We have spent a lot of time chastising companies that flee overseas in search of cheaper labor instead of working to reduce internal process waste. The myth that you must exploit cheap labor to be globally competitive is blown apart every day… we even wrote about one last week.
But now there’s an even more insidious reason being given, one that exploits the vagarities of corporate finance… coupled with a very real taxation issue.
Manufacturing conglomerate 3M Co. plans to move more of its operations to low-tax locations overseas in coming years as it attempts to reduce its overall tax rate. Chief Financial Officer Pat Campbell said the move is designed to help the St. Paul, Minn., maker of products ranging from transparent tape to stethoscopes achieve a tax rate of 30.5% by 2012, a reduction of about 2.5 percentage points. That would mean a $150 million to $200 million increase in 3M earnings.
The article goes on to state:
If 3M had said that it was moving plants abroad in search of lower wages, the story would have been on the front page, rather than buried in the back as a small notice. The lack of news coverage on international tax competition is odd, given the general concern about the health of the U.S. manufacturing industry.
Which is very true. If it was lower wages, we would have pounded on 3M for not understanding the true value of people, which transcends the simple cost of a pair of assembly hands. Likewise those against free trade would have cried for more tariffs and regulations.
But where is everyone when it comes to taxes? Being highly enlightened, we did mention it a few months ago and discussed the impact on many foreign countries. We also noted how virtually all other countries in the world, from highly capitalistic Singapore to the emerging markets of eastern Europe and even to the old welfare states like Sweden, are lowering tax rates. Even Hong Kong, the Chinese capitalist juggernaut that is helping plot the course for the mainland, just reduced individual and corporate tax rates. The one exception this trend: the U.S., where politicians are salivating over the prospect of increasing tax rates that are already higher than most of the world. Of course they’ll eventually realize, albeit too late, that increased taxes generally lead to reduced revenue.
There are analogous arguments to those we often make about the true value of labor. There is off balance sheet value in having suppliers nearby, high technology nearby, and a top notch transportation and information infrastructure. That’s what higher taxes are supposedly paying for.
But when other industrialized and emerging market countries are rapidly creating infrastructure of the same value, with lower taxes, how do you make the argument?