Mercatus Center: Manufacturing Productivity and Jobs since 1975

By January 27, 2011Taxation

Veronique de Rugy, is a senior research fellow at the Mercatus Center at George Mason University. She has a new analysis, “U.S. Manufacturing: Output vs. Jobs Since 1975“:

This week, Veronique de Rugy examines changes in employment and productivity in the American manufacturing sector. Since 1975, manufacturing output has more than doubled, while employment in the sector has decreased by 31%. While these American job losses are indeed sobering, they are not an indication of declining U.S. competitiveness. In fact, these statistics reveal that the average American manufacturer is over three times more productive today than they were in 1975 – a sure sign of economic progress.

The true cause of dwindling American competitiveness is a tax code that puts domestic firms at a clear disadvantage – not a lack of skill or innovation on the part of the American worker.

Veronique de Rugy explains why the price of our tax code is hurting American jobs at Reason Online.

The Reason column is very helpful for getting one’s head around the anti-investment U.S. global system of taxation versus the more common territorial system. De Rugy writes:

Not only is the U.S. rate too high, but the U.S. government also taxes corporations on their worldwide income. That means profits made by an American-owned computer plant are subject to U.S. tax whether the plant is located in Texas or Ireland.

Most other major countries do not tax foreign business income as aggressively. In fact, about half of OECD nations have “territorial” systems that tax firms only on their domestic income.

The combination of high rates and a competitive global marketplace makes the U.S. corporate tax system extremely punishing. Imagine a French firm competing with a U.S. firm for business in Ireland. The Irish government taxes each subsidiary on its Irish income at the (low) national rate of 10 percent. Fair enough. But unlike the French competitor, the U.S. parent company must also register its Irish affiliate’s dividends back home as income, which is then taxed. If the company can meet certain requirements, it can receive a credit for taxes paid to the Irish treasury. But the firm would still have to pay American taxes at the American rate on the Irish income minus the tax credit. The result is double taxation, costly paperwork, and less competitiveness than the French.

Nicely explained, thank you.

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