Hostess Brands: A Case Study in Government Burdens and Global (Un)competitiveness

As most people know by now, Hostess Brands  -  the maker of such American junk food staples as Twinkies, Ding Dongs and Wonderbread - announced last week that it had failed to come to terms with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and its 5000 striking members, and thus would enter Chapter 11 bankruptcy to unwind the company, sell off its assets and eliminate 18,500 US jobs.  The latest news is that Hostess and the union have agreed to enter into mediation in an attempt to prevent the company's dissolution, but Hostess Brands' story remains a very useful example of how government regulations can impose huge costs on US businesses and either drive them offshore or out of business entirely.

Last week, I focused on how the United States' unreasonably high corporate taxes can hinder American companies' global competitiveness, and Hostess Brands' monthly operating report (required for bankruptcy proceedings) shows at page 15 that the beleaguered company was/is responsible for not only state, local and federal corporate income taxes, but also millions of dollars in other taxes, including (i) Federal Insurance Contributions Act (FICA); (ii) Federal Unemployment Tax (FUTA);(iii) State/Local Unemployment Tax (SUTA); (iv) State/Local Business Licenses; (v) State/Local Sales Taxes; (vi) State/Local Use Taxes; (vii) State/Local Mileage Taxes; (viii) State/Local Real Property Taxes; (ix) State/Local Personal Property Taxes; (x) State/Local Vehicle Personal Property Tax; (xi) State/Local Accrued Franchise Taxes; and (xii) State/Local Accrued Operating Taxes.

Gee, is that all?

Of course, taxes aren't the only thing that can kill a company's bottom line - regulations hurt too, and as Henry Miller notes in a recent op-ed, they're getting increasingly worse:

Stultifying, job-killing regulation has been a hallmark of the Obama administration. An analysis by Susan Dudley, director of the George Washington University Regulatory Studies Center, reveals that with respect to "economically significant" regulations, defined as impacts of $100 million or more per year, Obama has been an outlier. While Presidents George H.W. Bush, Bill Clinton and George W. Bush "each published an average of 45 major rules a year ... the outliers are Reagan, who issued, on average, a mere 23 major regulations per year; and Obama, who has published 54 per year on average, so far."

And there are many more in the pipeline: According to Dudley, fully a third of the final major rules with private-sector impacts have been postponed. And the government's spring 2012 "Unified Agenda of Federal Regulatory and Deregulatory Actions," which provides a preview of and transparency with respect to agency and OMB planning for the coming year, still has not been published.

In the case of Hostess Brands, the most obviously relevant regulations are those laws which permit or favor "closed shop" rules that force workers to join a union and pay dues (as opposed to states with Right-to-Work laws that prohibit closed shops).  It's difficult to quantify the costs that such closed rules impose on businesses and workers, but a recent examination of US job creation demonstrates that they could be significant (h/t Mark Perry):

Since the recession ended in June 2009, almost three out of every four jobs added to U.S. payrolls have been in Right to Work states (1.86 million out of 2.59 million), even though those 22 states represent only 38.8% of the U.S. population (120 million). In contrast, only about one of every four new jobs were created in forced-unionism states (730,000), even though more than 61% of Americans live in those 28 states (189 million). Relative to their population, the Right to Work states have been job-creating powerhouses during the recovery, and forced union states haven’t even come close to “carrying their weight” in terms of their share of the population. Adjusting for differences in population, Right to Work states created four new jobs for every one job added in forced union states, because those 21 RTW states created 2.54 times more jobs even though forced union states have 1.6 times as many people. 

Hostess Brands' problems provide anecdotal support for the above data on right-to-work versus closed shop states.  According to the press release announcing Hostess' bankruptcy, existing union arrangements had crippled the ability to continue its business operations:

The [union] in September rejected a last, best and final offer from Hostess Brands designed to lower costs so that the Company could attract new financing and emerge from Chapter 11. Hostess Brands then received Court authority on Oct. 3 to unilaterally impose changes to the BCTGM’s collective bargaining agreements.

Hostess Brands is unprofitable under its current cost structure, much of which is determined by union wages and pension costs. The offer to the BCTGM included wage, benefit and work rule concessions but also gave Hostess Brands’ 12 unions a 25 percent ownership stake in the company, representation on its Board of Directors and $100 million in reorganized Hostess Brands’ debt.

These views find further support in several news reports which indicate that Hostess Brands' bankruptcy will likely attract several bidders for iconic labels like Twinkies because the new owners won't have to deal with existing union obligations:

Daren Metropoulos, a principal of the Greenwich, Connecticut-based private equity firm, said of Hostess in an e-mail yesterday that ``shedding the complications of the unions and old plants makes it even more attractive.”

