Obama’s tax code gambit

President Obama wants to use the tax code to promote manufacturing and deter U.S. corporations from shipping jobs overseas. It’s an appropriate goal; a strong manufacturing sector pays enormous economic dividends, as Germany will attest. But Obama seems to believe the United States can hold on to companies and jobs by making its tax system less competitive with the rest of the world’s. That’s a dangerous assumption.

The number of jobs in manufacturing edged upward last year but overall has plunged 40% since its peak in 1979. Supply chains have gone global, and many top U.S. manufacturers rely on workers in other countries to build the products they design. A good example is Apple, whose iPhones and iPads are assembled in China from parts made mainly in Asia. These trends have led to a widespread notion that the country’s manufacturing base is being eclipsed by overseas factories and cheap foreign labor.

The reality is more complicated. Although manufacturing has declined in comparison to the overall economy (a trend seen around the world, not just here), U.S. manufacturers are nevertheless churning out more products. According to United Nations data, the value of goods made in the United States has more than doubled since 1979. The reason is that manufacturers are much more productive than they used to be, which means they can sell products at lower prices. That’s a good thing for consumers but not necessarily for workers — the productivity gains often resulted from machines taking on tasks that humans used to do.

Obama’s proposal includes eliminating the tax deduction for business expenses associated with moving production overseas; reducing the tax rate for manufacturers in the United States, especially those making advanced technology products or expanding in high unemployment areas; imposing a minimum tax on U.S. companies’ overseas revenue, which would raise the cost of locating factories in a low-tax country; and cracking down on accounting maneuvers that shift patents and other intangible property to overseas tax havens.

We’re all for efforts to combat accounting gimmicks such as the intangible property shuffle, which the likes of Google have used to reduce their tax rates to a level even Mitt Romney would envy. But a head-on assault on multinationals’ investments overseas ignores the fact that some offshoring is inevitable, even desirable. Many goods have global markets, and it may make sense to locate production close to where the buyers are. Doing so pays dividends in the United States in the form of engineering jobs, administrative positions and other headquarters staff. But that’s true only if the company’s headquarters stays here.

Just as states compete to attract manufacturers, so do countries. One factor in the competition is having a workforce with the right capabilities, and the United States has lagged badly on that front. By one estimate, up to 600,000 manufacturing positions have gone unfilled here for lack of qualified applicants. Obama offered a good proposal to address that shortcoming, calling for more partnerships between businesses, high schools and community colleges to produce graduates with marketable technical skills.

Another important factor in the competition is tax rates. Obama’s approach revolves around the idea that the United States can deter companies from sending jobs overseas by making it less profitable to locate there. In so doing, however, he would make the corporate tax burden here — already the second highest on the planet — even higher for companies that have operations around the world. That increase would give them an incentive to move their headquarters to a friendlier home, while discouraging foreign firms from relocating in the United States.

A better approach is to simplify the maddeningly complex U.S. tax code, broadening the base and lowering the rates. Rather than penalizing companies for creating jobs in other countries, why not make it easier and more profitable for them to stay and expand here? Obama seems to recognize the value in doing so. The economic “blueprint” he released last week states: “The president’s framework will close these loopholes and simplify the tax code so businesses can focus on investing and creating jobs rather than filling out tax forms.” It’s too bad the simplification would be accompanied by an invitation for global U.S. companies to find another place to plant their flags.