The Wrong Way to Fuel Competitiveness

Michael  Franc
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Posted: Apr 27, 2007 11:48 AM
The Wrong Way to Fuel Competitiveness

When President Bush proposed to enhance U.S. "competitiveness" by doubling federal spending on research in the physical sciences over the next decade, adding 100,000 math and science teachers to the nation's high schools, and making the research-and-development tax credit permanent, he set off a predictable bidding war on Capitol Hill.

This latest feeding frenzy began when the National Academies of Sciences and the Council on Competitiveness published studies arguing that Americans must develop more of a taste for advanced math and science instruction to keep high-tech jobs in the U.S. In South Korea, 38 percent of all undergraduates receive degrees in natural science or engineering. In France, the figure is 47 percent, in China, 50 percent, and in Singapore, 67 percent. The corresponding U.S. figure? 15 percent.

The President's proposal was estimated to cost taxpayers $52 billion over the next four years (mostly because of the R & D tax credit). Lawmakers eager to hitch a ride on the competitiveness train, however, quickly jettisoned the proposed tax incentives and grew the pot to nearly $61 billion for new or expanded federal programs, virtually all of which duplicate existing federal activities.

The bipartisan consensus on Capitol Hill is that, to boost U.S. competitiveness, federal bureaucrats must have unfettered authority to make decisions best left to the free market, including which young scientists warrant federal assistance, what research is truly innovative, and what has the potential to enhance our global competitiveness.

Take federal programs to train math and science teachers -- please. Uncle Sam currently runs more than 100 such programs, but apparently that's not enough. Last week, in a sop to the competitiveness agenda, the Senate overwhelmingly approved $190 million for new summer teacher training programs, $210 million for more post-graduate training, $58 million to teach more math and science courses in low-performing schools, $424 million to a different agency for the same purpose, $595 million for undergraduate scholarships for aspiring math and science teachers, and so on.

Sen. Jim DeMint (R-S.C.) was one of the few senators who grasped the futility of this legislative exercise. "There is no need," he argued, "for us to be spending billions and billions of dollars to encourage Americans to be better at math and science if the research and development is moving to other countries."

Indeed, in a recent survey, the CEOs who run the U.S. subsidiaries of foreign companies (an increasingly important source of U.S. job growth) listed America's high tax rates, along with our costly health-care system, government regulations and runaway legal costs, as the top reasons foreign firms consider taking their investment to other countries. Ironically, these CEOs reported, "the United States' biggest selling point is its high quality work force."

Heeding this advice, DeMint sought to remove one notorious obstacle to U.S. competitiveness, section 404 of the 2002 Sarbanes-Oxley law. "In 2000," he told his colleagues, "$9 out of every $10 in stock offerings from foreign companies were invested inside the United States. In 2005, that number completely flipped, and $9 of every $10 in stock offerings from foreign companies were invested outside the United States." In fact, a study requested by New York City Mayor Michael Bloomberg and Sen. Chuck Schumer ( D-N.Y.) singled out Sarbanes-Oxley as "the reason international companies are no longer bringing their capital to the United States."

Alas, his effort failed on a 62-35 vote.

Another sure-fire way for Congress to enhance our global competitiveness is to align our corporate tax with that of our largest trading partners. One survey of the tax climates in 86 countries found that the average corporate tax rate has fallen from 38% in 1993 to 27% today. The U.S., however, has fallen behind, maintaining the same 40% (combined federal and state) top rate on corporate profits since 1994, higher than our 10 largest trading partners.

According to Heritage Foundation economist Tracy Foertsch, lowering our corporate tax to the new, lower global standard would yield dramatic results. She found that a 10-percentage point drop in the top federal rate on corporate profits would increase our annual GDP by $50 billion and, in turn, lead to the creation of 200,000 additional jobs and increase Americans' disposable incomes by $100 billion.

To boost American competitiveness, all Congress needs to do is remove self-imposed obstacles such as Sarbanes-Oxley and our outdated tax code. Why look to federal bureaucrats?