How Tax Rates Affect Manufacturing

From the Business Insider (bold highlights original)

The theme of this year’s Technology Day at MIT was advanced manufacturing in the U.S. Kresge Auditorium was close to capacity with alumni from all reunion years.

Learned MIT faculty weighed in on the importance of proximity between engineers and factories. The Atlas Device story was initially an inspiring tale of can-do New England spirit, with engineers in Somerville and a machine shop in Woburn working together to make improvements on a weekly basis.

But then we found out that the main customer was the U.S. military and they really didn’t care how much it cost or how efficiently it was produced. Similarly, the solar cell talk was great until we learned that there are about 12 good reasons why solar cells must be manufactured in Asia.

In a panel discussion afterwards, the speakers were asked what it would take to make the U.S. more competitive for manufacturing.

The answer was that it was pretty much hopeless at current tax rates.

Big companies make a lot of money in foreign countries, but if they bring the profits back home they get hit with the world’s highest corporate tax rate. So they leave the money in China, for example, and then invest it there in research and development or a new factory. I.e., our own multinational companies are financing the new facilities around the world that are rendering the U.S. uncompetitive.

Globalization is not to be blamed for investors who straddle to take advantage of the variances of tax rates. Instead, tax competition should help keep a check on insatiable or greedy governments. And importantly, tax competition provides a channel for the old saw—”money flows where it is treated best”.

The lesson is that tax rates should be competitive as they signify as one of the key variable in determining resource allocations. Although I would prefer to abolish them all.

Philippine Competitiveness: Cut Capital Income Taxes

Duanjie Chen and Jack Mintz writes, (special thanks to Cato's Chris Edwards for this)

Many industrial and emerging countries have reduced their corporate tax rates over the last decade or so. The largest rate cuts were in Austria, Bulgaria, Canada, the Czech Republic, Germany, Greece, Iceland, Ireland, Italy, Netherlands, Poland, Slovakia, Turkey, Egypt, Georgia, Kazakhstan, Lesotho, Mauritius, and Singapore. America’s largest trading partner, Canada, cut its statutory corporate rate from 43 percent to 29 percent, which helped to bring down its effective rate from 44 percent to 21 percent, according to our calculations. Substantial cuts were also achieved in Australia, Belgium, China, Denmark, Finland, Korea, Luxembourg, Mexico, New Zealand, Taiwan, and the United Kingdom. Taiwan cut its statutory rate from 25 percent to 17 percent in 2010, and now has an effective rate of just 10.9 percent.

A number of countries are initiating or phasing-in further corporate tax-rate cuts in coming years, including Australia, Canada, Ecuador, Israel, Japan, New Zealand, and the United Kingdom. In some countries, such as Israel and Japan, these are straight rate cuts. In other countries, such as New Zealand and the United Kingdom, rate cuts are being paired with base-broadening measures. When these reforms are in place, the average effective tax rate in 2014 will be 18.0 percent in the OECD and 17.4 percent among all 83 countries.

Philippine corporate tax rate is at 32%.

It’s positive to note how the world has been trying to stay competitive by lowering tax rates. This has been consistent with the growth explosion of global trade.

I hope the trend continues in spite of the recent crisis. And it would certainly be positive if the Philippines joins this global bandwagon.

It’s one of the many things that can be done to incentivize capital formation, build on research and attract foreign direct investments that could lead to more jobs.

As a side note, I honestly detest the rubric “jobs”, but this has been the mainstream vernacular. I’d rather say “economic opportunities” which is where jobs come from anyway.

And I hope that politicians will stop diverting people’s attention over to education policies. Education hasn’t been the answer, a big number of unemployed have been college graduates. Instead, the Philippines need to be competitive.

Back to taxes, in the Philippines, on top of corporate taxes there are capital gains and final withholding taxes on dividends. So you have a double whammy on capital income. Is it not a wonder why investments are low? And the hurdle rate is high?

While my ideal scenario would be to abolish all these taxes, this isn’t likely to be politically palatable, so I would suggest to start with the reduction of corporate tax rate or get taxed once by abolishing either capital gains or the final withholding tax on dividends.

Of course, there are other many factors that could lead to competitiveness, such as repealing obstructive regulations and avoiding distortions from arbitrary interventions, but this would be a topic for another post.

Overall, competitiveness boils down to economic freedom.