- Companies that go offshore will have to pay more taxes. Trump will incentivize 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.
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 made 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 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 the 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.
What does the worker get from off shoring?
- Wages and earning that are lower. There are plenty of ten dollars an hour jobs, but that is not enough today.
- 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 arm’s 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 offshore. 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, the quality will improve, the cost of transportation will decrease, US wages will go up. Further as a side effect, with less massive shipments to the US, the number of illegal shipments will proportionally decrease as there is less to patrol.
Since the cost of manufacturing is going up the 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 a 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 economic 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 the 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.
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 the comparative advantage was 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 overemphasized 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, cannot 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 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 a completely free market argument. The theoretical perfect world of textbooks in macroeconomics, absolute advantage, comparative advantage (producing at a lower opportunity cost than competitors) and production possibility frontiers in an economic theory classroom, is not real life world of people’s lives.
The comparative advantage might with maple syrup but not intellectual capital
Maybe in some commonly like maple syrup Canada might have a 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 railroads 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 the business. I see both sides of the equation.