ven as Korean automobile manufacturer Kia was finalizing a U.S. site-location decision in late 2005, U.S. companies continued to move some or all of their manufacturing operations to Mexico, China and other destinations at a rate that has some wondering just what the U.S. will be producing within 10 years. New plants are opening in the U.S. all the time, to be sure, but U.S. corporations have no choice but to explore and invest in offshore markets — and it’s not just about labor savings.
It has just as much to do with taxes. Ask your treasurer or CFO what your company pays in corporate tax in the U.S. I’ll bet it’s north of 60 percent.
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Tax inequities with respect to other industrial markets are a huge force behind the migration of jobs outside the U.S., and they are a big factor in the U.S. trade deficit, as well.
These inequities drive “American manufacturers [to] move their production facilities offshore to a nation that has a more export-friendly tax structure, such as the VAT [value-added tax]. Then they move their corporate headquarters offshore to a nation with a more friendly tax treatment of capital and labor.” Talk show host Neal Boortz and Rep. John Linder (R.-Ga.) make these and other points in The FairTax Book (Regan Books, 2005). Think what you want to of the authors or their agendas, but the concept deserves careful consideration.
In short, the FairTax would eliminate all income and business taxes and would replace them with an across-the-board, 23-percent consumption tax on everything from toothbrushes to transmissions. Income tax brackets, tax shelters — even the IRS — would be rendered unnecessary. Space here prevents me from exploring all the ramifications of the FairTax proposal. Best to read the book and let the experts on the topic explain in more detail how it works.
But I do want to highlight the implications to U.S. competitiveness and what this concept would mean to corporate real estate and economic development. Consider this passage from page 67: “Whether you’re building automobiles or widgets, mixing perfumes or creating clothing fashions, making shoes or kitchen appliances and cabinets, you’re going
to sit up and take notice of the fact that you can now do business in America with no tax on labor or capital. From manufacturing to real estate, the gold rush will be on as foreign businesses rush to expand their bottom line by locating facilities in the greatest tax haven the industrialized world has ever known … the United States.”
Or this from page 167: “If we succeed in getting all taxes out of our price system — by eliminating all business and payroll taxes and compliance costs — no foreign corporation will be able to compete with us. In order to be competitive, every foreign multinational corporation will build its next plant in the United States so that it can compete with us in a global economy.”
I urge you to become familiar with the notion of the FairTax (www.fairtax.org) and to help acquaint your financial and property asset management team with it. If nothing else, you’ll learn why your property portfolio has become so international.
Till next time,
Mark Arend