In today’s Wall Street Journal, Craig Barrett and James Moore cut through the heated political rhetoric about “outsourcing” and get right to the heart of the problem—a misunderstanding among some Congressional leaders on how jobs actually are created. In fact, they say, if the Creating American Jobs and Ending Offshoring Act rejected by the Senate this week ever became law, job losses would accelerate and even more companies would relocate jobs overseas.

In their column, “Outsourcing and the 21st-Century Economy” (subscription), Mssrs. Barrett and Moore explain that companies outsource for two reasons:

The first centers on the nature of the global. In today’s world, outsourcing can save companies money, reduce the time it takes to deliver products and services to customers, and provide access to skilled employees unavailable in the U.S. Outsourcing also allows companies to capitalize on incentives offered by foreign governments to attract investment…

The second reason U.S. companies outsource is that our own government pursues policies that drive investment and job creation offshore: excessive taxes, needless regulations, lengthy permit processes, a decreasing supply of U.S. citizens with technical and engineering degrees, and a general governmental misunderstanding of how to support private-sector jobs. For example, taxing new U.S. corporate investment at 35%—when the world average is just over 18%—pushes U.S. companies to invest offshore to increase return to shareholders.

They go on to argue, “Politicians who accuse the business community of being solely responsible for the loss of U.S. jobs are disingenuous at best and urge legislators to “recognize the competitive nature of the 21-st century world economy.”

Manufacturers could not agree more. In fact, NAM’s Manufacturing Strategy for Jobs and Competitive America sets out a roadmap for policymakers. On tax policy, rather than looking at ways to punish worldwide American companies, lawmakers should lower the corporate tax rate, provide a permanent and strengthened R&D credit and advance fair and competitive rules for taxing foreign income of U.S. companies, all changes that will make the U.S. a better place to do manufacturing.

The Washington Post continues its skein of well-reasoned editorials on the economy and federal legislation today with “Outsourcing Under Attack: ‘Keeping jobs in America’: As campaign slogan, great. As tax law, not so much.”

The editorial addresses the Senate’s bipartisan vote to block S. 3816, the Creating American Jobs and Ending Offshoring Act, which would permanently raise taxes on U.S. businesses with foreign operations to fund  temporary tax relief for some other businesses. The Post notes the obvious politics behind the bill while rebutting it on the substance:

The Senate proposal would have been extremely difficult to administer: How, exactly, would the government connect particular expenses to the export of particular jobs, or identify the revenue attributable to particular goods or services transferred? But more fundamentally, the Senate proposal, like the White House plan before it, reflects basic misconceptions about the conduct of multinational companies. In brief, there are many cases in which opening, or expanding, a subsidiary overseas can create or sustain employment in the United States. Sometimes U.S. firms make parts abroad that they ship to the United States for assembly. If Congress starts taxing the income they make by doing so, some companies will respond by shipping the assembly overseas as well. A 2008 study by economists Mihir Desai, C. Fritz Foley, and James Hines of Harvard Business School found that domestic investment by U.S. firms grows by 2.6 percent for each 10 percent increment in the companies’ investment overseas.

In other words, counterintuitive as it may seem, international capital flows are not a zero-sum game for American workers. To set tax policy as if the contrary were true is to invite retaliatory measures by other countries on behalf of their “national champions.” There is a strong case to be made for reforming U.S. corporate taxation, which may disadvantage U.S.-based businesses as compared with those operating in Europe and elsewhere abroad. The code is full of irrational loopholes and perverse incentives. But dealing with them piecemeal — much less dealing with them on the basis of politically popular misconceptions — will only make matters worse.

That’s an important point: The U.S. tax system is flawed, of course, starting with having the second highest corporate tax rate among developed countries. If Congress wants to seriously address the U.S. tax system, its incentives perverse and otherwise, please!

As the “Key Vote” letter from the National Association of Manufacturers opposing S. 3816 observed: “[NAM] supports a national tax climate that does not place U.S. manufacturers at a competitive disadvantage in the global marketplace.”

