3.29.2004

Tax cuts boost joblessness, encourage outsourcing AJC.com (3/29)

Why, economists ask, is this recovery jobless? No one seems to know. But the answer is right there in the Bush tax acts, which many economists have apparently never read.

Almost any business task can be performed using more labor and less capital or less labor and more capital. We learn in Econ 101 that if government doesn't intervene, business will choose the most efficient alternative. But what if government intervenes? What if it puts its heavy tax thumb on the "more machines, fewer workers" side of the scale?

Answer: Instead of using two workers and one machine to do a given job, business will use two machines and one worker.


Alright, so businesses are encouraged to invest in machinery but what does this have to do with outsourcing?

When a U.S. corporation manufactures in the United States, its income is subject to U.S. tax at a nominal rate of 35 percent. If the same corporation moves those jobs to some other country, it can normally structure the deal to reduce its U.S. taxes to zero. That's right, zero.

What this means is that the standard economists' assumption, "all else being equal," is simply not true. Current U.S. tax rules create a strong artificial incentive to move business offshore. Until recently, the one big disadvantage of doing so was that it was then hard to bring the resulting profits back to the United States. The most recent Bush tax act helped solve this problem by cutting U.S. taxes on the repatriation of offshore profits. In other words, the most recent Bush tax act made these artificial incentives to move business offshore even stronger.


As always: read for yourself and make up your own mind.

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