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Kerry Blames Corporate Tax Code for Shipping Jobs Overseas

But economists say "outsourcing" jobs overseas is a minor problem that Kerry's plan wouldn't do much to fix.

July 28, 2004

Modified: July 28, 2004

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Summary

 

A Kerry ad released July 20 returns to a theme he and his Democratic allies have been pushing for months: a claim that tax incentives to locate jobs overseas is a big problem that is Bush's fault and that Kerry promises to fix.

Kerry's latest ad -- all positive -- paints his tax fix as the centerpiece of a plan to create jobs -- the "lifeline for America's families." The negative side, blaming Bush, has been seen earlier in ads such as a Media Fund spot first aired last March saying "Bush's policies have encouraged the loss of nearly 3 million jobs" and "he supported tax breaks for corporations that ship jobs overseas."

But recent Labor Department data underscore what even Democratic economists have said for some time -- outsourcing jobs overseas, or "offshoring," accounts for just a small fraction of the many millions of jobs that are lost each year even in a good economy.

There is indeed a tax break for US-based multinational corporations to locate operations overseas. Bush isn't to blame for it -- it's been there for decades. It's also true that Bush doesn't support Kerry's proposed remedy, which is controversial.

But even backers of the Kerry plan concede that eliminating the tax break won't end the offshoring of some US jobs. Multinational businesses build plants in other countries to take advantage of lower wages and to be near their global customers, too, not just for tax reasons.

Analysis

Economic analysts say offshoring is a fairly small problem, and Kerry's tax proposal won't do much to solve it.

 Kerry Ad "Lifeline"

Kerry: I've proposed a new economic plan for America.  It begins by putting an end to tax incentives that are encouraging American companies to ship jobs overseas.

It invests in new technologies like alternative fuel sources that'll be a job engine in the future.

And it focuses on educating our children.

You can read the whole plan yourself at JohnKerry.com. Jobs aren't just statistics, they're the lifeline for America's families.

A Relatively Minor Problem

There are no official figures on the total number of jobs that have gone overseas, but in May 2004 the Labor Department made its first-ever report on the portion of "mass layoffs" attributable to "overseas relocation." Their survey showed that only 2.5 percent of major layoffs in the first three months of 2004 were a result of outsourcing abroad .
That survey only covers companies that have laid off 50 or more workers at one time for 30 days or longer, and so may not be representative of all companies and all job loss. But it gives scant support for Kerry's theme.

Trying to assess whether offshoring might actually be a larger problem than the Labor Department figures indicate, veteran Democratic economist Charles Schultze tried another approach. He reasoned that if America's production needs were increasingly met by foreign outsourcing (and cheap imports) this would be shown as a rise in the value of U.S. imports relative to the overall economy, as measured by Gross Domestic Product, or GDP. But what he found was that the ratio wasn't rising at all - it had leveled off since 2000. He concluded that "there is nothing in the data to suggest that large increases in. . . offshoring could have played a major role in explaining America's job performance in recent years. "    

He told FactCheck.org:

Schultze: It is clear that offshoring has had a relatively modest impact on unemployment when compared to all the other economic factors that create and destroy jobs week by week in the U.S. economy. 

He also said that offshoring only holds down US job growth in the short run. Over time, he said it is beneficial:

Schultze: In the short run, an increase in offshoring reduces U.S. job growth. But in the long run it improves the standard of living, increases real wages, and increases the country's economic growth. 

Schultze is now Senior Fellow Emeritus at the Brookings Institution, with impeccable Democratic credentials. He was President Lyndon Johnson's budget director in the 1960's, and was chairman of President Carter's Council of Economic Advisers back in the late 1970's.

Even backers of Kerry's proposed solution concede that the problem is relatively minor. One of those backers is Christian Weller, senior economist at the Democratic-leaning Center for American Progress. Weller acknowledges that the problem of outsourcing is not large when compared to overall levels of unemployment. He said in an article on the subject:

Weller: While offshoring has taken the spotlight in the national debate, estimates of the jobs lost due to this practice amount to between 300,000 and 995,000 over the last three years. Only a fraction of the jobs America has lost, but hardly insignificant.
Yet, even though offshoring accounts for a relatively small portion of U.S. unemployment, it deserves our immediate attention. For one, the pain and suffering of those who lost their jobs are real. Moreover, for those who still have jobs, offshoring has contributed to the stagnant wages and declining benefits.

