Kerry's Tax Plans Will Be Unworkable Say Economists

by Mike Godfrey, Tax-News.com, Washington

20 February 2004

Tax policies designed to stop the flow of US jobs offshore, proposed by front-running Democrat presidential candidate John Kerry, are flawed and may even prove counterproductive, economists have argued.

Under Mr Kerry’s plan, aimed mainly at the manufacturing sector, a new tax credit will be created that will give firms a two-year refund on an employee’s payroll taxes. In addition, US-based manufacturing firms will pay less corporate tax.

However, economists believe that the massive differentials in wage costs that exist between the United States and overseas labor markets such as China and India will not come close to being bridged by Kerry’s proposed tax reforms.

For example, according to the latest World Bank calculations, Chinese factory workers are thirty times cheaper to employ than their American counterparts. Further statistics produced by consulting firm McKinsey reveal that a software developer in the United States would cost on average around $60 per hour, compared to just $6 per hour in India. When additional benefits come into play, McKinsey states that these differentials translate to a net 50% increase in profits for American businesses which hire overseas workers.

By contrast, according to figures from the US government’s Bureau of Labor Statistics, Kerry’s proposals amount to a mere 8% of the cost of hiring an employee, a figure hardly likely to encourage US firms to recruit at home, economists point out.

Analysts also fear Kerry’s tax plan will have a distorting effect on the nation’s labor market, leading to firms turning over staff quicker in order to take advantage of the two-year tax credit, and in this way will have a negative, rather than a positive effect on US jobs.

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