FREE OR FAIR TRADE

FREE OR FAIR TRADE

Is your job outsourced to a little know location in South East Asia? Did your last employer close its plant here in the good old U.S.A. and open shop south, north, east or west of the border? Do most of the items in your shopping bag have a stamp that says “Made in Somewhere Else”? Welcome to the new world of “Globalization”. Now, I am not the complaining type, but if you have been unsuccessful finding a job with decent pay lately or you had to move back into your parents house because that college degree you just earned isn’t worth a dime, this might be a good time to stand up and be counted, although that may not necessarily make a difference at the end, because, in part, your elected officials might appear to be listening while they aren’t and your government of the people may be acting as if it is the government of the special interest.

I am sure you have heard this before from a number of officials in charge and I regret repeating it, but this is a very complex problem involving World Trade Organization (WTO) and its excruciatingly painful and complicated rules, member countries of European Union and emerging third world markets and thousands of diplomats from every habitable part of the world who are trying to communicate through hundreds of translators, sometimes in vain. You might not have realized this before but it is a mess out there in the realm of free trade. Although how we got there in the first place is another story, I have been told that our very own government might have played a role in all these by offering tax breaks and incentives to companies who ship jobs overseas. How quaint.

If my understanding is correct, this whole idea of Globalization has started when a few corporate bosses had instilled the idea of “One World” into a number of government officials with highly visible positions. The concept was that in order to fight poverty around the world, factories must be built and jobs must be created everywhere around the Globe, creating wealth for everyone. Very noble indeed. However, I do not know if anyone mentioned the fact that elevating living standards in poor countries might in fact result in decreasing living standards in rich countries simply because it will involve transfer of economic activity. That part of the story seems to remain a little fuzzy.

Now, I am not a cynic, but I have this persistent suspicion that the real motive behind this One World idea was in fact a desire to open up cheap labor markets. If you are an employer with hundreds of employees, it would make sense to cut your labor costs to be more competitive around the world by simply hiring people who can do the same or comparable job for smaller pay. After all, if an employer at an overseas location can build the same product you are offering for much less because their labor cost is a fraction of yours, then you have no choice but to move your operations into an area of comparable labor costs.  If you don’t, free market economics will swallow you alive.  This, in my opinion, is a real dilemma without any gold lining. Or is it?

We know we can not erect trade barriers by imposing import taxes because WTO will descend on us with all its might. We really do not want that. Only possible avenue I can think of is changing our corporate tax structure to make it more appealing to our corporations who do business globally to keep our jobs here in the U.S.A. Here is how to do it.

Currently our business tax structure is based on net profit. The difference between revenue and business expenses are considered net profit and a business entity pays a fraction of net profit as taxes. If you made no profits, you pay no taxes. (Think GE, Exxon, Conoco, etc. etc.) However, this system requires volumes of increasingly complex tax laws, by-laws and rules as well as an army of Internal Revenue Service (IRS) employees to check business records, books and accounting procedures and is more open to manipulations, mistakes and irregularities. After all, the government would like to know if that three martini lunch you just had with clients is really tax deductible.

A more practical way to assess taxes is to use revenues as tax bases. In the revenue based tax system, no one really cares about how many martinis you had for lunch or if that convention in Hawaii is tax deductible. Only thing that can be tax deductible is your payroll expenses such as employee pay, health insurance and fringe benefits up to a government set limit per employee. So, if you are a CEO with an annual pay of several million dollars, only a very small fraction of that pay can be tax deductible. Similarly, if you are an unskilled worker earning minimum wage, all of your earning may be considered as tax deductible.

Let us illustrate with an example; you are a US based corporation. Your annual revenues are XXX million dollars and your net profit, after deduction of all your legitimate expenses are zero. In the current tax system you pay no tax. In the new system you pay taxes on XXX dollars albeit at a smaller rate. There are no deductibles except certain amount of your payroll expenses, say first 40,000 dollars of wages per employee, non- transferable of course, (no cap and trade here) for each and every one of your US based full time employees, who have been employed for the entire calendar year and are based in the USA. So if you paid employee ZZZ 48,000 dollars last year, you can deduct 40,000 of those dollars from your taxes. But what about your CEO, whom you paid 5 million dollars last year in salaries and bonuses? Same thing, you can claim a deduction of 40,000 dollars. No more.  Now, what if an employee of yours was paid only 24,000 dollars last year, including wages, medical and dental insurances, bonuses and spiffs? Yep, all 24,000 dollars are deductible.

Now, you can not claim that 40,000 dollars for an employee, working at an office or a factory located at an oversea location, such as India or Mexico? All those expenses at those overseas locations CAN NOT be tax deductible. If you are NIKE and your entire manufacturing operations are based on locations outside of the USA, your corporate taxes go will up, several times over what a US based corporation will pay. So you have two options, move your operations overseas and become an international corporation, pay your taxes in the country you are operating or remain a US based corporation and hire people here. If you choose to be an international corporation, your payroll expenses will probably go down but your transportation costs will go up every time the price of a barrel of oil goes up. Choice is yours.

There are several advantages to this system. It simplifies the tax code, discourages cheating and most importantly reduces pressure on corporations to ship jobs overseas to cut labor costs, but most importantly it helps build our economy by creating jobs since in reality our government is actually paying you to hire.