All politics may be local, but the same cannot be said for American business, which is increasingly linked to opportunities beyond our shores. That is not surprising, given that 95 percent of the world’s consumers live outside the U.S. Last year, Wisconsin businesses sold roughly $21 billion worth of merchandise in foreign markets and these exports directly supported nearly one in five of our state’s manufacturing jobs. Clearly, the ability to compete and thrive in this 21st century global economy is vital for Wisconsin manufacturers and Wisconsin workers. But when we take a close look at how this global system operates, we often find that the cards are stacked against us, particularly in the realm of tax policy.
The overwhelming majority of our competitors rely to a certain degree on consumption-based taxes, which, according to World Trade Organization rules, can legally be rebated on products leaving the country for export and can be imposed on foreign products entering the country. The United States happens to be the only major industrialized country in the world that does not use a similar tax system and therefore cannot engage in this same practice. This system obviously creates an unequal playing field for U.S. manufactured goods in international markets.
To take an example, right now, Case New Holland tractors are at a competitive disadvantage against its foreign competitor, the Komatsu, because of the current U.S. tax code. When the Komatsu leaves Japan, Japan lifts its tax on the tractor, and it arrives in the US tax free. But when the Case tractor rolls off the assembly line in Racine and is exported to Japan, the U.S. first taxes it here and then it is taxed again in Japan.
In short, U.S. produced goods sold abroad face two layers of taxation while foreign goods arrive in the U.S. essentially tax free. This clear cost advantage for foreign producers hampers the ability of U.S. businesses to compete in the global market and kills American jobs.
I have proposed tax reform legislation that would finally level the playing field between American businesses and their foreign competitors. My plan would scrap our corporate income tax, which is the second highest in the industrialized world, and replace it with a business consumption tax that would be imposed on foreign goods entering the U.S. and repealed on our American-made exports. Unlike the current tax system, this plan would promote the export of U.S. products rather than the export of U.S. jobs.
My plan to lower the tax burden on trade-dependent American manufacturers and workers, and to enhance our country’s international competitiveness, is in sharp contrast to the tax plan outlined in the President’s budget. The President wants to add another layer of taxes on American companies doing business abroad by eliminating their ability to defer taxes on their foreign operations. Without the ability to defer taxes, a U.S. based manufacturer with foreign sales would have to pay foreign taxes and U.S. taxes on its international profits. All other industrialized countries either don’t tax the foreign operations of their domestically headquartered businesses or they allow for generous tax deferral rules precisely to avoid this form of double taxation. By eliminating tax deferral, the U.S. would severely handicap some of its most successful job-creators with a new tax burden and give an advantage to their foreign competitors.
Let’s look at another example that hits close to home. Under this proposal, Milwaukee-based Harley-Davidson would end up losing market share abroad to the Japanese-owned Honda since Honda would then have a substantial tax advantage over Harley. In essence, when selling motorcycles overseas, Harley’s foreign competitors will be taxed once, while Harley will be taxed twice. The impact on Harley's Wisconsin operations would be immense – and would exacerbate the mounting layoffs that have been announced in recent months.
In the end, those who would end up paying the price for this nonsensical tax change will be the American workers. It turns out that U.S. headquartered companies with international operations – like Harley Davidson and Caterpillar – employ more than half of all U.S. manufacturing workers and produce more than $2.5 trillion of U.S. GDP. And workers at these companies tend to earn 10 to 15 percent more than their counterparts at companies without foreign operations. In other words, this is a vital segment of the U.S. economy that is battling in this new era of globalization, and our economic policies must be reformed to boost their competitiveness.
For many of these U.S. based companies, the President’s proposed tax change would represent an insurmountable hurdle to clear. In fact, PricewaterhouseCoopers estimates that if this tax change were to become law, U.S. companies doing business abroad would need to earn a whopping 40 percent higher rate of return on their foreign operations in order to simply reach parity with their foreign-based competitors in terms of after-tax profitability. The practical result of such a tax change would very likely be a rise in foreign takeovers of U.S. based companies.
We have actually been down this road before. In the mid-1980s, tax deferral was eliminated for U.S.-based shipping companies. Several large U.S. shipping companies were subsequently taken over by foreign competitors in order to bypass the harmful effects of the new law and reap the benefits of being foreign-owned. These takeovers led to a loss of U.S.-headquartered jobs at these shipping companies and negatively affected domestic jobs in businesses tied to the shipping industry.
Our economy is in a deep recession. Global competition is fierce and getting tougher. We need to implement new ideas to get America back on track and creating jobs. The reforms I’ve put forth to boost our global competitiveness demonstrate yet another innovative solution to the challenges we face in the 21st century. Unfortunately, our government is seeking to take us in the opposite direction, by increasing the tax burden on American manufacturers. Washington is looking for any revenue to extract from our economy in an attempt to fund massive new government spending programs. Not only will these tax increases fail to keep pace with Washington’s gusher of new spending, but these economic policies will further cripple an American workforce in the midst of a deepening economic recession. Now – more than ever – we need to strengthen American jobs and put American products and workers in the position to thrive in the 21st century global economy.
Congressman Paul Ryan serves Wisconsin’s 1st Congressional District. To contact him by phone in Washington, D.C., call (202) 225-3031. Or visit Paul Ryan at www.house.gov/ryan