Will the Factory Czar Do Tax Returns?

On Labor Day, President Bush announced that he was creating a new assistant secretary with the Department of Commerce “to focus on the needs of manufacturers, to make sure our manufacturing job base is strong and vibrant.”

Personally, I’d prefer the President to re-focus on the needs of taxpayers, and eliminate the Department of Commerce entirely.

But if we’re going to have what appears to be a Factory Czar, let’s at least hope this yet-unnamed official provides good advice. The U.S. has, after all, lost about 2.5 million manufacturing jobs during the current slowdown. What’s to be done?

The Factory Czar should start to stem the job-loss tide by calling for reform of the corporate tax code. America now has the second-highest tax code in the industrialized world, second only to Japan, which is an economic basket case. Uncle Sam and the states grab a combined average top rate of 40 percent of corporate profits, while the OECD average top rate is just 30.8 percent in 2003. That means our international competitors are left with more resources to cut prices, invest in research or marketing, or otherwise get a competitive advantage.

We need to slash corporate income tax rates—indeed, let’s repeal them entirely, since companies simply pass the cost on to consumers and investors anyway. Talk about a boom! Every company in the world would want to move to the United States. It would also let America put all of those smart corporate tax lawyers and tax accountants (it’s okay, my sister is accountant) to work on improving our products and services instead of spending all of their time trying to outfox the IRS. Did you know that America files 2.2 million corporate tax returns every year? And that the IRS has a total of 100,000 employees, many of whom are dealing with complex corporate returns? What a tragic waste of time and resources, especially at a time when America faces so many other challenges.

Slashing or ending the corporate income tax would also end much of the political gamesmanship in Washington. Without a complex corporate tax code, there would be no corrupt corporate loopholes given to politically connected industries. It’s the ultimate level playing field.

Repealing (or at least slashing) the corporate income tax would also alleviate another problem: our punitive treatment of overseas earnings. Not only are America’s corporate tax rates too high, but we’re especially aggressive in our “worldwide” treatment of earnings. The U.S. taxes earnings regardless of where they are generated, while most of major competitors use a “territorial” tax system, which only taxes earnings generated within their country.

Consequently, in a global market, U.S. firms are taxed twice, locally and at home, while other foreign companies only pay taxes where they are doing business. That’s why Bermuda and the Bahamas have become more than a vacation destination for pale New Yorkers; U.S. firms are being pushed offshore by an outdated tax code to keep their competitive edge.

This “worldwide” treatment of overseas income also makes U.S. companies more attractive targets for foreign-owned firms operating in territorial tax systems. Firms in other countries can buy a U.S. multinational and see an immediate boost in terms of after-tax profits. Because of the U.S. tax code, a global firm like Intel is worth more as a foreign subsidiary than as a U.S.-headquartered firm! Why in the world is Congress helping the French, the Germans, and other foreigners buy control of U.S. firms?

Let’s hope the new Factory Czar isn’t just some union hack or industrial policy wonk. This new official needs to understand the tax code, and the way it is killing American jobs and competitiveness. We need to make America the most attractive place in the world for multinational companies to operate—let’s start by repealing the corporate income tax to put U.S. firms on an equal footing with the overseas competition, and stop the flight of U.S. companies and jobs overseas.