Trump, Trade, & Taxes

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

The best way to restart investment (and thus employment opportunities) is to make the U.S. a magnet for productive capital rather than a graveyard of tax-avoidance strategies.

Donald Trump has made trade agreements a central issue in this presidential election, declaring trade treaties such as the North American Free Trade Agreement (NAFTA) as unfair and subject to cancellation or renegotiation.

Setting aside the issue of whether presidents can cancel trade treaties via executive orders, let's look at the underlying issue: the erosion of manufacturing and entry-level job opportunities that lead to middle-class security and pay.

The question then becomes: what are the causes of this erosion of manufacturing and the middle class? Trade is relatively easy to finger because the flood of cheap goods into the U.S. coincided with the wholesale offshoring of manufacturing capacity.

But it isn't quite that simple. "Free" Trade, Jobs and Income Inequality: It's Not As Easy As We Might Think (March 22, 2016)

There are many other issues in play, including:

1. Currency manipulation, i.e. pegging one's currency (such as the Chinese RMB) to the US dollar to maintain a predictable cost advantage.

2. Technology, as automation reduces the inputs of human labor per output even in nations with few trade treaties.

3. Global wage arbitrage, as domestic corporations move production overseas to lower labor costs (exacerbated by insanely high costs of healthcare insurance for employees in the U.S.)

4. High tax rates on domestic corporations (35%) push companies overseas to lower tax nations.

5. Trade is grossly miscalculated by current metrics; if we calculate the value that actually flows to each nation that makes parts and software for the iPhone, we find that "Analysts estimate that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy, in the form of income paid directly to Foxconn or other contractors." Meanwhile, twenty times that sum flows directly to Apple HQ in Cupertino, California for software and profit.

Forget "Free Trade"--Focus on Capital Flows (October 28, 2014)

"In a world dominated by mobile capital, mobile capital is the comparative advantage."

6. Triffin's paradox demands that any nation issuing the global reserve currency must run a trade deficit as a means of exporting the reserve currency into the global economy. I know this is counter-intuitive, but I've explained it many times over the years:

Why the Shrinking Trade Deficit Will Choke U.S. Corporate Profits (August 8, 2013)

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

The Dollar and the Deep State (February 24, 2014)

In other words, if you want the Exorbitant Privilege of issuing the global reserve currency, you have to run a permanent trade deficit.

Let's look at what any president can influence/control and what is beyond their reach. Presidents can complain about currency manipulation and even threaten reprisals, but currency manipulation is not only a trade issue; it overlaps with diplomatic issues that extend far beyond trade. For example, the U.S. might tolerate some currency pegs to support key allies.

Any president's ability to limit automation, technology and "software eating the world" is essentially zero. Nations that attempt to limit or stifle technological advances end up stifling productivity and innovation, and as a result they are doomed to stagnation.

The same can be said of global wage arbitrage. There is very little any president can do to stop companies from taking advantage of the divergence of wages between states, nations and regions.

As for destroying the reserve currency (the U.S. dollar) in a quixotic quest for trade surpluses: look at Japan, which has consistently run trade surpluses while wallowing in decades of social and economic stagnation.

That said, there is one issue the president can influence: the tax rates on domestic corporations. Many nations use tax credits and the like to encourage manufacturers to maintain domestic production, but America's 35% corporate tax rate is an absolute job killer.

This high tax rate forces corporations to game the global tax system for zero benefit to the U.S. or its work force.

Trump would serve the nation and its work force best by lowering the corporate tax rate to a flat 5% for companies that maintained substantial facilities and work forces in the U.S. I submit that a flat 5% rate would actually collect more tax revenues than the 35% rate that pushes employers and employees overseas.

The corporate tax rate of 35% has perversely incentivized moving production and employees overseas. I have yet to meet anyone defending the sky-high nominal tax rates who actually employs people and pays the 35% corporate rate or operates a global corporation.

As an abstraction, the 35% rate appeals to "progressives" intent on punishing Corporate America for its many sins. But the reality is the "progressives" aiming at "evil corporations" have shot American workers in the chest.

The best way to restart investment (and thus employment opportunities) is to make the U.S. a magnet for productive capital rather than a graveyard of tax-avoidance strategies. The problem isn't trade per se; it's a perverse tax system that drives domestic employers overseas.

*  *  *

Of related interest:

The Truth About Trade: What Critics Get Wrong About the Global Economy

"The truth is more complicated. Although imports have put some people out of work, trade is far from the most important factor behind the loss of manufacturing jobs. The main culprit is technology. Auto­mation and other technologies have enabled vast productivity and efficiency improvements, but they have also made many blue-collar jobs obsolete. One representative study, by the Center for Business and Economic Research at Ball State University, found that pro­ductivity growth accounted for more than 85 percent of the job loss in manufacturing between 2000 and 2010, a period when employment in that sector fell by 5.6 million. Just 13 percent of the overall job loss resulted from trade."

