Biggest Business Burden: Taxes

April 12, 2004
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GRAND RAPIDS — About the time that the Manufacturers Council of The Right Place Inc. generated the move for a federal undersecretary of manufacturing, another Midwest business loaded some ammunition for that official’s work with Congress.

The firm in question is Emerson, based in St. Louis, Mo., a 114-year-old business once known as the country’s major manufacturer of fans.

Today, however, it’s a global company that mates engineering and technology all over the world but which wants to preserve half its market: the United States.

Accordingly, last year it sponsored an economic analysis about the loss of American manufacturing jobs.

The result was a paper issued in December under the aegis of the National Association of Manufacturers.

And according to the analysis, state and federal taxes on corporations constitute the single biggest factor militating against investment, innovation and job creation in this country.

The paper also contends that the aggregate burden of environmental and economic workplace regulations and taxes on manufacturers amounts to $550 billion a year, forcing manufacturers to seek relief in other countries.

The analysis, entitled “How Structural Costs Imposed On U.S. Manufacturers Harm Workers and Threaten Competitiveness,” is available in full through a link on the right side of NAM’s home page,

The analysis compares the relative competitiveness of U.S. manufacturers with their counterparts in the nine largest U.S. trading partners. It finds that costs which federal, state and local governments impose upon companies add more than 20 percent to the cost of doing business, hurting U.S. manufacturers more than any foreign competitor.

That summarizes the conclusion of the study’s author, Jeremy Leonard, who went on to write, “absent these extra costs, the United States would compete on an even playing field. The costs of government mandates and taxes place U.S. manufacturers at a significant disadvantage compared to competitors in our nine largest trading partners.”

Leonard’s study notes that since 1990, the manufacturing sector in the United States increased productivity by 54 percent, the highest gain since World War II.

He also points out that during the ’90s boom, manufacturing accounted for 22 percent of the nation’s economic growth and sharply increased its share of total value added in the U.S. economy.

Despite such gains, however, the paper contends that U.S. exports declined from 12 percent in 1998 to 10.7 percent in 2002. And in the last 39 months (as of December 2003), he added, 2.8 million manufacturing jobs disappeared. (Note: According to the Bureau of Labor Statistics, the bleeding of manufacturing jobs finally ceased in March.)

Leonard’s report found that, “The largest burden comes from high corporate tax rates and employee benefits, with small but substantial burdens caused by litigation costs and regulatory compliance.”

He indicates that when federal and state corporate taxes are combined, the corporate tax burden is 40 percent — the second highest among the nation’s nine major trading partners.

“The high tax burden discourages foreign businesses from setting up operations in the United States and encourages U.S. companies to migrate production to more friendly tax jurisdictions.”

Leonard cited Ireland as a perfect example of a manufacturing-friendly country in its tax policies.

He pointed out that Dublin reduced Ireland’s corporate tax rate from 16 percent to 12.5 percent in 2003, well below the EU average rate of 30 percent and much lower than the U.S. government’s 35 percent rate.

As a result Leonard said he found that Ireland receives one-third of all U.S. investment in Europe.

“The three largest industries to invest in Ireland,” he added, “are engineering, computer and software companies, three industries making the most noise about outsourcing in the United States.

“Rather than attempting to regulate how and where firms do business,” he said, “a simpler solution would be to lower corporate tax burdens, which would keep American businesses from locating facilities elsewhere and save U.S. jobs.”

He noted that Congress has been about as receptive to lowering corporate taxes as it has been to addressing another external cost that hurts manufacturing: litigation.

Leonard’s study estimated that tort litigation reduces U.S. manufacturers’ competitiveness by more than 3.2 percent.

He points out that an independent consultant assessed the total cost from tort litigation in 2002 at $233 billion, which he termed “a shocking 2.23 percent of the entire Gross National Product.”

When possible, he said, companies pass this bill to consumers in the form of higher prices and reduced services, costing the average American $809 a year.

“Foreign competitors are able to offer lower prices than American companies because trial lawyers continue to exploit the (U.S.) legal system for personal gain. Class action lawsuits and rampant punitive damage claims have imposed significant costs on business in the United States.”

He maintains that tort reform — which Congress has proved unable to legislate — is needed to help American companies become more competitive and save American jobs.

Leonard also contends that another excessive external cost that culminates in outsourcing is compliance with excessive environmental mandates.

By Leonard’s calculations, pollution abatement expenditures alone reduces U.S. cost competitiveness by at least 3.5 percent.

“The United States is one of the ‘greenest’ countries in the world,” the analysis indicates, “and yet some politicians want to adopt Kyoto Protocol-like regulations which will hamper economic growth while providing little or no environmental benefits.”

He believes a more market-oriented approach to environmental issues would reduce compliance costs and make U.S. companies more competitive while improving environmental quality.

Leonard’s view seems to be that U.S. industry, by increasing productivity so dramatically, has done its part.

He argues that Congress should match industry’s efforts by simplifying the tax code, reducing tax rates, instituting tort reform and tempering the regulatory costs U.S. companies face.    

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