Tom Becker, a spokesman for Hostess, declined to comment on potential asset bids. While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, Chief Executive Officer Gregory F. Rayburn said yesterday.

In short, the company is only an attractive investment without the unions.  Shocking, I know.

Unfortunately, even if Hostess Brands resolves the current union impasse through mediation, onerous labor regulations and obligations aren't the only thing raising the company's costs and hindering its competitiveness.  In fact, US sugar protectionism is also putting a serious crimp in the company's (and other American bakers' and confectioners') bottom line:

Since 1934, Congress has supported tariffs that benefit primarily a few handful of powerful Florida families while forcing US confectioners to pay nearly twice the global market price for sugar.

One telling event: When Hostess had to cut costs to stay in business, it picked unions, not the sugar lobby, to fight.

“These large sugar growers ... are a notoriously powerful lobbying interest in Washington,” writes Chris Edwards of the Cato Institute in a 2007 report. “Federal supply restrictions have given them monopoly power, and they protect that power by becoming important supporters of presidents, governors, and many members of Congress.”

Such power has been good for business in the important swing state of Florida, but it has punished manufacturers who rely on sugar in other parts of the United States, the Commerce Department said in a 2006 report on the impact of sugar prices.

Sugar trade tariffs are “a classic case of protectionism, pure and simple, and that has ripple effects through other sectors of the economy, and, for all I know, the Hostess decision is one of them,” says William Galston, a senior fellow at the Brookings Institution in Washington....

[Congressional] refusal to address tariffs that neither support infant industries nor provide national security has come despite damning reports from the Commerce Department about the impact on US jobs, including the fact that for every sugar job saved by tariffs, three confectionery manufacturing jobs are lost.

Some of those job losses came when candy companies like Fannie May and Brach’s moved the bulk of their manufacturing to Mexico and Kraft relocated a 600-worker Life Savers factory from Michigan to Canada, in order to pay global market prices for sugar.

The impending mass layoffs from 33 Hostess plants scattered around the US, economists say, might force Washington to take a more serious look at how public policy affects the ability of corporations to make money – especially in an economy where even iconic brands like Twinkies and Wonder bread aren’t safe.

“I think there are policy implications here,” says Mr. Edwards, an economist at the conservative Cato Institute. “The Department of Commerce, the Obama administration, and [Congress] need to look at Hostess as a case study: Why did this company have to go bankrupt? Why were its costs higher than it could afford? Are there regulatory issues with import barriers on sugar or unionization rules that we need to look at and change? We’ve got to understand why manufacturing in a lot of cases doesn’t seem to be profitable anymore.”

Unfortunately, congressional repeal of US sugar subsidies and protectionism doesn't look to be happening anytime soon; for example, the Senate in June voted 50-46 to maintain the sugar program in the new Farm Bill.  Thus, even if mediation saves Hostess Brands in the short term, American sugar protectionism, as well as other onerous US regulations and taxes, could still prevent the company from regaining profitability and competing at home and abroad over the long term.  As a result, Hostess - or a buyer of its most famous brands - could end up following many other US manufacturers facing competitiveness-crippling taxes and regulations:

[A]nother possible bidder hints at the future of Twinkies and maybe the US bakery business as a whole: Mexico’s Grupo Bimbo, the world’s largest bread baking firm, which already owns parts of Sara Lee, Entenmann’s and Thomas English Muffins.

Bimbo has already sniffed around the bankruptcy proceedings that have haunted Hostess for a decade, in a bid to further expand its North American portfolio and pad its $4 billion net worth. Bimbo reportedly put in a low-ball bid of $580 million a few years ago, Forbes reports, and may be rewarded for that move since the Hostess kit-and-kaboodle may fetch more like $135 million today.

But the big question is whether the same problems that haunted Hostess – high sugar prices tied to US trade tariffs, changing consumer tastes, and union pushback against labor concessions – will squeeze whatever profit is left in the brands.

Especially if a Mexican buyer is involved, production may go the way of the Brach’s and Fannie May candy concerns: south of the border. With US sugar tariffs set artificially high to protect Florida sugar-growing concerns, a non-unionized shop with access to lower-priced sugar in Mexico could be the Twinkie lifeline, economists suggest.

If Hostess or its new owners move offshore in order to avoid onerous sugar tariffs and other US regulations/taxes, Twinkies might indeed get that lifeline.  Unfortunately, the thousands of Americans who used to make them won't be so lucky.

