The Democrats try to shovel water against the tide of productivity.
Outsourcing is a new phenomenon," a Kerry aide said. "We don't really have a clue what's going on."
Democrats Ponder What to Do About Jobs
By Jonathan Weisman
Washington Post Staff Writer
Thursday, February 19, 2004; Page A01
Democratic presidential candidates have made the loss of U.S. jobs to international competition the centerpiece of their campaigns, but even some of the candidates' economic advisers acknowledge that remedies offered -- such as closing tax loopholes on overseas income and offering tax breaks for domestic hiring -- would probably do little to staunch the bleeding.
The issue of job losses in old-line manufacturing and moving service jobs overseas catapulted to the political forefront last week, after the Democratic presidential campaigns traversed hard-hit industrial states such as Wisconsin, Michigan and Missouri. The rhetoric was further amplified when President Bush's top economist, N. Gregory Mankiw, said last week that outsourcing was "probably a plus for the economy in the long run."
Yesterday, President Bush appeared to back off projections in his own Economic Report of the President, which predicted that 2.6 million jobs would be created this year.
The movement of jobs to low-wage countries such as China, India and Mexico has been driven by powerful forces of economic globalization that may be beyond a politician's control, economists say. The two leading Democratic candidates have fallen back largely on one economic factor that Washington does control: the tax code.
Sen. John F. Kerry (Mass.) and his closest challenger, Sen. John Edwards (N.C.), both have said that tax law rewards corporate expansion overseas. And both would cut taxes for domestic manufacturing and offer temporary tax credits for hiring manufacturing workers in the United States.
"We will repeal the tax loopholes and benefits that reward Benedict Arnold CEOs and companies for shipping American jobs overseas," Kerry said Tuesday night in his victory speech after the Wisconsin primary. "Instead, we will provide new incentives for good companies that create and keep good jobs here in America."
Many economists and some business officials agree that companies are reaping tax benefits from overseas expansion. Citigroup executives told industry analysts last month that the banking firm lowered its effective tax rate from 31.3 percent to 30.6 percent last quarter, boosting income by $52 million, by putting more money into overseas operations.
The decline from a 33.7 percent tax rate in 2002 "primarily represented benefits for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested," a company document says.
But virtually no one would say that taxes are a primary -- or even a significant -- factor in the movement of as many as 300,000 white-collar jobs and many more manufacturing jobs abroad in the past several years. No matter how sweet the tax incentive is to expand in India, for instance, it could not be more enticing than lowering a software developer's pay from $60 to $6 an hour, a figure cited recently by the consulting firm McKinsey & Co.
"I don't think you can say it's the tax code that's pushing jobs abroad," said Michael J. Murphy, a tax lawyer with Sutherland Asbill & Brennan LLP in Washington.
Other factors include the emergence of well-educated, English-speaking workers, improving infrastructure in countries such as India and China, growing political stability and rapidly improving Internet, telephone and transportation links, said Larry R. Langdon, the former head of the Internal Revenue Service's large and mid-size business division.
Langdon, who was Hewlett-Packard Co.'s top tax attorney in the 1990s, recalled his company's decision to expand printer-cartridge production in Ireland, an often-cited tax haven. "We started making printer cartridges in Ireland, not because of taxes but because of wage rates. Taxes were just frosting on the cake," he said.
Another case in point is DaimlerChrysler AG's decision last week to shift its contract for Dodge Ram truck frames from a Tower Automotive Inc. plant in Milwaukee to a Mexican auto-parts maker. The decision, which will cost Milwaukee as many as 500 jobs, became an issue before the Wisconsin primary.
"I went to Tower Automotive, met with some of the employees who were about to be laid off, [saw] that vacant look," Edwards said during a debate in Milwaukee. "I will stand up and fight every way I know how to protect these jobs, including the jobs that are being lost at Tower Automotive."
At first blush, DaimlerChrysler's decision looked easy. Wages in Mexico are as little as one-fifth the $18 an hour that employees in the Milwaukee plant's largest union are paid. But a closer look shows the complexity of the issue. The cavernous Milwaukee plant was built in 1910, sprawls over 149 acres and has 3.1 million square feet under one roof, of which only 1.1 million are in use, said Bev Pierce, a Tower spokeswoman.
"That certainly affects the cost structure there," she said.
Tower Automotive won the contract to build the frame for Chrysler's redesigned Dodge Dakota sport-utility vehicle at its relatively small, 294,000 square-foot plant in Plymouth, Mich., which was built in 1996. That is proof that low-wage countries do not necessarily have the edge, said DaimlerChrysler spokesman Michael Aberlich.
"They were the best," he said of the Plymouth plant, "and that's what it's all about."
The tax code does offer some advantages for overseas expansion, tax experts say. A company can deduct from its taxes the interest paid on loans for any new plant. If that plant is built in the United States, its profits are taxed immediately. If it is built overseas, profits are taxed once they are brought home, and if they are reinvested abroad, they may never be taxed, an Edwards economic aide said.
Gary C. Hufbauer, an international tax expert at the Institute for International Economics, noted that when a U.S. subsidiary operating in China pays royalties to the parent company for technology developed in the United States, it gets U.S. tax credits to offset royalty taxes imposed by China. By inflating royalty payments to itself, a company can use its foreign operations to reduce its U.S. taxes.
"The tax code does favor international expansion," Hufbauer said.
Kerry and Edwards have embraced pending congressional legislation to create a lower tax bracket for domestic manufacturing operations. Kerry would give employers tax credits to offset payroll taxes for new hires. Edwards would renew tax incentives for business investment in impoverished areas, but target them at regions hit hardest by international job losses.
Both candidates have promised programs to finance alternative energy development and to lower the cost of employer-sponsored health care, programs they say would make U.S.-based industries more internationally competitive.
Kerry has also said government contracts, when possible, should go to U.S.-based businesses, and that call-center phone operators should at least be required to identify what country they are in. He has called for a government study into outsourcing, its scope and costs, and has backed a law requiring companies to keep records of what jobs were sent abroad and why.
"Outsourcing is a new phenomenon," a Kerry aide said. "We don't really have a clue what's going on."
Roger C. Altman, chairman of the Wall Street investment firm Evercore and a Kerry economic adviser, said some jobs, for which the wage differences are vast, will not be saved. But, he said, an integrated response focused on taxes and lowering business costs will save "certain jobs that are susceptible to a competitive response."
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