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Latina Lover's picture

Hillary for Prison 2016

MillionDollarBonus_'s picture

So Trump supports tax cuts for the rich? What a surprise - yet another republican who sides with the corporations against the people. Instead of cutting taxes, why don't we clamp down on tax havens around the world and make sure that there's nowhere for these greedy corporations to escape to?

The Overpopulation Crisis

baldknobber's picture

MDB wants to invade the Caymen Islands ,, sign me up

buzzkillb's picture

https://www.donaldjtrump.com/policies/tax-plan/

"Taxable income: Rate Less than $75,000 12%
More than $75,000 but less than $225,000 25%
More than $225,00 33% 

The Trump plan will retain the existing capital gains rate structure (maximum rate of 20 percent) with tax brackets shown above. Carried interest will be taxed as ordinary income."

Million Dollar Bonehead's picture

The Donald is a disgusting, overweight, sweaty buffoon. Dear Leader Hillary, on the other hand, is poised, cultured, and professional. When she is inaugurated on January 20th, her first executive order will be to have The Donald strung up by his feet and have his bowels sucked out of his body with a wet-vac jammed into his rectum. All Hail President Elect Dear Leader Hillary!! Praise be to Baalshamin!

scm's picture

Im totally confused, doesn't

THUMPs VP SUPPORT TPP?

Oh yeah Thats right, HE DOES.

You idiot THUMP supporters would be better off with GJ, at least he admits he is for it. PLUS many other better than THUMP ideas on taxes and trade.

 

FreezeThese's picture

He's great at identifying problems ... It's the solutions he lacks

Bwana's picture

You never replied as to how much crack you smoke prior to posting.

GoldToDaMoon's picture

Did anyone wonder how much Hillary paid for some master of spin to come up with that phrase... "Trumped up trickle-down"?

Zero-Hegemon's picture

Probably something Lester Holt came up with. When Trump first laid into NAFTA, etc., I was wondering how long it would take him to pin that on her husband. Too long, IMO.

BuddyEffed's picture

Some master of spin here at ZH has proffered several times that trickle down was really trickle up and out of the country, calling it the Trickle Down Trick.   Almost sounds similar.

Zero-Hegemon's picture

Don't piss down my back and tell me it's trickling

Tarjan's picture

Even if China pegged the RMB at 1:1 to the USD they still have a huge cost advantage. I live in China and not too far from my home is a light industrial area with Texas Instruments, Siemens, Apple, Foxconn (without suicide nets), etc. factories. Let's say the average worker in those plants makes $3.75 an hour. If that worker lives in an apartment nearby he/she commutes to work on an electric scooter - new cost about $400, with $0 in insurance costs, and at most $9 per month to charge the battery. Compare that cost with how US workers in cars or pickup trucks get to work.

A Chinese worker/employer does not have the problem of Obamacare to contend with. Medical care here is inexpensive. Last year I had a bicycle accident and badly bruised my left calf. The cost of x-rays (to rule out broken bones), diagnosis, and treatment came to the equivalent of $35.

The cost of food for these workers is reasonable. When I eat like the locals, I can get by on $4.50 a day, or slightly less, eating out. For the workers that do not live in a company dorm, a rental apartment of say 35 sm can cost as little as $105 per month, less if shared. After all monthly expenses, that $3.75 per hour worker can, and does, save 15% to 30% of their pay each month.

~

BuddyEffed's picture

Points well noted.   As Kunstler describes "The Long Emergency", similarly the offshoring and gutting of the American economy over the past 3 decades was "The Long Betrayal" akin to the death by a 1000 cuts, where the individual players who offshored and replaced American workers with foreigners rationalized their own self agrandizement and making their net worth greater at the expense of making their country weaker.

nevertheless's picture

To quote the idiot George Bush, "fool me onc, shame on you, fool me twice... The point is stop being fooled!

"Ron Unz, “We naively tend to assume that our media accurately reflects the events of our world and its history, but instead what we all too often see are only the tremendously distorted images of a circus fun-house mirror, with small items sometimes transformed into large ones, and large ones into small. The contours of historical reality may be warped into almost unrecognizable shapes, with some important elements completely disappearing from the record and others appearing out of nowhere.”

Mind-fucked, most Americans can’t even see that an American president’s only task is to disguise the deep state’s intentions. Chosen by the deep state to explain away its crimes, our president’s pronouncements are nearly always contradicted by the deep state’s actions. While the president talks of peace, democracy, racial harmony, prosperity for Main Street and going after banksters, etc., the deep state wages endless war, stages meaningless elections, stokes racial hatred, bankrupts nearly all Americans and enables massive Wall Street crimes, etc.