Global Competitiveness, Ctd.

Two very timely updates since last night's post on US corporate taxes and global competitiveness:

• Cause. First, the National Federation of Independent Business, the main trade association for small businesses in the United States, highlights other aspects of the Ernst and Young study that I mentioned last night: "New data released today by Ernst and Young shows tax increases shows that allowing the top two tax rates to increase, as has been proposed by President Obama and many Members of Congress, would greatly impact small businesses. The preliminary results of the study show business owners paying the top two rates account for: 72 percent of all S corporation income; 61 percent of all partnership income; and 13 percent of all sole proprietorship income. Subchapter S corporations, partnerships, LLCs, and sole proprietorships are all considered "pass-through' businesses for tax purposes, in which business income is taxed at the individual rates. NFIB research shows three-quarters of small businesses are organized in such a manner. In addition to this week's Ernst and Young data, the Congressional Joint Committee on Taxation recently published research that estimates around 53 percent of business income would be impacted allowing tax relief to expire on the top two individual brackets, impacting an estimated 940,000 who earn business income.  

• Effect.  Second, we see the real world effects of the US government's inability to reform its painful, arcane tax and regulatory policies: "Cisco CEO John Chambers says there’s one place in the world where doing business is easy – and it’s not the U.S.  Canada, he told analysts during a Tuesday conference call, is “the easiest place to do business." "It doesn’t matter which party is in power, even in their provinces, i.e. their states... leaders in Ottawa get it,” he said. “They drive down through and make it very easy to do business there. You’re going to see us grow our business there as well as invest overall."   In case you've forgotten, Canada has repeatedly lowered its corporate tax rate over the last several years, and it now stands at 15% - a full 20 percentage points lower than the federal statutory corporate tax rate in the United States.  Oof.

So What Now? (Global Competitiveness Edition) [UPDATED]

In the coming weeks, I'm going to look ahead to the next few years of US international economic policy and examine (i) what the United States should emphasize; and (ii) whether I think the Obama administration will do so.  This series will cover a wide range of subjects, including things like trade agreements; unilateral trade liberalization; regulatory protectionism; energy; and subsidies policy.  Tonight's first installment, however, will focus on something I briefly discussed last week: how federal policies, particularly those related to business taxes and regulations, affect US companies' global competitiveness.  This subject seems particularly timely, given that US tax policy is dominating the current "fiscal cliff" negotiations in Washington, and that the future of the struggling US economy will depend, at least in part, on whether American businesses can compete in the global economy.  (And, as I've repeatedly explained here, outsourcing and protectionism would be far less common political themes if US companies became more globally-competitive due to lighter government tax and regulatory burdens.)

Unfortunately, in terms of business-friendly policies and global competitiveness, things aren't too good for the United States right now:

As I detailed in July, the United States has declined - in some cases significantly - in every independent study of global economic strength and competitiveness since President Obama took office.  These studies reflect a failure by the Obama administration to implement tax, trade and regulatory policies that could help US businesses and workers compete and prosper in the global economy.  Since July, the World Economic Forum's latest Global Competitiveness Index has dropped the United States another two places (now 7th, from 2nd in 2009, 4th in 2010 and 5th last year); respondents' top three problems with the US economy are inefficient government bureaucracy, tax rates and tax regulations - all things that the Obama administration could've addressed (especially when Democrats had total control of the US government in 2009-2010) but instead completely ignored.  The United States also has dropped from 10th to 12th in the Legatum Institute's Prosperity Index, with the US economy a mediocre 20th overall.  This is not good at all.

Not good, indeed.  Unmentioned in my note above is the World Bank's latest Doing Business survey which came out a few weeks ago and measures a wide range of regulatory policies in order to determine which countries are the best places to - unsurprisingly - do business.  While the United States remains fourth overall in the report, a closer look at the World Bank rankings shows a decline in seven of ten categories and no change in the other three:

TOPIC RANKINGS	DB 2013 Rank	DB 2012 Rank	Change in Rank
Starting a Business	13	12	-1
Dealing with Construction Permits	17	16	-1
Getting Electricity	19	19	No change
Registering Property	25	15	-10
Getting Credit	4	4	No change
Protecting Investors	6	6	No change
Paying Taxes	69	65	-4
Trading Across Borders	22	21	-1
Enforcing Contracts	6	4	-2
Resolving Insolvency	16	15	-1

As you can see, by far the worst area for the United States is tax policy, where the United States ranks a depressing 69th overall, down four spots from last year.  A breakdown of this ranking shows that the United States struggles not only with respect to total corporate tax rate (46.7%, well above the OECD average), but also in terms of tax complexity (taking a mind-boggling 175 hours - over four workweeks! - for the average New York business to prepare and file its taxes).