Sixty votes were required to invoke cloture.

The National Association of Manufacturers sent a “Key Vote” letter Monday opposing S. 3816, the Creating American Jobs and Ending Offshoring Act.

We’ll post the roll call when it becomes available.

UPDATE: The roll call vote is here. Joining the Republicans in voting now were Sens. Max Baucus (D-MT), Jon Tester (D-MT), Ben Nelson (D-NE), Mark Warner (D-VA) and Joseph Lieberman (ID-CT).

Earlier posts here.

People are used to hearing epithets like “greedy CEOs” on the campaign trail, but on the Senate floor?

Senate Majority Leader Harry Reid, Congressional Record Page S7456 (our emphasis):

When that funding gets to where it is going, as many as one-half million people who are looking for work today will soon be on their way to a new job. We fought so hard for this bill against such stubborn minority opposition because we know we have to do everything we can to get people back to work. That means we have to work just as hard to create new jobs as we have to protect existing ones. It means that when a corporation tries to take away someone’s job in Nevada and send it halfway around the world, we have to stop them. We cannot let the greedy CEOs do that anymore, and that is exactly what we are going to do this week. We are going to take away the incentives that our corporations have to send our jobs overseas and give them powerful new incentives to keep the jobs right here in America.

Then there’s this:

Let’s use this week to remember whom we work for: middle-class families and the hard-working people who built this country and will rebuild it toward recovery; middle-class families and not corporations that take advantage of tax loopholes at their expense; American workers and not foreign companies that want to take away their jobs.

It’s very difficult to see how this kind of rhetoric creates an environment conducive to investment and hiring in the United States.

Sen. Charles Grassley’s floor speech Monday on S. 3816, the Raise Taxes on Successful U.S. Businesses with Overseas Operations Act, provided a thorough, historical discussion of the U.S. tax system’s treatment of foreign income, as noted before.

Grassley, the ranking Republican on the Senate Finance Committee, also offered his views on the payroll tax holiday, a two-year tax break for some small businesses financed by a permanent tax increase on others. And he asks the key question: Why is the Senate debating this when taxes on small business are going to rocket higher when the 2001 and 2003 tax rates expire at the end of the year.

This provision only scores, according to the JCT, as costing $1 billion.  So, let’s make sure we are clear on this point – the other side is seriously considering raising taxes on small businesses – the lead creator of jobs – by tens of billions of dollars by letting top individual rates go back up in 2011, but, in an effort to support job creation, they offer up this $1 billion payroll tax holiday? 

According to the Joint Committee on Taxation, 50% of small business flow-through income will be hit by a marginal tax hike of 17 to 24%.  That tax increase is scheduled to hit these job-creating small businesses in a little over three months.  Finance Committee Republican tax staff calculate the effect of that tax hike to be 50 times the benefit provided by this bill.  On our side, we don’t see the logic of raising $50 in taxes and providing a complicated tax benefit of $1. 

Why aren’t we dealing with the real problem, for the folks responsible for creating 70% of America’s jobs.  I’m talking about a time-out on the tax hit that’s coming to those small businesses.  That’s what we ought to be debating here on the Senate Floor. 

Agreed.

The Hill, “Democrats not optimistic ahead of Senate vote on outsourcing bill,” which suggests an attitude of, “We know it’s a bad bill, we know it won’t pass, but what the hey…”

Notably, revenues measures  must originate in the House of Representatives — Article I, Section VII, U.S. Constitution – and this bill did not.

The cloture vote is scheduled for 11:30 a.m.

Sen. Charles Grassley (R-IA), ranking member of the Senate Finance Committee, gave an excellent overview of the issue in a Senate floor speech Monday, going back to the origins of tax deferral and how the U.S. tax system treats overseas earnings. Excerpt:

Allow me to explain why the net effect of the bill would be to decrease U.S. employment.

