If you were to remain in your community for all time, including many future generations, and the education of your children only needs to compare and compete with others stuck in the same circumstance, then you might not worry much about it. But, if you don’t live in an isolated village with no contact with the outside world, then you probably don’t want to be stuck with your school.
Suppose you choose an alternative. You pay for a private school, homeschool, or move to an area with better neighborhood schools.
You have just outsourced your children’s education. Instead of hiring the local educators at hand, you hire someone else outside the local public school system. Do you feel guilty about it? Probably not. Your priority is getting the best education you can for your children; it is not making sure local teachers stay employed regardless of value. The very idea of calling this outsourcing seems ridiculous.
Let’s look at a company, a corporation, that makes a product it sells in a worldwide market. Suppose the place where the company resides raises corporate tax rates and insists on hiring local union workers at a pay scale above the market rate. The company’s priority is to make a product or service that they can sell for a profit. They may or may not be additionally interested in employing particular individuals, or contributing to the community in which they reside. But those things can’t be their main purpose, because if they don’t make a product or service they can sell for a profit, then they can’t contribute in those other ways, regardless of intentions.
If the corporate tax rates are too high in one place, the corporation will go do business where the tax isn’t so punishing. They’ll go to a place where they can best meet their purpose of making a product they can sell for a profit. Their market is worldwide. As far as they’re concerned their employment base is also worldwide. If employees are too expensive in one place, they’ll hire people who can do the job with adequate quality at a rate that better allows for profit. If the tax is too high to do business in one location, they’ll go do business in another location.
The corporation isn’t thinking of this as outsourcing; the corporation is thinking about the best way to meet its purpose—just as you thought about going wherever you needed to for you children’s education. Going where taxes are lower and employees are more affordable isn’t a matter of lack of loyalty; it’s a matter of sensibly doing business.
When a government assumes it is against the rules for a business to move elsewhere rather than suffer confiscation of its profits, that government isn’t being sensible. If you tax businesses higher rates, you will be left with only those businesses that are least able to escape—just as a failing school system would be left with the students whose parents are least mobile and flexible.
A piece in Harvard Business Review this week, called “A Better Way to Tax US Businesses,” by Mihir A. Desai, discusses business tax reform and what good reform would entail. It’s more complex than I can summarize here, but even without being an economist, I can understand that, if you make it more expensive to do business in one place, those who can do business elsewhere will go do that. Here are a couple of paragraphs that give the essence of the article:
The worst of all worlds—high rates and a narrow base. In 1986, the year of the last significant tax reform, the U.S. corporate tax rate was lower than that of most developed countries. Today the top U.S. corporate rate of 35% is one of the world’s highest. During the intervening years, America’s global economic importance decreased—a sometimes unsettling artifact of welcome growth in the developing world. As the importance of doing business in the United States has shrunk, the relative cost has risen rapidly.
Because capital is mobile, high tax rates divert investment away from the U.S. corporate sector and toward housing, noncorporate business sectors, and foreign countries. American workers need that capital to become more productive. When it’s invested elsewhere, real wages decline, and if product prices are set globally, there is no place for the corporate tax to land but straight on the back of the least-mobile factor in this setting: the American worker. The flow of capital out of the United States only accelerates as opportunities in the rest of the world increase. This is the key to understanding why, despite political rhetoric to the contrary, reforming the corporate tax is central to improving the position of the American worker.
His point that the way to benefit the American worker is to reform corporate tax is significant. The very ones who say, “Those evil corporations; they’re giving our jobs to foreign workers, and taking our taxes offshore,” are the very ones making it necessary for those corporations to do their global business elsewhere.
Where the federal-caused problem can be mitigated, mobilization happens between states. Where tax rates and other factors set up a business-friendly environment, unemployment is lower and the economy as a whole benefits. That’s why so many businesses leave states like California and move to states like Texas. The evidence is there to prove the theory at the interstate level. Now we need to change federal policy to make the US again the place to do business.