Another assessment comes from Ben Bernanke, Chairman of the economics department at Princeton University and also a governor of the Federal Reserve. In a speech at the end of March he estimated that the total number of jobs lost to "offshoring" at roughly one percent of all jobs lost.
Bernanke estimated that over the past decade the US economy lost an overall total of about 15 million jobs each year for all reasons, while creating an average of about 17 million new jobs each year - a huge rate of "churn" as countless businesses fail or downsize while others grow or are created. Of that 15 million annual gross job loss, he said the portion due to outsourcing is quite small. Bernanke cited a 2003 study by the Wall Street firm of Goldman, Sachs & Co. that estimated outsourcing abroad had averaged between 100,000 and 167,000 jobs per year since 2000. And he said offshoring would remain a minor factor even if the figure grew larger:

Bernanke: Two hundred thousand jobs per year amount to a bit more than 1 percent of the 15 million gross jobs lost each year. . . for all reasons.  Quantitatively, outsourcing abroad simply cannot account for much of the recent weakness in the U.S. labor market and does not appear likely to be an important restraint to further recovery in employment.

The Upside to Outsourcing

Recent studies show that when companies move some jobs abroad the savings stimulate job creation at home. Matthew Slaughter, a Dartmouth economist, looked at foreign and domestic job growth in multinational corporations from 1991 to 2001. He found foreign affiliates of American companies added 2.9 million workers to their payrolls overseas, but at the same time those companies added 5.5 million US employees to their payrolls.

And a study released by the private economic consulting firm Global Insight in March looked at outsourcing in the information technology (IT) sector. It found that outsourcing generated a net gain of 90,000 jobs during 2003, in both IT and non-IT sectors.  Furthermore, the study found that the cost savings of IT outsourcing lowered inflation throughout the US economy, increased consumer spending, and "contributed significantly" to the overall growth of US GDP.  It said that by 2008, "real GDP is expected to be $124 billion higher than it would be in an environment in which offshore IT. . .outsourcing does not occur. " 

Global Insight's research was supervised by Lawrence Klein, a Nobel Laureate and Professor Emeritus at the University of Pennsylvania's Wharton School of Business.  He told FactCheck.org:

Klein: In the initial phases of IT offshoring there is a loss of jobs, but the overall impact on the economy will be favorable.  Because companies are paying lower costs, they have more money for investment which leads to an increased demand for labor. This does not indicate a 1-to-1 ratio of jobs gained to those lost, however the overall economy will benefit from offshoring.

Bernanke, the Princeton economics chairman, also said in his speech that the US gains more from "insourcing" of jobs than it loses from outsourcing. He said that in 2002, the most recent year on record, the US exported $29 billion in "business services" while importing less than $11 billion. And he said the jobs that are being gained are generally higher-paying jobs than those that are being lost.

Bernanke: An important reason for the U.S. trade surplus in business services is that this country provides many high-value services to users abroad, including financial, legal, engineering, architectural, and software development services , while many of the services imported by U.S. companies are less sophisticated and hence of lower cost.

Is It Bush's Fault?

Kerry is correct when he says the US tax code creates an incentive to move jobs overseas. But that's not Bush's fault, as Kerry and his supporters often say.

 Media Fund Ad

"It's about Jobs"

Announcer: During the past three years, it's true George W. Bush has created more jobs. Unfortunately, they were created in places like China.

Announcer: Bush's policies have encouraged the loss of nearly 3 million jobs.

Announcer: He supported tax breaks for corporations that ship jobs overseas.

Announcer: George W. Bush is taking America in the wrong direction. It's time to make America work for every American. 

For example, see this Media Fund ad claiming "Bush's policies encouraged the loss of nearly 3 million jobs."

In fact, tax experts say the incentive has been there for decades - since there has been a corporate income tax. It's not Bush's doing.

The incentive exists because the US taxes corporations at rates higher than most other countries. According to the Institute for International Economics, the effective rate for US corporations was just over 30% in 2002, while mainland China's effective corporate rate was only 11.3%, Britain's 18.2%, Mexico's 15.1% and Indonesia's a miniscule 0.2%.
Furthermore, the US also attempts to tax money that US-based companies earn in other countries, but only after those profits are brought back to the US. That means profits that remain overseas, perhaps invested in new factories in low-tax countries, never get taxed at the higher US rates. And that's been true through both Democratic and Republican administrations.

Even the Institute for International Economics, which disagrees with Kerry's tax proposal, acknowledges he is correct that the current system is unfair.  A recent report states:

IIE: Senator Kerry's diagnosis - that the US corporate tax system disadvantages firms that produce in the United States - is basically correct.  Moreover, US corporate tax rates are sufficiently high that some multinational corporations may be tempted to deploy strategies that book profits in low-tax jurisdictions.

