Today, the U.S. business federal income tax rate is 35% which is the highest business tax rate in the world. to what extent does this make U.S. manufacturers non-competitive, and how does this affect where our manufacturers choose to to locate their business operations?
Just a quick look at the corporate tax rate's impact on competitiveness; 35% does not seem like a huge number, but it only applies to the pre-tax profit, not on the value of total sales. Thus, if a company earns %10 pre-tax profit on a $100 product, the tax charged would be $3.50. Even if we were to lower the tax rate to "zero" and take all of this tax amount away from the initial $100 price, the price would only go down to $96.50. Also, there would be some additional price reduction due to lower prices on all purchased parts, materials and services etc.
Now, let's look at how lowering taxes would affect business management decisions. Here we need to separate the issue into two categories.
The extremely high U.S. business federal income tax rate causes business to want to relocate their main office to lower tax-rate countries. What the business has left of their pre-tax profit has a large effect on how much money they will have for engineering new products and overall business growth. Thus, lowering the U.S. corporate tax rate will help to keep the main office operations in the U.S.
Regarding the second category, that of where to locate the production operations (i.e. manufacturing jobs), the cost of labor becomes the dominant issue. Products can be produced in China today for less than half the price of being made in the U.S. This is why so many U.S. factories have closed up and the machinery and jobs sent to China. Their previous customers have switched over to buying their new products from lower cost manufacturers in China. If the U.S. manufacturers want to stay in business they will have to do their manufacturing in China.
Lowering the U.S. corporate tax rate will help to keep corporate main offices here in the U.S. but will do nothing of any significant value to lower the selling price of U.S.manufactured products. As a result, as long as there remains te very large difference in labor cost between the U.S>and China, the "purchase orders" and "jobs" will continue to be sent to China no matter whether we lower U.S. corporate tax rates or not.
See our website for www.NewHopeForAmerica.org for a solution to this problem.
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