Adding fuel to this fire is AEI's Jim Pethokoukis, who today notes a new report from Ernst & Young on US business tax policy, including taxes on corporate income and investment (i.e., dividends and capital gains).  And things are gonna get much, much worse next year if the fiscal cliff talks fail:

- Taking into account both the corporate and investor level taxes on corporate profits and state level taxes, the United States has among the highest integrated tax rates among developed countries and these integrated tax rates will rise sharply in 2013:

- The current top US integrated dividend tax rate of 50.8 percent will rise to 68.6 percent in 2013, significantly higher than in all other OECD and BRIC countries.

- The current top US integrated capital gains tax rate of 50.8 percent will rise to 56.7 percent in 2013, the second highest among OECD and BRIC countries.

Pethokoukis next clips the section of the E&Y report which explains why these taxes are such a bad thing for economic growth and business competitiveness (and why most countries keep them relatively low):

Most developed countries provide relief from the double tax on corporate profits because it distorts important economic decisions that waste economic resources and adversely affect economic performance:

– It discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards.

– It favors debt over equity financing, which may result in greater reliance on debt financing and leave certain sectors and companies more at risk during periods of economic weakness.

– A tax policy that discourages the payment of dividends can impact corporate governance as investors’ decisions about how to allocate capital are disrupted by the absence of signals dividend payments would normally provide.

Given these facts, it's really no surprise that tax policy remains one of the biggest areas of concern American business owners and managers who are struggling to compete against companies that reside in more accommodating countries (e.g., the 68 countries that rank better in the World Bank's "paying taxes" list and all of those to the left of the United States in the E&Y charts above).  And it all begs the question: what does President Obama intend to do about this problem?

Well, as you may recall, the President did release a tax reform plan last February that would lower the statutory federal corporate tax rate from 35 percent to 28 percent (32% with state taxes included), but that plan has gone nowhere and, beyond a glancing debate reference or two, hasn't been discussed in months.  And as I mention above, Obama didn't touch the issue during his first three years, even in 2009-10 when he and his party had total control of the US government.  So it's really anyone's guess as to whether the President intends to pursue corporate tax reform now that the election's over and he no longer needs the talking point.

Moreover, simply lowering the statutory rate a few points wouldn't really solve the tax problem that American companies now face.  First, as Cato's Dan Mitchell explains, 28 percent is still well above the rates of most industrialized countries in the world, and Obama's plan actually increases the tax burden on certain types of common corporate activity.

Second, as Pethokoukis notes, the plan also--

would leave the integrated capital gains rate more or less unchanged and the dividend rate sharply higher. As E&Y point out, a) the top federal income tax rate on dividends will increase from its current level of 15 percent to 39.6 percent in 2013; b ) the top federal income tax rate on long-term capital gains will rise from its current level of 15 percent to 20 percent in 2013; c) For many taxpayers, both dividends and capital gains will also become subject to the additional 3.8 percent Medicare tax in 2013 due to changes under the Affordable Care Act of 2010.

Finally, I'd add that it's highly unlikely that the President would significantly reform the tax code's troubling complexity by, for example, eliminating the hundreds of tax breaks (aka "subsidies") for certain types of manufacturing and green energy production.  Indeed, Obama's "old" corporate tax plan celebrates and expands these types of subsidies (more on that here).

(There's also the little problem of the fact that the vast majority of American businesses pay under the individual rates, which the President wants to raise.  But since we're talking corporate tax reform, we'll leave that little issue for another time.)

Add all of this up, and it seems highly unlikely that the United States will be surging in the global competitiveness rankings anytime soon due to serious reforms of our corporate/investment tax system or any other business regulations.  I'd be thrilled to be proven wrong next year, but I'm certainly not holding my breath.

UPDATE:  This just in:

President Barack Obama will begin budget negotiations with congressional leaders Friday by calling for $1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.

Mr. Obama, in a meeting Tuesday with union leaders and other liberal activists, also pledged to hang tough in seeking tax increases on wealthy Americans....

The president's opening gambit, based on his 2013 budget proposal, signals Mr. Obama's intent to press his advantage on the heels of his re-election last week.

In case you're wondering, the President's 2013 Budget paid lip-service to corporate tax reform (at p. 38) but provided no actual details.

Will Green Subsidies Be Part of a "Fiscal Cliff" Deal?

