How to prosper by killing American jobs

U.S. LAW ENCOURAGES IT; WHY NOT A TAX HOLIDAY FOR UNEMPLOYED ENGINEERS?

Author: Daniel Sneider

Published: October 21, 2004

Here is a word that has barely appeared in the presidential election campaign: China.

Foreign policy in this campaign seems to consist only of the war in Iraq, with an occasional excursion into places like North Korea and Afghanistan. But arguably the rise of China as a great economic power has more impact on our daily lives.

China's voracious appetite for energy and raw materials is driving up the prices of those goods. China's role as the factory of the world means it is piling up a record trade surplus with the United States. By August, China had sold almost $100 billion more to us than we had to it. Those dollars are purchasing American assets: China is the No. 1 purchaser of Treasury bills to finance President Bush's budget deficit.

I was reminded of China's impact at a recent Silicon Valley conference on business in Asia. The CEO of a telecommunications equipment manufacturer, Charles Kenmore of ANDA Networks, cheerily recounted how he saved the company in this recession by adopting a ``hybrid U.S.-China business model.''

The model is pretty simple, really. You just move almost all of your jobs to China. ANDA, recounted Kenmore, once employed about 400 people in the United States. Now it has just 27 employees here -- a handful of the top engineers, a small corporate office and some marketing people.

The company dramatically shrank in size but saved money by moving all of the test engineering, production, purchasing and global marketing to China, where it employs about 50 people now. The Silicon Valley engineer who got paid $125,000 a year, Kenmore said, has been ``transformed into a person earning $17,000,'' a Chinese engineer with equivalent, or even better, education and training.

Kenmore's model: If the cost is 10 times less in China and you can't get 10 times more productivity here, ``move it.''

It may have been the only way to save the company. But why is it in America's interest to save a company if it means losing almost all the jobs?

Unfortunately, the United States encourages companies to follow this path. The tax code is one of the most powerful factors, for example, behind the shift of business operations overseas.

Some companies move to take advantage of significantly lower corporate tax rates -- 35 percent here vs. around 10 percent, for example, in countries such as Ireland or Singapore. Nominal tax rates are higher in China, but local governments regularly make deals for extensive tax holidays. Business executives at the conference joked about wining and dining local officials in China.

Our tax code supposedly discourages this by taxing all income no matter where it was earned, with credit for taxes paid to other governments. But there is a huge loophole. Companies can defer ever paying taxes here by keeping their income overseas. They can invest it and make more money from it indefinitely. American firms have as much as $400 billion -- and by some estimates more than $600 billion -- now parked overseas.

A bill passed in September, bearing the Orwellian title of the American Jobs Creation Act, offers a one-year tax holiday to encourage companies to bring the money back. During that year, they will pay only 5 percent. Firms claim they will take advantage of this to re-invest in the United States.

In reality, this is yet another corporate tax giveaway that encourages job loss. It will decrease potential tax revenues and encourage firms to simply bank their money and wait for the next holiday, explains Reed College economist Kimberly Clausing, who did a study of the bill for the non-partisan Tax Policy Center.

Several other less-publicized changes move the United States away from taxing worldwide income. ``This bill just opens up a lot of loopholes that will make it even easier to evade taxes on foreign income,'' she told me.

Sen. John Kerry proposes to end the deferral of taxes on overseas income and to reduce the overall corporate tax rate. Clausing agrees that this will be more effective in encouraging job growth.

And why not give a tax holiday to those engineers who got ``transformed'' -- a three-year moratorium on their taxes? Unfortunately, those engineers don't have highly paid lobbyists to make their case in Congress.