Why the US should tax the heck out of companies offshoring

  • Companies that go off shore will have to pay more taxes. Trump will incentivizing the return of business domestically with a tariff.

From free trade economics to common sense economics

If we do not put some incentives for companies to stay, the middle class wages will continue to decline.

Multinational companies will offshore operations, relocate business processes and find cheap sources of labor. That means you have less money and the top executives have more money. I do not mean a little more money, I mean earnings and total compensation that has no meaning in relation to their value.

Yes, I have worked in corporations at in management, and the big bosses are not worth their weight in salt, for what they are paid.  Small efficient companies are more profitable. yet most of the off-shoring and outsourcing are concentrated in top tier fortune 500 companies, not small entrepreneurial firms.

When the corporate elite crush the American dream under the banner of free economics it is tragic, as it is a misrepresentation of capitalism.

Taxing off-shoring equates do dampening corporate ambitions to restore the American dream

What happens when companies offshore:

  • Poor end user experience – You get customer service representatives that you can not understand on the phone. They are somewhat rude and do not fully understand your issues. This has been my personal experience. Has this been yours?
  • You get products that are toxic – For example, children toys, cosmetics, most of the garlic I see in the supermarkets is from China. I do not know what they sprayed it with. The fish is contaminated and this has been proven. You get toys for children make with lead and other substances. You cosmetics for Mom make with products that I would want to give my enemies. Do not be so naive, that it is all closely watched and regulated. Do you want American children sticking Chinese plastic toys in their mouths?
  • Clothes fall apart in a six months – You buy clothes that are of poor quality but fall apart but are not any cheaper. You have clothes selling for 30 dollars that were made for pennies. It is not the cost the determines price but where marginal cost equals marginal revenue, or supply and demand.
    You get products that break and clearly of low quality, it is so annoying. You wash your clothes a couple of times and they are done.
  • American families split up – American workers have to take jobs in cities that are distant from their families. Husbands working with small one room apartments, man cave or man cave or  apartment complexes with single women, meanwhile with wives and children in other cities holding down the fort. This does have a social cost of broken families. I have seen many families break up from the corporate lifestyle. Look around your office and be honest.
When products are manufactured abroad, quality goes down as a general rule.

What does the worker get from off shoring?

  1. Wages and earning that are lower. There are plenty of ten dollar an hour jobs, but that is not enough today.
  2. Both parents have to work now and the child goes to daycare and you have less economic stability.  That was not true years ago.

That means US capital goes abroad to enrich other people instead of your own family.

Free trade and fair trade are two different ideas – Even Adam Smith would agree that an arms length transaction is needed for free trade, but policies of governments do not keep the playing field level. I am a free market, free trade advocate, but what we are talking about is fair trade when we want to tax companies and individuals that off shore. Foreign countries are not trading on a level playing field and we know this. Is there any debate?

Will prices go up if you tax multinationals?

No. Prices will go down as corporate domestic taxes go down.  If a company makes something in China, for pennies and sells it in the US for a substantial markup. If they bring it back domestically, what will happen is, quality will improve, cost of transportation will decreases, US wages will go up. Further as a side effect, with less massive shipments to the US  the amount of illegal shipments will proportionally decrease as there is less to patrol.

Since the cost of manufacturing is going up price to the consumer might go up, or it might not.  Price in the market is determined by supply and demand, not cost. People have to understand where prices come from. They do not come from cost. In fact they almost never are based on cost but rather supply and demand. The economics during the marginal revolution determined this and this economics theory, of supply and demand is something that has little debate. Prices are determined by an intersection of supply and demand, this is equilibrium, not cost of production.

Entrepreneurs will adjust and find ways to make production at home competitive through invitation or smaller local companies will displace multinationals that have an unfair advantage because of their capital advantages.

Decline in US standard is both relative and absolute.

What will happen when we onshore production though tax incentives:

  • Wages will increase
  • Innovation will increase
  • Cost of transportation will decrease
  • Trade deficit will increase – This has multiple effects

In the US we can make anything we want:

  • Farmland and potential for food production
  • Natural resources for energy independence
  • Intellectual capital unmatched plus creative innovation
  • Mineral wealth
  • Infrastructure in place for interstate transportation and export
    stable political structure and process compared to the rest of the world

Why do we really need to off shore our production and services unless it is for a bonus to the big bosses?  This is not enlighten capitalism.

Adam Smith’s world of free trade and comparative advantage was a different because of technology

Adam Smith world did not have the Internet, mobile phones, movement of people and labor that is almost instantaneous. The economic boundaries are almost instant. Therefore there is no time for adjustment for domestic market to flow into different areas of skill. You can not change professions in a year if your career has been outsourced.

People are not widgets or inputs that can be plugged and played because they have long term obligations and connection to locations that can not be uprooted. This is not an emotional argument but a reality. Children are in schools, people have family remember they have to take care of.

