Companies are owned by private investors seeking the maximum return on their investment. In the decades after the Second World War, the United States slowly became a high-cost place to do business. Labor costs (wages and benefits), and environmental and workplace safety regulations played an important role in this process. The weakening quality of the American workforce in terms of science and math also played a role.
Beginning in the late 1970s major American firms began seeking higher profits through the lower production costs that could be attained by moving operations outside the United States. General Electric, under Jack Welch, figures as one of the leaders in this movement and GE was not shy about encouraging its own suppliers to do the same. Many other manufacturers followed the example of GE. For example, in 1992 the Ford Motor Company overseas manufacturing sector employed 47 percent of its workforce, but still employed 53 percent of its workforce in the US and Canada. In 2009 the overseas operations employed 63 percent of its workforce, while 37 percent were employed in the US, Canada, and Mexico.
Then, in the 1990s, the growth of the Internet exposed service industries to globalization as well. Computer programmers have seen 13 percent of their jobs exported to foreign countries.
Furthermore, the United States has the second highest rate of taxation on corporations in the world. The nominal tax rate on corporate profits is 35 percent. Companies have spent decades lobbying Congress in successful efforts to create tax loopholes, so the average effective rate is 25 percent. In Canada the corporate tax rate is 16.5 percent; in Germany it is 15.8 percent; in Ireland it is 12.5 percent. Thus, the tax rate on corporate profits in the United States remains higher than the rates in many foreign countries.
Many American companies have created foreign branches to take advantage of lower labor and regulatory costs, and lower rates of taxation. Moreover, American corporations with operations abroad must pay the difference between the tax rate in the country where they earned the profit and the tax rate in the United States when they repatriate those profits. Rather than do so, the companies reinvest the foreign profits in their foreign profits in expanding production overseas, rather than reinvesting in the United States. America is almost alone in double-taxing profits earned abroad.
In 2010, the Simpson-Bowles commission President Obama recommended that the US tax rate be lowered to 23 percent and most loopholes closed. American business leaders generally accepted this proposal. However, the proposal also encountered opposition from the left to any reduction of taxes on business. According to one critic of corporate tax avoidance “It’s unpatriotic, it’s unfair, and we can’t afford it.”
Who profits from this strategy? American corporations profit: in 2009 47 percent of the revenues of the five hundred leading American corporations came from their overseas operations. Developing economies that host American corporations profit: between 1995 and 2008 China’s GDP grew an average of 9.6 percent and India’s GDP grew an average of 6.9 percent. It’s harder to say that America itself benefits. Between 1995 and 2008 the GDP of the United States grew an average of 2.9 percent. In 1950, the United States Government pulled in thirty percent of its revenue from taxes on corporations. In 2010, the United States Government pulled in nine percent of its revenues from taxes on corporations.
Corporate “inversions” are just the latest example of these problems.
“Where America’s Jobs Went,” The Week, 25 March 2011, p. 13; “Taxing corporations,” The Week, 2 September 2011, p. 13.