Corporate Taxes

Nice post by Jared Bernstein a few days ago on reforming the corporate tax code:

In that sense, the White House’s proposal creates an interesting political challenge.  For years now, American corporations and their reps here in DC have been calling for a lower rate while at the same time availing themselves of billions in tax breaks that have kept them from paying the statutory rate.   In my debates with supply-siders, they’re all about the rate…they’re happy to trade more base for points off of the rate.  In the next chapter of this debate, we’ll get to see how much they meant it.

It would be great to see such a compromise work with the conservatives, but I highly doubt it.  There's always a caveat with them; if you shave points off the tax rate, they will still look (and fight) for loopholes in the tax code.  Give a Republican a tax cut and he'll ask for more..

Outsourcing

This relates back to the iPhone story I posted last week; Stiglitz warned us about the dangers of outsourcing years before the current US unemployment crisis:

But even if the eventual numbers are limited, there can be dramatic effects on workers and the distribution of income. Growth will be enhanced, but workers may be worse off - and not just those who lose their jobs. This has, indeed, already happened in some developed countries: in the ten years that have passed since the signing of the North American Free Trade Agreement, average real wages in the US have actually declined.

Economics, especially economic policy, never ceases to amaze me.  The people that were right before the financial crisis continue to be right.  The only problem is, they're not the ones making the policy decisions.  For every Larry Summers or Tim Geithner, there is a Paul Krugman or a Joseph Stiglitz sitting on the sidelines getting these things right.  Why aren't they the ones advising the president?

$25 billion isn't enough?

American corporations send jobs abroad to create a cheaper product (because they care about the consumer?). Apple, for example, employs labor in China at around $17 a day to build our iPhones, iPads, and Macbooks. Their factory employees work 12 hour days, 6 days a week, and live on the premises, making it easy to have them work any time of day (what corporate executives like to call "labor flexibility"). The result – an iPhone that sells in the US for $199. Because this price is relatively cheap, Americans won’t complain about the exploitative labor practices used in producing it – we seem to believe that products would surely be more expensive had they been produced in the US. But, would they really? Let’s compare the labor costs of making an iPhone in China vs. the US:  

                           

Here is the most important figure in this chart: 177,557 – the number of jobs that could’ve been added to the US labor force just for building the iPhone domestically. Not a small number, but again – how would this affect the final price of the product? Using the labor costs above, here is the total cost breakdown (per iPhone):

Based on these calculations, US labor would increase the cost of producing each iPhone by about $150. The question is – does this drive up the price consumers pay for the phone? The simple answer – it doesn't have to, and here’s why:

Apple's profit margin on the iPhone is 71.15%. This means that the company makes $462.49 per iPhone, resulting in $37 billion in profit for Apple. Switch to US labor, and the profit margin drops to 47% and a profit of only $24.6 billion...

So, if Apple can produce iPhones in the US, create thousands of jobs in our labor market, make the consumer happy by charging $199 per phone, and still make a profit of close to 25 billion – why don’t they?

Footnote:

I used various sites that calculated the cost of iPhone components, daily wages of Chinese workers at the Foxconn plants (an electrical manufacturing company used by Apple for production), etc. Links to all the source data are below. Bureau of Labor Statistics calculates hourly compensation of US workers, which comes to about $34.74 (with $23 of it coming in hourly wages and the rest in benefits and employer social security contributions). The units per year calculation comes from Apple's most recent (2011 Q3) earnings report (I use 20 million units over 4 quarters which is a reasonable estimate).  

http://www.apple.com/pr/library/2011/07/19Apple-Reports-Third-Quarter-Results.html


http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?_r=3&pagewanted=all


http://news.cnet.com/8301-31021_3-20009027-260.html