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June 24, 2006

Business Taxes and Outsourcing

If Craig Barrett is correct, the Democrats are about to run into a hard choice in their campaign against outsourcing. Barrett is the Chairman of the Board for Intel, and he explained to the House Ways and Means Committee that relative tax burdens play a huge part in his company's plans to build new plants. According to Mr. Barrett, it costs Intel approximately $1 billion more to build a wafer fabrication plant in the United States as opposed to building it in China, and roughly 70% of those costs are in taxes. Given that is almost one-third the cost of a new plant, Intel would be foolish to construct the plant in the United States rather than in China.

The dilemma for the Democrats is clear: they're unlikely to favor reductions in the corporate tax rate, but they certainly don't want to see more U.S. companies building overseas simply because there are competitive advantages to doing so. Republicans can utilize this kind of news to pressure the Democrats to choose one or the other: fight outsourcing by making the U.S. business climate more amenable to business investment, or give up on their claims that they're committed to keeping jobs in the U.S. While the U.S. economy is currently on reasonably solid ground, fears of job losses overseas are a continuing problem for both parties, and this offers a means to fighting the problem.

The converse to this is that Mr. Barrett is a corporate executive who is trying to get governments to fight over his investment dollars. Corporate rent-seeking is a time-honored tradition in our system (ask yourself why almost all this country's major banks are incorporated in Delaware, or why insurance companies cluster in Connecticut), and it is in Mr. Barrett's best interests to convince the government to offer him as many tax breaks and other incentives as possible to reduce his costs. This is precisely what the overseas governments are doing. According to Mr. Barrett, other nations are offering the following:

• Malaysia – providing a 10-year tax holiday, and tax depreciation for capital building and equipment costs equal to 160% of their cost;
• Ireland – with a 12.5% corporate tax rate, and a 20% research tax credit;
• Israel – paying up to a 20% capital grant, with a 10% tax rate and a two-year tax holiday; and
• China – granting a 5-year tax holiday, followed by 50% of the normal tax rate for 5 more years.

Ireland appears to be the only country that's competing simply by creating a good business climate. The other nations all offer various tax holidays and capital grants to lure business into their countries, since once a capital-intensive plant is in place, it's difficult for a company to pick up stakes and move.

That makes Ireland a good model to follow, in my opinion. Rather than offering various companies certain incentives to build in the United States, amounting to little more than government bribery of the business world, establish a system that makes it reasonable for businesses to set up shop within the United States. It's important to remember that the U.S. offers a lot to businesses; we have solid infrastructure already in place, an educated work force, stability, and proximity to the biggest market in the world. We don't necessarily have to have the most attractive tax climate to convince businesses to stay in the U.S. Incentives like China's work as long as we're willing to offer them, but a simplied and competitve business tax regime is a better solution because it takes the government out of the business of trying to bribe businesses to stay here. Maintaining a good climate for business strikes me as a wise use of government power. Actively working to convince businesses to stay in the U.S. strikes me as a good way to further corrupt our political system, as businesses will spend a few dollars on politicians in exchange for bills that give them the incentives they crave, meaning the businesses that stay will do so not because it makes economic sense, but because they're better at playing the game.

Hat tip: Cato-at-Liberty.