You Can't Engineer Your Way Around America's Corporate Tax Rate

philip greenspunPhilip Greenspun and his class

Photo: trothwell on flickr

The theme of this year’s Technology Day at MIT was advanced manufacturing in the U.S. Kresge Auditorium was close to capacity with alumni from all reunion years.Learned MIT faculty weighed in on the importance of proximity between engineers and factories. The Atlas Device story was initially an inspiring tale of can-do New England spirit, with engineers in Somerville and a machine shop in Woburn working together to make improvements on a weekly basis.

But then we found out that the main customer was the U.S. military and they really didn’t care how much it cost or how efficiently it was produced. Similarly, the solar cell talk was great until we learned that there are about 12 good reasons why solar cells must be manufactured in Asia.

In a panel discussion afterwards, the speakers were asked what it would take to make the U.S. more competitive for manufacturing.

The answer was that it was pretty much hopeless at current tax rates.

Big companies make a lot of money in foreign countries, but if they bring the profits back home they get hit with the world’s highest corporate tax rate. So they leave the money in China, for example, and then invest it there in research and development or a new factory. I.e., our own multinational companies are financing the new facilities around the world that are rendering the U.S. uncompetitive.

A new enterprise, meanwhile, would be facing a choice between China, with a 15 per cent corporate tax rate, proximity to all kinds of suppliers, and low costs, and the U.S., with a 35 per cent tax rate (plus any state corporate income tax) and an ocean separating it from most component vendors.

Other than for defence contracting, nobody seemed optimistic about the U.S. becoming comparatively more attractive. (Can we still call it “defence” when we keep starting the wars?)

[I was a bit sceptical of the message that high costs and taxes explain the U.S. decline. After all, Germany has high costs for everything and Europeans are famous for high tax rates. Yet Germany is wonderfully successful in manufacturing. Then I looked up the corporate tax rate in Germany and it turns out to be 15%, the same as China’s.]

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