Federal Triangle: Trade Wars and Taxes
In the great scheme of things, U.S. trade and corporate tax policies must change to avert a disaster. Solutions to many related problems are on life support, but the calendar controls outcomes. America is headed for the losing end of a world trade war at year-end unless corrections are made now and not tomorrow. Issues harbor nuances with great economic impacts for the nation.
For thirty years U.S. corporate tax law has granted breaks to exporters via Foreign Sales Corporations (FSC) and since October 2000 to multinationals via an Extraterritorial Income Exclusion Act (ETI). Beginning in 1999 the European Union (EU) challenged these preferences in the 146 member World Trade Organization (WTO) and has won all cases and all appeals. Beginning 1 January 2004 the EU has the right to impose $4.1 billion in trade sanctions against 1600 U.S. export items by imposing duties of up to 100%.
Despite complaints by protectionist labor, industry management and politicians to have a "level playing field," FSC and ETI are the antithesis of that regime. In the last Congress a bill (HR-5095) by House Ways and Means Committee Chairman Bill Thomas (R-CA) to repeal FSC and ETI went nowhere. It has not been reintroduced in the 108th Congress, no hearings have been held, and the Crane (R-IL) - Rangel (D-NY) proposal (HR-1769) is a laughable alternative to lower the 35% corporate tax rate by 3.5%; it achieves nothing because it does not remove the offending FSC and ETI codes for five years. Currently, this presents a political problem because repeal in 2003 of ETI would impose an added $2.255 B in corporate taxes and another $67 M from FSC repeal; next year a $4.698 total tax increase would result, and total $51.233 B over ten years. The partisan politicians of Congress are fiddling while American industry prepares to burn.
It is worthwhile to examine the value of restrictive trade policies when the fact is that U.S. share of world exports has been between 12% and 13% since 1913 when record keeping began and imports have steadily climbed in recent years. For example, the U.S. light truck-manufacturing sector connived forty years ago to impose a 25% tariff on imports; our Big-3 produced 87% of U.S. sold trucks last year. The U.S. International Trade Commission ruled repeatedly (a plurality of 335 cases) in the second half of 2002 that cold-rolled steel was not being dumped to harm U.S. makers, this during a time when U.S. prices fetched $100 per ton above foreign market prices, 75% of mills ran near capacity, while 32 companies filed bankruptcy in a purge of overcapacity. Yet another distortion is a so-called Byrd Amendment (named for Robert Byrd D-WV), officially the Continued Dumping and Offset Subsidy Act of 2000 which allows a U.S. manufacturer to petition the U.S. under claimed "dumping" to impose a tariff, to have Customs Service collect it and give it to the petitioner (who by now has become importer of the dumped product). These are examples of why U.S. trade policies and industry practices offer WTO a rich target environment. Says William Lane, Caterpillar lobbyist in Washington, "(The Byrd Amendment) promotes litigation, violates our WTO commitments, and undercuts U.S. competitiveness."
My view is that American industry senses a shift coming, explaining a movement of assets (especially intangibles) to tax havens with increasing frequency. Tax haven profits have risen about 750% over the past twenty years (to $92 B in 1999) while only 130% in non-havens ($114 B). The domestic corporate tax base is eroding; American companies paid 35.4% of offshore profits in tax in non-haven countries and averaged 5.8% in thirteen tax havens (ranging from under 1% to 12.5%). The double taxation of corporate earnings is just another reason to reduce the business taxes to zero, a great idea except in the opinion of piggy governments.
All of this is exacerbated by devious methods of tax avoidance, not evasions because much is legal, but a bad practice now driven to excess by governments' greed. The concept used by multinational companies overprices U.S. imports and underprices U.S. exports. As example, a foreign maker produces a widget for $100 but its U.S. subsidiary buys it for $199 and sells it for $200. At a 34% U.S. tax rate, government collects tax on $1 instead of $100. Taxes in the owner's nation are only collected when repatriated and can be held to offset loss in a bad year. Studies by Simon Pak at Penn State with John Zdanowicz of Florida International University reveal that such tax manipulations shaved $53 B from U.S. corporate taxes in 2001, a 19% increase over 2000, and an 89% increase over 1993. Unfortunately, money laundering is used by folks other than multinational widget makers.
The message is clear and immediate. Congress must eliminate FSC and ETI tax codes plus the corporate income tax. Trade barriers prevent prosperity and America must set the example, even unilaterally. We must then work to eliminate greedy governments and the inept politicians that created these problems.