Further, Adam Smith over emphasized the division of labor. In a modern world transfer of jobs happen in a flash.  You can take a person from India and train him relatively quickly at a job an American has. However, that American with an American mortgage and fixed payments, can not change to a higher paid profession as fast. In the world of Adam Smith, people were not as dependent on the world economy. Most people grew their own food, did a lot of their trade work and owned their house without a mortgagee. In every decade in this century the burden of housing payments has increased, currently it is the largest competent of anyone’s budget. https://www.bls.gov/news.release/cesan.nr0.htm  This is a fixed payment but a variable cost out of disposable income.  It was a different world.

Taxing outsources and offshored operations will bring revenue

This will bring revenue for the the US that can go into direct investment in our infrastructure. This will help the US lower the US tax corporate tax rate from 35% to 15%. It will be a windfall for the US. I have not seen any legitimate counter arguments to this. Some people will claim it will spread inequality and it is a  cliché ‘tax break for the rich’. However, my rebuttal is how? It is just the opposite. The opposition has more to do with a political agenda against Trump. The only legitimate argument is the complete free market argument. The theoretical perfect world of text books in macroeconomics, absolute advantage, comparative advantage (producing at a lower opportunity cost than competitors) and production possibility frontiers in an economic theory class room, is not real life world of people’s lives.

Comparative advantage might with with maple syrup but not intellectual capital

Maybe in some commonly like maple syrup Canada might have an comparative advantage over the US, but when you are talking accounting services or IT, which does not have a specialized climate need, it is not the case. In most business operations,the factors of production have changed, as the tools of Excel and a PC are universal. Physical capital and natural resources are not the main drivers of innovation  for example, Coal mines and rail roads a century and a half ago.  Today economics is more about inexpensive laptops and brainpower, which every country in the world possess. Therefore, the old arguments of free trade need to be replaced with fair free trade, cognizant of the displacement and effect on the whole.

  • I teach economic theory, but I also work in business. I see both sides of the equation.

4 Replies to “Why the US should tax the heck out of companies offshoring”

  1. “I live near the poverty level. I am a programmer and have not sold my products yet, and live as an expat” ?

    Come now: If you live near the poverty level and have not sold your product how on heart are you paying income taxes?

    “I not only pay taxes in my host country but the USA.” US citizens are not exempt from taxes even if they are expats or dual citizens”

    If as you mention you hare a low income Expat you need not pay any income tax from income bellow $85,000 per year to the US.
    You need to find help if you pay taxes I don’t think you need to.

    1. Mark Biernat says:

      I have an US schedule c and almost no matter what, unless you make nothing, you have to pay a self employment tax. There is no way to get around this. 15.3% is not nothing. Maybe I could have set it up all different but I always prefered to have an US ‘company’ than a company in Poland.

      I have a lot of stock investments, but do not take gains on those,but just trade them. That is my war chest until I sell my program.

      I had to pay Polish taxes no matter what, on income generated in Poland, as that is where I live.

      But your right, I am not neither totally impoverished nor rich yet, and therefore, my relative tax burden is low.

      I am philosophically against taxes but too many irons in the fire to focus on tax minimization strategies at this junction. More focused on the income generation side.

  2. Mark.

    We are in a very special times and for many investors holding to what they have is there priority.

    However we do have some wild market moves that can transform in to unique opportunities. The question is what is real and reliable information?

    When we have a Central Bank that can place a back stop on markets it’s no longer a real market. I look at this and try to understand the consequence of this ridiculous economic engineering and how to profit from it.

    For what it’s worth other than a few trading situations I have been almost 100% cash since mid 2008.

    Result is:
    I lost returns on Bonds = No Income.
    I avoided the general collapse= Very nice.
    I missed the entire recovery= Not very proud of that.
    I did not know Government and the FED where to bail out the disaster by borrowing and printing even more money.
    I underestimated politicians idiocy.

    I did well trading the US$ back and forth but over all I am still “CASH”.

    In the financial media we do not read much about being cash.
    But what was the biggest shortage in this over leverage economy ? Answer is: “CASH”

    We now can purchase 30% 40% more housing valuation for the same dollar.

    It’s not over but its getting closer and it will change soon and that to me is where an investor need to focus.

    The money base is up but the money supply is still low.
    When that starts to change we are in new territory.

    Be rational, Never be impulsive, Trust no one, Make your own research and Happy New year and Happy Investing.

    1. Mark Biernat says:

      Interesting advice and good move to be out so early. I was out early too, but have done trading since then. I know this sounds cliché but I still think there is downside risk in the market (real estate and maybe stock) as the fundamental problem has never been solved. I talk to my neighbors who are locked into 30 year mortgages that are well beyond their means because the market has dropped and the job market is different; yet I talk to others who are in government jobs and they are happy and a little clueless. Something is off.

      You are right the money base has been expanded to no avail.

      My take on it is nothing much has changed since the markets have not been allowed to adjust naturally. It should be a long slow grinding going forward. However, people come up with new ideas and from no where sometimes the economy reinvent itself.

      I think 2012 is no clearer than 2011 was.

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