Taxes and Outsourcing of Jobs

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Taxes and Outsourcing of Jobs

The high-tech and pharmaceutical industry is so heavily capitalized that the manufacturing labor costs are relatively small compared to the capital costs and administrative, marketing and sales costs. The costs due to additional handling and transportation costs and the additional loss due to theft and breakage from shipping goods from foreign manufacturing facilities more than offsets any labor cost savings. Not only does the US lose jobs but just as important is the transfer of technology abroad.

For example, a computer company makes a chip in the US, ships it to a foreign country (that provides a tax holiday to attract the company manufacturing facility) where it is installed in a computer and returned to the US. Most of the costs (research administration sales and marketing) are assigned to the US operation but the revenue is credited to the foreign manufacturing operation. With a tax holiday the company pays no taxes in the foreign country and pays little or no taxes in the US. Once the tax holiday is over in that foreign country, the US company packs up and moves to another country where it receives another multiple-year tax holiday.

The solution to both the outsourcing of jobs and corporation tax avoidance is fairly simple. Replace the corporate income tax with a corporate value added tax (sales tax). At each stage of production the company pays a tax on sales. As a company adds value, additional manufacturing or sales cost, that company pays taxes on the total value of their sales.

EW Eboch, Ph.D.
Economist
http://www.conservativemonitor.com/finance03/49.shtml