To fix the tax problem, Kerry has come up with a proposal to tax businesses on their foreign income right away. Corporations would still get a credit for any taxes paid to other countries, as they do now, but would no longer be able to defer the US taxes indefinitely.

At the same time, Kerry would cut the corporate tax rate by 1.75 percentage points, to a top corporate rate of 33.25 percent. He also would offer a one-year "tax holiday" to businesses that repatriate earnings that have been parked overseas for years, avoiding all US taxes. And he would offer a tax credit to companies when their US hiring exceeds previous levels.

It's complicated and controversial. Kerry's plan wouldn't impose US taxes on income earned by producing and selling goods in another country. Len Burman, a former Deputy Assistant Treasury Secretary for Tax Analysis, told the Washington Post that this will almost certainly be "extremely complicated" to enforce. It could also encourage gamesmanship, should businesses try to avoid US taxes by selling their goods to foreign wholesalers, who can then export back to the U.S. or other countries, thereby avoiding US taxes on the profits from those sales.
The Bush administration doesn't support Kerry's plan. To that extent there is a genuine issue here. Bush supports a measure that would give US-based multinationals a larger tax credit on their overseas income. Democrats argue that idea would only increase the incentive to move jobs overseas; the Bush administration argues that it would help US firms compete globally with foreign firms that avoid US taxes altogether.

Would Kerry's Plan Fix Offshoring?

Whether Kerry's plan would have much impact on the movement of jobs abroad is debatable, to say the least. It is impossible to measure exactly how much the tax code exacerbates global outsourcing. Companies argue the main reasons they locate plants in other countries are lower wages and proximity to foreign markets, not taxes.

Even supporters of the Kerry plan concede that tax breaks aren't the main reason for offshoring. Christian Weller told the Cleveland Plain Dealer :

Weller: There are so many things that go into companies' decisions to move jobs overseas . . . I think taxes are a very small part."

Others agree. David Wyss, chief economist for Standard & Poor's, was quoted by The Associated Press :

Wyss: The tax deferral is a very minor reason for why companies move jobs overseas.

Critics of Kerry's plan see some big drawbacks. The IIE analysis calls it "misguided" and says it could be a boon to foreign-based multinational corporations as they compete globally with US-based companies. Japan-based Toshiba could produce products in India or China and ship them to the US or other countries without having to pay the higher US taxes that the Kerry plan would impose on IBM or Texas Instruments, for example.

Kerry's proposal may be worth considering anyway -- that's a matter of opinion. A supporter of the proposal,  Bob McIntyre of Citizens for Tax Justice, told the Washington Post that, as a company,  "you may go to India or China or Ireland for the wage differentials -- there's nothing we can do about that. But we don't have to pay you to go there."

Still, there's little reason to believe that Kerry's plan would end offshoring, or have more than a minor impact on net job growth in the US.

Sources

 

"Extended Mass Layoffs Associated With Domestic and Overseas Relocation, First Quarter 2004 Summary," Bureau of Labor Statistics, 10 June 2004.

Charles L. Schultze, "Offshoring, Import Competition, and the Jobless Recovery," Brookings Institution, 22 June 2004

Charles L. Schultze, interview with author, 26 July 2004.

Christian E. Weller, "On Offshoring, Perceptions Matter," Center for American Progress website, 21 May 2004.

Ben S. Bernanke, Remarks at Duke University, 30 March 2004.

Matthew J. Slaughter, "Globalization and Employment by US Multinationals: A Framework and Facts," Daily Tax Report 58, BNA,Inc. 26 March 2004.

"The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry," Global Insight (USA), Inc. March 2004.

Lawrence R. Klein, interview from 24 June 2004.

"Senator Kerry on Corporate Tax Reform: Right Diagnosis, Wrong Prescription," Institute for International Economics, International Economic Policy Briefs, April 2004.

Johnathan Weisman, "U.S. Firms Keep Billions Overseas; Kerry's Plan Spotlights Huge Untaxed Earnings," Washington Post, 2 April 2004: A01.

John D. McKinnon, "U.S. Overseas Tax Is Blasted," Wall Street Journal, 5 May 2004: A4.

Elizabeth Auster, "Is Kerry's Plan for Employment up to the Job?" Plain Dealer, 11 April 2004: H1.

Martin Crutsinger, "Kerry Reveals Plan to Keep Jobs in U.S.," Associated Press, 26 March 2004.

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