Posted by
Ken Moyes on Tuesday, March 11, 2008 6:38:40 PM
America needs to regain the fundamentals of a strong economy for a number of important reasons.National
socio-economic health, political and diplomatic influence in the world
for trade, defense, and standard of living all depend on a
fundamentally strong economy.The fundamentals of a strong economy, from a non-economist’s view – mine, start with comparative advantage in world trade.This
is something which our country and our leadership and labor unions have
taken for granted over the last 20 years, letting this precious
commodity dwindle away.We also have mistaken productivity and its usefulness toward comparative advantage with an effective trade economy.Remember,
while productivity helps our trade advantage, it does little to help
our trade related employment number or the quality of the trade related
jobs.Simply put, the definition of comparative trade
advantage is “what do we have to offer in the deal that makes us come
out ahead of the other guy?”
We hear about free trade agreements and that trade is good – and it is!Entering
into the world trade arena without a trade advantage or at least a
trade equilibrium is just down right dumb and we have run headlong into
this arena stark naked.We need to rediscover our comparative trade advantage or discover a new one, if we are to successfully compete in world trade.
Look around, the world has oil and we need it, the
world has cheap goods and we need them to keep inflation down, the
world has the capability to produce both quality goods and cheap goods
that it could not produce 50 years ago, the world has cheap labor –
shall I go on?What do we offer?Well we
still have some bright minds, even though they may be heavily populated
with foreigners, we still can grow food with the best of them, we still
offer innovation, but we have no monopoly any longer on innovation.Our
dollar is losing value which helps us produce relatively cheaper goods
for the world market and thus lower the trade deficit.
A devalued dollar is a two edged sword as also it
brings us a higher cost of living and a lower standard of living
relative to the world.What do we plan to do about this obvious problem?Well
Senators Obama and Clinton want to tax us more - mostly business and
the rich – you know, tax the engines of investment and growth!Senator
McCain wants to keep personal income taxes low and cut spending, but
this will not bring us back to a fundamentally strong economy even
though it is good start.It is how, when, and who we tax that is the problem.We are an economy that taxes income accumulation.We should be taxing the disposable money spent on “stuff” and not the money earned and used for growth re-investment.
Businesses pay a 35% Federal corporate tax rate
and varying state corporate tax rates, bringing the total corporate
income tax on profit to between 40% and 50% for the most part.Remember the corporations only collect the tax and anyone who buys their goods pays the taxes.If
a corporation works on a 15% profit margin, and they make a set of golf
clubs which they wholesale for $500, $65 is taxable profit of which the
retailer pays $30 of the income taxes due on the item.When
the item is resold at retail at $800, assuming a 15% profit margin,
$105 is the taxable profit and $47 is the income tax due on the item
paid by the end user, the consumer, you.Actually you pay a total of $77 of the corporation’s and reseller’s income taxes.
Granted, this example is clunky and probably
filled with holes, but it does serve to demonstrate that when we tax
corporations for manufacturing or reselling all we do is raise the
price of the item.This works fine when all the competition is paying the same taxes.If
does not work fine when world trade is involved, because our goods and
services are then less competitive with the goods and services of other
nations. We already start out with a disadvantage, in
that we pay our workers more than the workers in far off lands receive,
but this can be adjusted with productivity.
Unless we seriously look at our tax structure and
make changes sooner rather than later – maybe move to a consumption tax
or a fair tax and get away from inhibiting investment, growth, and
production with income taxes, we can expect to have a lower dollar
value, a lower standard of living, etc.Income taxes on domestic corporations foster a comparative trade disadvantage for us.Our
government must find ways to domestically foster healthy manufacturing
and servicing sectors so we can compete with the rest of the world
without giving up good paying jobs.If the tax burden
shifts from corporations to individuals, their will be no real change
in who pays the taxes, except we will compete in the world trade
markets effectively, create good jobs, and restore a fundamental of a
good economy.