Outsourcing our intelligence

“Misinformation, Distortion, and Demagoguery”

With all of the anger and bitterness that has been directed toward the democratic leadership in D.C., you would think they would have eased up a bit on the socialist tax and spend policies that have provoked it. Nope, in their final weeks before the mid-term election recess, democrats dodged a vote that would have extended the Bush-era tax cuts, and instead raised an issue they know most Americans will either not correctly understand, or not pay any attention to. Of course congressional democrats lost the battle over increasing taxes on profits of American companies with foreign subsidiaries as a way to punish firms that relocate plants overseas. Thankfully, even a few of their own saw this as an economically stupid plan, especially considering the state of our economy. It was the dems last attempt to inflict more damage on business before the election.

Like so many others, this tax increase was being promoted by President Obama, who declared that “for years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries. I want to change that.”

The democrat congressional campaign committee ran TV and radio ads accusing Republicans of favoring “tax breaks for companies that ship our jobs overseas.” There is no legitimate factual basis for such an accusation — where is this policy? when did they ever propose such a thing? — but this rhetoric is fabulously effective with the kind of “Don’t Know Much About Politics” voters who are the target audience of these democrat class-warfare attacks.

Democrats all around the country are making this issue their number one campaign theme, since they can’t run on health care, stimulus or anything else they’ve passed into law. Think about this: One of the two major political parties in the world’s leading economy is trying to hold on to its majority by running against foreign investment and the free flow of capital. Anti-capitalist populist propaganda will not cure the economic problems we face. Quite the contrary. They should be looking for ways to help American businesses compete. They need to be doing what they can to keep the costs of doing business in America as low as possible. That creates jobs. That creates tax revenue. That makes voters less likely to throw your ass out of office!

We’re all for increasing jobs in the U.S., but the President’s plan reveals how out of touch dumbocrats are with the real world of tax competition. The U.S. already has one of the most punitive corporate tax regimes in the world and this tax increase would make that competitive disadvantage even worse, accelerating the very outsourcing of jobs that Mr. Obama says he wants to reverse. Instead of outsourcing a few jobs here and there, entire companies would pull up stakes and move, not only some of the jobs, but all of the jobs they provide for American workers.

At issue is how the government taxes American firms that make do business overseas. Under current tax law, American companies pay the corporate tax rate in the host country where the subsidiary is located. They then pay the difference between the U.S. rate (35%) and the foreign rate when they bring profits back to the U.S. This is called deferral—i.e., the U.S. tax is deferred until the money comes back to these shores. Now, while most countries do not tax the overseas profits of their domestic companies. Mr. Obama’s plan would apply the U.S. corporate tax on overseas profits as soon as they are earned. This is intended to help discourage firms from moving operations out of the U.S.?

“Limiting deferral would hinder the global competitiveness of these American companies, impede U.S. economic growth, and ultimately result in more loss of jobs,” Bruce Josten, an executive vice president at the Chamber of Commerce, wrote in a letter to Senators.

There is little we can do about the cost-of-labor advantage other countries have over America. This is why American companies must engage a some outsourcing. To not do so would leave them little chance of competing in the world market, causing them to either go out of business or be so weakened that they are purchased by their foreign competitors. American companies that outsource are not the bad guys! The bad guys have moved their entire operations overseas. Would you rather loose some of the jobs, or the entire company? Hard to hear, I know, but in this current global economic climate, outsourcing a portion of operations is a necessary evil American business must engage in to survive.

The real problem we can do something about is the U.S. corporate tax rate. Over the last 15 years has become a huge competitive disadvantage. The only major country with a higher statutory rate is Japan, and even its politicians are debating a reduction. A May 2010 study by University of Calgary economists Duanjie Chen and Jack Mintz for the Cato Institute using World Bank data finds that the effective combined U.S. federal and state tax rate on new capital investment, taking into account all credits and deductions, is 35%. The OECD average is 19.5% and the world average is 18%.

Paul Volcker led this handpicked White House tax reform panel whose recent report concluded that “The growing gap between the U.S. corporate tax rate and the corporate tax rates of most other countries generates incentives for U.S. corporations to shift their income and operations to foreign locations with lower corporate tax rates to avoid U.S. rates.” As nations around the world have cut their rates, the report warns, “these incentives [to leave the U.S.] have become stronger.”

Mr. Obama believes that by increasing the U.S. tax on overseas profits, some companies may be less likely to invest abroad in the first place. In some cases that will be true. But the more frequent result will be that U.S. companies lose business to foreign rivals, U.S. firms are bought by tax-advantaged foreign companies, and some U.S. multinational firms move their headquarters overseas. They can move to Ireland (where the corporate tax rate is 12.5%) or Germany or Taiwan, or dozens of countries with less hostile tax climates.

I’m not saying it may happen, it will happen, we’ve seen it before. The 1986 tax reform abolished deferral of foreign shipping income earned by U.S. controlled firms. No other country taxed foreign shipping income. Did this lead to more business for U.S. shippers? Precisely the opposite. Over the 1985-2004 period, the U.S.-flag fleet declined from 737 to 412 vessels, causing U.S.-flag shipping capacity, measured in deadweight tonnage, to drop by more than 50%. Much of the decline was attributable to the acquisition of U.S.-based shipping companies by foreign competitors not subject to tax on their shipping income.

