com. Copyright © 2004 by The Atlantic Monthly Group. All rights reserved. |
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