Why does Uncle Discourage Onshore Manufacturing

In my previous post on technology now and then, I alluded to the issue of tax policy encouraging offshore rather than on shore manufacturing. Its a complex issue, full of nuances… it is very real, but also very easy to spin.

From a high level point of view, it would seem our max corporate rates of 45% (max rates combined state and federal) is a serious disadvantage in comparison with China whose corporate rate is 25%. Such is the view portrayed by the Heritage Foundation in their quest to maintain the status quo which provides for offshore tax deferral and other tax advantages.

In contrast, the Obama administrations “Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives For Shifting Jobs Overseas” presents the view that such is counterproductive.

From the standpoint of a wealth being generated via investment, the Heritage foundations model is probably the best one. A good example of this is how google was able to lower its overseas tax rate to 2.4% and there by achieve a effective 22%rate which was far below the rates of Germany, France, and Japan. If one goes a bit further as concerns the applicability to defer and shift income eternally, the following stat from the Obama paper is likewise helpful. “In 2004, the most recent year for which data is available, U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings – an effective U.S. tax rate of about 2.3%.

Its also interesting to consider the differences in the banking industry between the US and China. While this article is a couple years old, it is an eyebrow raiser.

In light of this Erik Hare presents a interesting view. .”,..it is work that creates all wealth in the end. Investment is only the tool that makes it possible.” Big picture wise, Erik is correct… but pragmatically, imagine the howls and screams which would occur should that 2.3% figure shift upward, even if only a tiny bit. Obviously there needs to be a balance, protectionism is counter productive, yet the current policies in place while being counter protectionism, also end up putting onshore entities at a severe disadvantage.

Another way onshore manufacturing is discouraged is via the delegation tax which I wrote on back in 2004. Sadly, little if any has changed in this regard, if anything, we’ve shifted towards a more regressive structure rewarding multinationals, while penalizing onshore efforts.

So what is the answer… there are no easy ones. Add in the fact that the above discussion can be swung and soundbited any number of ways, its unlikely that government will have any will to seriously address the problems at the base of this.

However, such is not all gloom and doom. It may mean that large factories of yore are off the table, but such doesnt mean their wont be niche markets that a small and nimble firm can jump into. I figure if Peavey Electronics, in one of the most manufacturing unfriendly states (MS goes so far as to tax inventory) can not only survive, but thrive, hope is present for all of us.