Refugee CEOs

Posted: Apr 05, 2004 12:00 AM

The hot-button issue for the Democratic Party this year is "outsourcing," the latest political euphemism that seeks to stigmatize companies voting with their feet and escaping high taxes and onerous regulations that drive up the cost of labor, increase the cost of capital and drive down rates of return on investment. By way of illustration, Sen. John Kerry seeks to demonize firms that move operations offshore to more business-friendly environs by labeling their CEOs "Benedict Arnold CEOs" with the obvious implication that they are traitors.

The enemy of American jobs is not Japan, India or China, but rather stupid policy made in Washington, D.C. Therefore, a more apt metaphor is "refugee CEOs" who are fleeing punitive government policies that hurt both capital and labor.

Kerry's analysis of the "outsourcing problem" is faulty, and his policy prescriptions are fundamentally absurd. He looks only at the cost side of the ledger where mobility of capital investment is concerned, and he ignores completely the benefits side. Free trade and free mobility of businesses create gains from trade and permit foreign companies, such as Toyota and Mercedes, to locate plants here - "insourcing" - creating high-value jobs that more than compensate for jobs lost when companies leave the United States.

According to a recent study by the Organization for International Investment, foreign companies with U.S. subsidiaries employ 6.4 million Americans here in the United States. These jobs pay, on average, 16.5 percent more than U.S. companies. Also, over the last 15 years "outsourced" jobs grew at an annualized rate of 1.5 percent, whereas total "insourced" jobs grew by 117 percent - at an annualized rate of 3.8 percent.

 A good example is the Toyota Motor Co., on whose North American Diversity Board I serve with former Secretary of Labor Alexis Herman, who chairs the board. Since setting up U.S. operations in 1957, Toyota has invested more than $14 billion in the U.S. economy, which is roughly equal to the company's profits earned here during that time. Presently, Toyota directly employs 31,000 Americans. If you include dealerships and suppliers, that number exceeds 180,000. Toyota also has announced plans to expand current operations in Indiana, Tennessee and West Virginia. Moreover, Toyota will open a new truck manufacturing facility in San Antonio, which will employ another 2,000 employees.

 Imagine the outsourcing debate in Japan's Diet, where representatives lament the hollowing out of Japan's manufacturing base as companies like Toyota, Honda and Nissan shift operations to North America and elsewhere. The bottom line in trade is that "more is better" for everyone, whether you live in Toledo, Tokyo or Taipei.

To his credit, Kerry recognizes that foreign taxes are in many cases as much as one-third lower than U.S. taxes on corporations. He also is to be commended for suggesting that we cut the corporate tax rate, but it doesn't make sense to turn around and raise corporate taxes in other ways as he proposes. The 5 percent rate cut he proposes (from 35 percent to 33.25 percent) is too way too small. Why not cut the rate by one-third to 23 percent to bring the U.S. corporate tax rate more into line with our trading partners and competitors for capital and firms. Now that's a real solution to keep refugee CEOs from fleeing the greedy hand of the tax collector.

Of course, the ultimate solution is to overhaul the tax code and cease the onerous practice of worldwide taxation altogether, moving instead to a system of territorial taxation where firms are taxed only on the activity conducted inside the United States. Unfortunately, Kerry would move the tax code in exactly the opposite direction by ending tax deferral on income earned by foreign subsidiaries of U.S. companies and adding a complex new jobs tax credit.

 It is difficult to stand up for free trade if you represent a district in North Carolina that is losing jobs in furniture manufacturing or in the textile industry. It's hard to look a constituent in the eye who has lost a job because the firm is going overseas. I know because I was a free-market congressman representing Buffalo, N.Y., for 18 years. The solution is not, however, to punish firms for wanting to leave but to empower them to want to stay in the United States.

 We at Empower America have proposed Enterprise Zones of Choice (EZTaxReform) for areas adversely affected by trade. The zones would be able to opt out of the current tax code and into a fully reformed tax code. The incentive effects of this proposal, coupled with existing job retraining programs, should help to turn problems associated with free trade into solutions for America's displaced workers.

 The benefits from trade are everywhere to be seen. This year the United States and the rest of the world set new records for GDP, at $11 trillion and $33 trillion respectively. This could not have been achieved in the absence of free trade. Going forward, if we are equipped with facts gained from an understanding economic fundamentals, if we are armed with creative solutions to problems that arise from free trade and if we have the courage of our convictions, we can maximize both freedom and prosperity, not only here in the United States but also around the world.