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From the Desk of Jack Healy

Tax Code Makes USA Uncompetitive

By Jack Healy, Director, Manufacturing Advancement Center, jackh@massmep.org

New England was built by the wealth produced from manufacturing. While those days are long gone, the tax system which manufacturers’ continue to labor under is not. The US tax code, coupled with state and local tax systems, places the US manufacturing community at a significant disadvantage. This is compounded by the governments of our trading partners, either through currency manipulations or out right tax reductions.

A report by the Manufacturers Alliance (MAPI) in the March 23, 2005 edition of Manufacturing and Technology News indicated, “During the past decade, Western Europe has used aggressive ‘tax competition’ to nearly double its exports to the rest of the world -- far faster than (the United States) export growth -- and has built a substantial trade surplus with the United States.”

MAPI goes on to explain that Western Europe has reduced corporate income tax rates, while rebating value added taxes (VATs) on its exports and is using the World Trade Organization’s “arbitrary rules to thwart effective responses by the United States.” These are our friends!

The National Council for Advanced Manufacturing (NACFAM) recently summarized the disproportionate share of taxes borne by US manufacturing as compared with other countries.

CORPORATE TOP MARGINAL INCOME TAX RATE

(Includes federal , state and local taxes)

Country
1985
1990
1995
2001
2004

Australia

46

39

36

30

30

Austria

61

39

34

34

34

Belgium

45

41

40

40

34

Canada

45

37

36

35

37

China

 

 

 

 

33

Denmark

50

40

34

30

30

Finland

43

25

25

29

29

France

50

37

37

36

35

Germany

63

58

57

38

40

Greece

44

40

40

38

35

Ireland

50

43

38

20

13

Italy

46

46

53

40

34

Japan

55

51

50

41

41

Luxembourg

44

41

40

37

30

Mexico

 

 

 

 

33

Netherlands

43

35

35

35

35

New Zealand

45

33

33

33

33

Norway

51

51

28

28

28

Portugal

55

40

40

35

33

Spain

35

35

35

35

35

Sweden

60

45

28

28

28

United Kingdom

40

34

33

30

30

United States

50

38

39

39

39

Non-US Median

46

40

36

35

33

Table 1: Engen and Hassett: http://www.aei.org/docLib/20040401_TaxNotes1102.pdf

KPMG: http://www.kpmg.ca/en/news/documents/CorpTaxRateSurvey2004.pdf

Note: Rates for 1985, 1990, 1995, and 2001 are from Engen and Hassett. Rates for 2004 are from KPMG. There are minor differences in methodology between them.

The figures in Table 1 show that the US corporate tax rate fell by 22% between 1985 and 2004, but the average rate for all others dropped by 32%. Further, the deepest decrease in the US rate (from 50-38%) resulted from the1986 Tax Reform Act (TRA), but then remained steady (at 38-39%) over the last 18 years. Indeed , the effect of the 1986 TRA was highly favorable for manufacturers, putting the US (at 38%) below the median rate (of 40%) of its global competitors. Since the TRA, however , the US rate remained at 38-39%, while other nations continued to drop their rates in the intervening period.

The result is that the US rate in 2004 (39%) was six points above the median (33%) that year.

This means that the overall US corporate tax rate (39%) is the third highest in the world, behind only Japan (41%) and Germany (40%). To retrieve the relatively advantageous position it had in 1990, below the median, the US would have to drop its rate by 6%, not by the 3% secured by the recent Job Creation Act. Even this projection assumes that the median rates of 22 nations listed in the preceding table will remain static at their 2004 levels. Of course, history suggests otherwise. This is especially true if you’re assuming state and local taxes will not rise, which is optimistic, at best.

Summary of NACFAM Findings

  • The US has the third highest corporate income tax rate (behind only Japan and Germany) out of 23 leading industrialized nations.
  • Although the US is lowering the federal tax rate from 35% to 32% over the next five years, the US rate will remain above the median.
  • Manufacturers are bearing a disproportionate share of taxes. Although manufacturing is generating only 7% of total corporate profits, it is paying 25% of corporate tax revenues.

Bottom Line: While last year’s tax cuts on domestic production moved in the right direction, deeper tax reductions are needed to keep US-based manufacturing competitive in the tax arena.

Taxes are just a single contributor. Healthcare and other structural costs also are a significant factor in making US manufacturing uncompetitive in the global market. Whether the political community is up to this challenge remains to be seen, as there seems to be no current appetite for further tax reduction, no matter how urgently it may be needed.

In the words of an old radio personality, Arthur Godfrey, who summed up the situation for the manufacturing community, “I am proud to be paying taxes to the US. The only thing is -- I could be just as proud for half the money.”

1. Except China and Mexico, since figures for their corporate tax rates were unavailable until 2004.

2. The 13% corporate rate for Ireland, far below the median of 33% for 2004, was included in this averaging. The dramatic decrease in Ireland’s rate had a powerful impact: “Its low rate for manufacturing activities between 1991 and 2000 posted a average growth rate of real GDP that was almost three times the average of other countries in the European Union.” (Engen and Hassett)

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