Only the infantile will imagine the president as any kind of savior or, even more hilariously, anti-establishment. Since the deep state won’t even tolerate a renegade reporter at, say, the San Jose Mercury News, how can you expect a deep state’s enemy to land in the White House?! It cannot happen.

A presidential candidate will promise to fix all that’s wrong with our government, and this stance, this appearance, is actually very useful for the deep state, for it gives Americans hope. Promising everything, Obama delivered nothing. So who do you think is being primed by the deep state to be our next false savior?

Frontline Retailer's picture

"Mind-fucked, most Americans can’t even see that an American president’s only task is to disguise the deep state’s intentions."

The president has 'the bully pulpit' that the deep state does not. We need a strong leader to get us off the track of Cold War 2.0. Hilary represents staying on the track. She would be a weak leader, especially with the skeletons in the closet.

Let's not forget the President also directs foreign policy.

What better guy than Trump to figure out the best course for business tax incentives?

taketheredpill's picture

So...85% of Employment and Facilities in the U.S. gets a 5% Corporate Tax rate?

Zero-Hegemon's picture

The effects of "Trickle down ecomonic" policies enacted in the 1980s by Reagen weren't felt until the Clinton years. Or so I've been told. Any truth to this?

Hype Alert's picture

Somewhat, but the big wave Clinton rode was the Internet boom and Y2K spending with some shuffling between entitlement funds.  Those two windfalls will not be repeated no matter how much the Fed pretends.

Caledonian's picture

trickle down worked great. certainly can't trickle up. What are we going to pay our employers for the honor of working.

Cluster_Frak's picture

I'd say Trumpiumphant plan on economy.

Cardinal Fang's picture

Dude, international relations is about carrots and sticks.

The Globalists have been using our carrots and sticks to advance their agenda at the expense of Joe Sixpack's interests.

This is coming home to roost during this election.

youngman's picture

I know how to spend my money much better than some government employee..much better

Caledonian's picture

Even if you don't you did the work its your money!

My tax burden is getting in the way of my pursuit of happiness. They should just print what they need and leave my money the f*ck alone. 

Oh wait they are printing what they need.

 

LEAVE MY MONEY THE FUCK ALONE!!!

FIAT CON's picture

I have one question.... Due to all the technological advances we should be taking home more money and paying less taxes, all while working 3 days a week, but are we? Why is this not happening? Is it due to our own personal greed. We live in huge houses with all of the latest gadgets, the fanciest of cars etc... Maybe we all are too greedy, we all want to be like the Jone's.  

PirateOfBaltimore's picture

This article is spot on.

 

Trump should be pointing to tax inversions and Ireland -- where a bunch of companies were moving their HQs due to tax incentives -- as to the reason that our high corporate tax rate actually matters and shouldn't be used as a punitive tool.  

Not to mention many small businesses that are corporations are subject to the ridiculously high rate -- it is no wonder business births have decellerated massively.

Hillary's idea of more profit-sharing is all fine and dandy, but how does she expect to do that?  Probably by passing a law demanding it, which makes people resent the government immediately.  As a business owner (a side project company), I see profit-sharing and equity arrangements as a very effective way to align incentives, but would not be OK with forcing people into that arrangement -- it isn't right for every business, and it's my choice, particularly since I've taken the risk of running a business.

 

What no one talks about is the removal of "accredited investor" laws -- meaning individuals, regardless of net worth or income, could buy private equity stakes -- what better a way to share profits by removing a class-ist law that "protects" people differently under the law depending on their income, not their actual knowledge.  It is designed to help the 1%.

rejected's picture

Anyone want to show us a large corporation that actually paid 35% tax. Oh, those poor punished corporation, manufacturing their products for pennies, no concern for their lowly cheap labor sickened by the environmental destruction and allowed to bring their product back in to the u.s at prices marked as if they were actually produced here. $1000 for an Ipad. Talk about RIP OFF!.

Then if someone actually wants to start up production here these nice corporations lower their prices long enough to either put the competition OOB or buy it up. Then raise the prices afterwards.

Oh yea,,, those poooor punished corporations that are writing all the trade acts and buying off governments while selling America to the lowest bidder. Tears are welling up as I type...

PirateOfBaltimore's picture

Plenty of small corporations do pay that confiscatory rate -- not to mention this massive inefficiency of deciding how to file taxes as an LLC/S Corp/C Corp.  Don't let your hatred of big corps blind you to the fact that corporate tax rates are absolutely a problem.

 

There needs to be an across the board removal of "loopholes" / crony capitalist tax breaks, and an overall lower rate.  Since you mentioned how big corps are able to avoid taxes, I'd suggest the new rate be equal to the average effective corporate tax rate actually paid, perhaps plus a percent or 2.  No higher than 20% ideally, but no deductions or credits besides net operating losses (possibly remove multi-year carry over).