Now the White House wants to repeat this experience with all U.S. companies. Two industries that would be most harmed would be financial services and technology, and their emphasis on human capital makes them especially able to pack up and move their operations abroad with ease. CEO Steve Ballmer has warned that if the President’s plan is enacted, Microsoft would move facilities and jobs out of the U.S.

Companies make investment decisions for a variety of reasons, including tax rates. But as long as the U.S. corporate tax is more than 50% higher than it is elsewhere, companies will invest in other countries all other things being equal. One Volcker recommendation is to lower the corporate rate to closer to the international average, which would “reduce the incentives of U.S. companies to shift profits to lower-tax jurisdictions abroad.”

We live in a world of global competition and the U.S. tax regime is hurting American companies and workers. Mr. Obama would add to the damage. His election-eve campaign to raise taxes on American companies making money overseas may actually be his most dangerous economic idea yet. And that’s really saying something.
Hence, “shipping jobs overseas” has entered the political discourse and (perhaps because the overpaid dim wits at GOP-HQ don’t understand how damaging this accusation can be with uninformed blue-collar voters) the democrats are never called to account for the bogusness of their rhetoric. Now, however, Senate democrats are actually trying to turn their dishonest rhetoric into disastrous policy.

Hey, Republicans: How about standing up and speaking out about the idiocy of attacking “Corporate America” at a time when so many companies are struggling to avoid bankruptcy? How about pointing out that this legislation would damage the value of stocks in the pension funds, 401(k)s and IRAs of honest, hard-working Americans?
Someone, somewhere, needs to tell Americans that democrats are merely exploiting ignorance and engaging in empty demagoguery, scapegoating “Big Business” for economic problems that the democrats and labor unions have helped cause?

The only problem with telling the American people the truth, while it can be politically effective with those who actually study the issues before voting, the uninformed voter has no more than a 50/50 chance of believing it over the B.S. 30 second soundbites designed to mislead and misinform.

Sometimes the truth is difficult to hear. Truth is, the outsourcing of professional services is a prominent example of a new type of trade. The gains from trade that take place over the Internet or telephone lines are no different from the gains from trade in physical goods transported by ship or plane. When a good or service is produced at lower cost in another country, it makes sense to import it rather than to produce it domestically. This allows the United States to devote its resources to more productive purposes. Why spend money and resources trying to develop a way to produce fuzzy dice for 30 cents less per dozen, when there are technical and medical advances to be discovered. That’s standard economic theory, of the sort that can be found in any freshman-level economics text.

In a nut shell, the democrats are so tangled in the web of labor unions that they must be the enemy of business. Big business, small business, pretty much anything that profits from the work of an American worker. They wage war on the employers, through excessive taxation and regulation, to reduce what they see as ill-goten-gains and increase funding of their government social programs. This battle with business, and the profits they make, acts to reduce research, investment, and expansion that lead to increased employment. The taxes and regulations they impose are restricting the free market system and building bigger, stronger walls between the American worker and employment in the private sector.

What we need to do is not build walls but tear walls down. Our economy throughout the majority of modern history has outperformed all others precisely because we don’t have a lot of walls here. What we need to do is work to tear walls down in other places, that stop our products, our services from being in their marketplace.

Unfortunately, the Obama administration is also too slow to work towards more free trade agreements that labor unions oppose. This is another issue that democrats have seemed to have cut the truth from for political advantage. While it stands as one of the greatest achievements of the Clinton administration, the democrats have turned NAFTA, and all free trade agreements, into job shipping, outsourcing, economy killing legislation. Nothing could be further from the truth. The more markets open to our products and services, the more opportunities American businesses have to grow, prosper, hire, and pay.

It’s now becoming clear that Mr. Obama’s policies have failed to rally voters and failed to inspire democrats to follow their president’s lead. And while the fissures are small now, they will likely widen unless the president shows that his policies will do what his campaign did–expand the pool of voters in favor of democrats.

Part of Mr. Obama’s problem is his tone and language. During the healthcare and most other debates, instead of binding Americans to his cause, he called legitimate concerns “misinformation,” “false,” “demagoguery,” “distortion” or “tall tales.” He declared them “lies.” This was like calling voters with valid objections stupid, and it’s not the way to win them over.

Mr. Obama may be changing the electorate for 2010, but in the wrong direction for his party. This has worried many of the 70 democrats in congressional districts carried by George W. Bush or John McCain.

I’m beginning to believe that the Obama administrations term in power may have been a good thing at this point in our history. Sure it will have been an unbelieveable waste of federal dollars, but those dollars did provide us invaluable lessons;
-His failures will be fresh in our memory for decades, not just old historical footnotes like those of F.D.R.
-He’s a reminder to all presidents and citizens of the future that socialized governmental programs, and tax and spend policies, are very expensive and hugely ineffective.
-Limited government leaves people free to pursue their own American dream.

 -The Conservative