Tax Policy Makes U.S. Uncompetitive, Not China’s Low Wages

Written by: Henry R. Nothhaft
CEO of Tessera, Inc.
Co-author of Great Again: Revitalizing America’s Entrepreneurial Leadership
Posted: February 7, 2011 @ 3:02 pm
Page viewed 469 times

President Obama delivers his weekly address on Feb. 5, 2011

In his February 5th radio address, President Obama noted that “If we make America the best place to do business, businesses should … set up shop here, and hire our workers, and pay decent wages, and invest in the future of this nation. That’s their obligation.”

I agree. But government has an obligation, too. Is it doing all it can to truly make America the best place to do business?

Consider Evergreen Solar, which until last month was one of America’s largest solar panel makers. On January 14th, it shut down its Massachusetts factory and sent 800 jobs to China. This leaves only Silicon Valley’s Solyndra making solar panels in the U.S., and it just shut down one of its two production facilities.
Why did Evergreen flee to China?

Many people assume that there’s no way American manufacturers can compete with cheap Chinese labor. It’s just basic economics, right? Wrong. It’s the U.S. government’s myopic policy, not China’s lower payroll costs that make our nation uncompetitive in the all-important solar and other high-tech manufacturing sectors.

According to Massachusetts’ former energy chief, Ian Bowles, the real challenge for Evergreen Solar was not labor costs but the fact that China offers manufacturers, both domestic and foreign, huge tax and other incentives whereas America does not.

“[Our] government has brought a knife to a gun fight,” Bowles told the New York Times on January 14.
And he’s right. The U.S. is the only major nation on earth that does not offer tax breaks, capital grants, low-cost loans or other meaningful incentives to high-tech manufacturers. But could America really compete with Chinese labor even if we did offer incentives?

Absolutely, says Louis Vintro, vice president and general manager of the semiconductor product division at equipment maker ESI: “What we see from our data is that China has a roughly 50 percent advantage in labor costs,” he explained in an interview for my upcoming book, Great Again. “But since labor represents an average of only 7 percent of operating costs across all of the semiconductor sectors, that means China has a 3.5 percent overall cost advantage.” Add in China’s tax holiday and firms locating there get an additional 2.5 percent advantage, if you assume they avoid paying 25 percent tax on a 10 percent operating profit. That brings China’s total cost advantage as a manufacturing location to roughly 6 percent.

But what if manufacturers were given a tax holiday in the United States? If you take as a guide the roughly 30 percent tax that Intel has paid in recent years on 10 percent operating profit, that would mean a 3 percent lower cost of operating a plant here. Add in an enhanced, permanent 20 percent R&D tax credit equal to what other nations offer—and again, America is the only major nation refusing to offer such a credit—and China’s advantage drops to 1 to 2 percent.

We can definitely compete with that.

As Vintro notes, “The U.S. still retains a very high percentage of the R&D centers and the high-tech machinery used in manufacturing. Companies can use the faster time to market they’d get by locating their plants here — and all the other benefits of having their R&D closer to manufacturing — to remain competitive with, if not superior to, anything the Chinese can do in the high-tech field. But we’ve got to have help from Washington.”

Former Intel chairman Craig Barrett once explained it this way in testimony before Congress: “[It] costs $1 billion more to build, equip and operate a factory in the U.S. than it does outside the U.S. The largest portion of this cost difference (about 90 percent) is attributable to taxes [and] capital grants. Labor cost is not a large difference.”

I grew up in the once-thriving middle-class community of Sharon, Pennsylvania, where I watched the steel industry flee offshore, causing the collapse of the whole economic ecosystem built around it. Today I’m starting to see the same hollowing out of the middle class happening in my adopted home of Silicon Valley.
I am the son of a steelworker, and I did not work my whole life creating jobs and wealth just to spend my golden years in some banana republic of Silicon Valley. So let’s ask ourselves why China and Europe go to such great lengths to attract manufacturers. It’s because they know that manufacturing is the greatest economic force multiplier on earth, creating up to 15 additional jobs outside of manufacturing for every position on the shop floor.

It’s time we joined the rest of the world in recognizing that fact. Only when we do will America truly be the best place to do business.

Other recent articles on U.S. innovation and job creation Harvard Business Review:
Memo to the President: Looking for Jobs in All the Wrong Places
Manufacturing Technology News: Economic State of the Union: The Future Will Likely Be Worse
The Hill.com: Leahy Patent Bill: Litigation, not Innovation
IAM Magazine: A Message You Just Cannot Argue With
The Wall Street Journal: U.S. Firms, China in Tech War

Bill Fowler