 

 

Iconoclast421's picture

There shouldnt be a corporate tax at all. Raise the top end personal income tax rate to compensate. Companies that fully reinvest all revenue into employees and capital, pay effectively nothing to the federal government. Companies that hand out large sums of money to their top executives end up paying massive tax rates via the personal income tax. I really do not know why this concept is so difficult to comprehend.

Infield_Fly's picture

Hillary to drop dead - 2016

wide angle tree's picture

Taxing income of any kind is dumb. It only makes sense if you want more government meddling in your life and the economy. If you want a flat rate tax then tax imports. Corporations do not benefit from tax cuts in a competitive market. When companies have excess profit margins they have to cut the prices of their product to compete. There is no shortage of corporate income. We have a shortage of personal income of workers and a shortage of jobs.

The system we have is not a free market. We have a government power freak system. The inefficiencies caused by government meddling directly subtract from your standard of living. This includes the super low rate policies which are causing huge distortions in where resources should be being used.

LawsofPhysics's picture

Massive mis-allocation and mal-investment of capital and resources will have consequences, eventually.

Of course the government has (in the past) funded high risk research and innovation that private companies simply would NOT.

These days the .gov would rather BAILOUT BANKS and fund POINTLESS WARS.

robertocarlos's picture

Totally agree. Only tax should be on resources and land, which we all own.

Han Cholo's picture

We have a shortage of personal income of workers and a shortage of jobs.

 

I contend the reason behind that is Corporations don't really pay the tax at all, it is passed on to the consumer. In the end, we, the consumers, pay ALL the taxes. Hence the loss in income and definately the shortage of jobs.

 

just my $2.02  (taxes snuck in on the two cents).

dojufitz's picture

I was dissapointed at his lack of attack.....

but then thought about it and realised he only had to NOT act like a lunatic to win because everyone was expecting the lunatic.....

He was respectful and got quite a few of his main points out - low taxation, losing jobs left right and centre...etc....

and that was why he was so restrained.....

She was the petty one....

BillyBass's picture

The attacks he did muster were off the mark.  Why attack Ford when Ford can, and did, call him out on it?

 

Attack Carrier AC, and its parent company United Technology, for moving production from Indiana to Mexico.  Carrier is profitable for UT, but, they are moving production anyway.  Carrier and UT don't have prepared slides ready to prove him wrong.  

 

Talk about an unforced error.

roadhazard's picture

Would Trump be the first candidate to go into a Presidential election without releasing his tax returns.   

homonohumanus's picture

Taxes are not the problems, who pays them for most part is one, and how it is spent is a second one. As for fiscal optimization well... that is the core of the financial system "smart money" escape taxes through fiscal safe heaven and trust which makes some of the richest people on earth anonymous...
Trump is clever enough not to speak about that. As for expecting one man to sort everything it is quite a strech, if he get elected and people start to stir back to sanity, the same people will start to find solution (the real world works from the bottom up). 

Kickaha's picture

The author of this piece bases the entire article on the archaic notion that investment decisions are still based upon whether or not the end result will be after-tax profits.  That might be true in an environment where real interest rates prevail and can be used as a guide to determine whether the money borrowed to fund the investments will yield a sufficient return to cover repayment of the principal plus interest on the loans.  When money is available at near zero cost, and loans can be rolled over at that negligible cost when the bill falls due, the rate of return on an investment may still be a factor, but other, more important factors will dictate how the free money gets "invested".

First and foremost is how much of that free money can be siphoned from the corporation into the pockets of the men and women managing it.  The most obvious use for the free money is to use loans to buy back company stock after putting in place high-level executive compensation packages that include stock options as a major component.  The corporation stock price rises due to the persistent buy backs while the corporate balance sheet deteriorates due to the increased debt load.  The non-insider shareholders think everything is hunky-dory as they see the value of their shares rise and then rise some more, but they will be the bagholders when the buy backs end.  The insiders will scheme there very best to go massively short and buy bunches of puts when it looks like the buy backs are no longer levitating stock prices as they once did, and the decision is made in the boardroom to end them.

If the after-tax profitablility of a planned investment is no longer the main factor in the decision-making process, any manipulation of income-tax rates will have only a marginal impact.

The only thing that will put the economy back on the road to recovery is to normalize interest rates, which would require either the end of the Fed or the removal of the "dual mandate", to be replaced by a sole mandate of currency stability.  The longer this insanity continues, the longer more money is invested without regard to the discipline of true interest rates, the greater the malinvestment throughout the economy, the greater the continued operation of zombie businesses that should have been put down in 2008, and the deeper the hole will be for us to climb out of with less available capital to assist us when all of the free money bubbles burst.