“Free” Trade & Tax Reform | Carrier’s Move to Mexico

Here’s the good news for employees at the Carrier plant in Indianapolis — the next Carrier air conditioner they buy will be cheaper.  The bad news is Carrier’s jobs are moving to Mexico, and the employees’ next jobs will likely pay them less.  (See: “Carrier Workers See Costs, Not Benefits, of Global Trade,” The New York Times, March 20, 2016)

“This is strictly a business decision!,” CEO Robert McDonough told an assemblage of Carrier’s workers about the outsourcing plans that will cost them their jobs. This explanation was met with boos and curses. To help discarded employees, the company promised to pay for four years of additional education, but many older workers feel it is too late for them.  Carrier wages averaged $20 or more per hour, and jobs at the adjacent Amazon warehouse average just over $15 per hour.

We can presume that Mr. McDonough, as most public company CEO’s, is under pressure from parent United Technologies management and stockholders to increase profits any way they can.  And, with global competition, “You can blink and see your market position erode,” he said.  In a subsequent address to a gathering of financial analysts Mr. McDonough went further: “We’ve shifted an abundant part of our manufacturing footprint to relatively lower cost countries, about two-thirds.  Still, there’s some opportunity there.”

We can’t blame UT management for the outsourcing decision, which is a consequence of government policies and free trade agreements.  But it is also important to note that corporations have pushed Congress for these trade agreements, which enable outsourcing in the search for higher profits.  Then, too, there is no faster way for top management to increase the value of their stock options than to dramatically lower the cost of labor through outsourcing.  The result is a deck stacked against the American worker, now in competition with cheaper wages in other countries.

It is little wonder that middle-class workers are flocking to the speeches of Sen. Bernie Sanders and Donald Trump.  Twenty-five years of “free” trade agreements have eroded the hope of millions of Americans for higher-wage manufacturing jobs, which have fallen by nearly one-third since 1990 accompanied by stagnant wages.

What policies might help to stop the bleeding?  Mr. Trump sees tariffs, which could threaten world trade and cause economies to implode.  Secretary Hillary Clinton and Sen. Sanders envision higher education as a ladder to higher paying employment, but that is a longer-term solution based upon speculation that those jobs can and will be created in sufficient numbers.

Most effective in the short-term would be a shift in the way we tax corporations to match our global competition.  Changing to a Value Added Tax as a replacement for the Corporate Income Tax would go a long way towards making American workers more competitive.  How?  Because VATs are border-adjustable, i.e., subtracted from exports and added to imports to eliminate the cost of government from the price/value relationship of goods crossing borders.  For example, China has a 17% VAT that is added to their imports, and 17% is subtracted from the price of their exports.  That is a big difference, coming and going.  Likewise, Germany has a 19% VAT that has enabled their higher-wage country to still be very competitive with higher wages.

Among the presidential candidates, the only remaining contender proposing this shift in how we tax ourselves is Sen. Cruz.  Whether you like his other positions or not, this tax reform deserves your support.  Sen. Paul has proposed a similar plan.  This should not be a partisan issue.  Gov. Jerry Brown ran for president in 1992 based upon the same tax reform.  President Bill Clinton has endorsed the concept, and so have many labor leaders.  Will Hillary?  Will Donald?

It’s time we got smart about how we tax ourselves, if we want to compete in the world economy.  It’s time for VAT.