First of all, if a U.S. parent company has a foreign subsidiary, then this creates managerial headquarters jobs in the U.S. that would not otherwise be there.  The Reid-Durbin-Dorgan bill might encourage American companies to simply sell off their foreign subsidiaries.  This would in turn mean laying off employees at management positions at the American headquarters.

A bigger way this bill would hurt employment in the U.S. would be to discourage assembly jobs in the U.S.   A U.S. parent company could have foreign subsidiaries engaged in manufacturing parts that are shipped back to the U.S. parent.  The U.S. parent in turn might assemble those parts here in the U.S. into a finished product.  So, yes, just maybe this bill would encourage the company to repatriate the parts production, but it’s just as easy to imagine that this bill would encourage the company to expatriate the assembly jobs.  So, this bill is an unacceptable gamble with American jobs.

In the words of the late Senator Moynihan in speaking in opposition to this proposal 14 years ago:  “Investment abroad that is not tax driven is good for the United States.”

More recently, Senator Baucus’ concerns that this would put the United States at a competitive disadvantage are exactly right.  Last Thursday, Senator Baucus was quoted in Congress Daily saying, “I’m looking at it.  I think it puts the United States at a competitive disadvantage. That’s why I’m concerned.”

• Wall Street Journal, “Antitax Group Hits Back on Outsourcing“
• Marketwatch, “Democrats try to lure jobs back to U.S.”

The Senate will vote Tuesday on cloture on S. 3816, the bill that permanently increases taxes on companies with foreign operations in order to provide temporary tax breaks to other companies. The title is painfully, purposely misleading. Calling S. 3816 the Creating American Jobs and Ending Offshoring Act is like calling a bill to eliminate secret-balloting in union elections the Employee Free Choice Act.

Sen. Jon Kyl (R-AZ) spoke on the Senate floor today, shining light on the misleading claims of the bill’s supporters. His prepared remarks provided a substantive rebuttal to the populist slogans that unfortunately pass for argument these days.

Outsourcing hurts U.S. employment, right? No, Sen. Kyl explained:

A few years ago, PepsiCo embarked on an aggressive expansion program in Eastern Europe, largely by buying up existing bottlers and snack chip producers, upgrading plants and equipment, and improving distribution while increasing their marketing efforts in these countries, achieving large gains in sales as a result.

As a result of this expansion, PepsiCo’s employment abroad increased, but that did not cost any Americans their jobs. Pepsi merely took over existing plants and their workers.

In fact, PepsiCo’s foreign expansion created jobs here in the United States. To support their overseas operations, the company needed to expand their logistics, marketing, and other support operations-all well-paying jobs at their U.S. headquarters. As a result, expanding operations abroad increased employment here in the United States. 

Oh, c’mon, Senator. It’s just greed, greedy corporations. Isn’t it?

(continue reading…)

The Wall Street Journal today points out the ironic title of the Creating American Jobs and Ending Offshoring Act (S. 3816), slated for a procedural vote in the Senate tomorrow.  Masquerading as a way to “insource” jobs back into the United States, the bill introduced on Sept. 21 by Sen. Richard Durbin (D-IL) would make U.S. companies less competitive and actually could lead to a loss of U.S. jobs.

The real culprit here is the U.S. corporate tax rate, currently ranked No. 2 among developed nations and much higher than most of our competitors. The NAM’s Manufacturing Strategy for Jobs and a Competitive America encourages law makers to support policies to ensure that the United States will be the best country in the world to headquarter a company, to innovate and perform global R&D and to manufacture, both for the American market and as an export platform for the world.

To this end, the National Association of Manufacturers supports a national tax climate that does not place U.S. manufacturers at a competitive disadvantage in the global marketplace. Unfortunately, the tax increases in S. 3816 do just the opposite. With “jobs” a key theme in political campaigns around the country, it’s hard to understand why the Senate tomorrow will vote on a bill that would be a job-killer when instead lowering the corporate tax rate could create more than 2 million jobs by 2019.

Earlier …

• Deferral, Outsourcing and Making the U.S. Less Competitive
• Raising Taxes on Manufacturers is not a Pro-Manufacturing Strategy