In order to avoid the political spotlight, Congress and the President have punted on all sorts of tax and spending issues until after the November elections.  The primary issue to be addressed during the short post-election legislative session is the "fiscal cliff" - an onslaught of automatic tax hikes and spending cuts that will occur on January 1, 2013 - but there are also a lot of other matters that were shelved due to political cowardice expediency.  Among them are several green subsidy programs, including a one-year extension of the wind energy production tax credit and its $12 billion price tag.  Given the many problems with US green energy subsidies, the best move would be to let this boondoggle and its brethren expire at the end of the year, but - fear not! - it ain't gonna be that easy.  In fact, BNA reports that the PTC and other green subsidies could very well end up in the fiscal cliff deal:

Legislation that would extend the wind energy production tax credit and other expiring energy incentives may be included as part of a congressional deal to avert looming tax increases and budget cuts expected by year's end, a Senate Finance Committee staffer said Oct. 17.

Ryan Abraham, a Democratic committee aide, said he is optimistic the tax credit measure (S. 3521) will be incorporated into efforts during the lame-duck congressional session to blunt the effects of the “fiscal cliff” when tax hikes and automatic spending cuts go into effect in January (see related story in this issue)....

More than $18 billion in energy-related tax incentives would be extended under S. 3521, the Family and Business Tax Cut Certainty Act of 2012, approved Aug. 2 by the Senate Finance Committee.

The majority of that spending—$12.1 billion—would fund a one-year extension of the wind energy industry's 2.2 cent per kilowatt-hour production tax credit as well as pay for a change that allows wind projects that are under construction by the end of 2013 to be eligible....

Other energy tax incentives that would be extended in the legislation include a production tax credit for other renewable energy projects, credits for energy-efficient homes and appliances, and tax incentives for cellulosic biofuel and other alternative fuels....

In addition to securing the bill in a deal to avert the fiscal cliff, Abraham said “we'll fight hard” to make sure “something that will be helpful to renewable energy,” such as tax extenders of longer duration, would be included in a longer-term budget deal that could address tax reform.

Granted, Mr. Abraham speaks only for Senate Democrats and was speaking to a room of anxious people dependent on these subsidies, so a bit of skepticism is in order here.  Then again, the Finance Committee approved the Christmas tree that contains all of these green presents with strong bipartisan support (a vote of 19-5), so it's not like there will be strong resistance in the Senate to this bill.  And do we really expect House Republicans - many of whom love green subsidies too - to stand firm when everyone starts FREAKING OUT about the oncoming fiscal cliff?  Oh, and let's not forget that we'll also have to deal with the pork-laden Farm Bill during the post-election legislative session, so it's really anyone's guess as to what gets thrown into a bipartisan deal to avert "fiscal disaster" on January 1.

In short: gird yourselves, folks.  This is going to get really, really ugly, no matter who wins in November.

I need a drink just thinking about it.

American Subsidy Madness, Ctd. (UPDATED)

A couple weeks ago, I lamented the hundred billion dollars in annual business subsidies that the US government doles out every year.  Today from Cato's Thomas Firey comes another eye-opening - and sigh-worthy - stat about the United States' addiction to spending: the 2.4 trillion - with a "T" - dollars in borrowed money that the US government has spent on "stimulus" measures since 2008:

[The Stimulus] was just one of several fiscal stimulus bills that Washington adopted, beginning with the February 2008 Economic Stimulus Act and continuing through to early this year. Some of those bills were explicit stimulus measures; others were ostensibly intended to address other policy goals, but were engineered to provide fiscal stimulus by borrowing and spending money now, and then using future government revenues to pay off that borrowing (perhaps when God grants St. Augustine chastity and continence)...

#	Name	Stimulus (Billions)	Became Law	Public Law	Note
1.0	Economic Stimulus Act of 2008	$167	2/13/2008	110-185	A ”timely, targeted, and temporary fiscal stimulus.”
1.0.1	Unemployment Compensation Extension Act of 2008	$5.7	11/21/2008	110-449	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.0	American Recovery and Reinvestment Act of 2009	$819	2/17/2009	111-16	This package of public works projects, tax breaks, unemployment insurance extension, and other spending would keep unemployment below 8%.
2.0.1	Cash for Clunkers Extension	$2	8/7/2009	111-47	Continues the subsidy for new car purchases that was first enacted as part of ARRA.
2.1	Worker, Homeownership and Business Assistance Act of 2009	$44.7	11/6/2009	111-92	Extends and expands the homebuyer tax credit program.
2.2	Temporary Extension Act of 2010	$8.1	3/2/2010	111-144	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.3	Hiring Incentives to Restore Employment Act	$17.6	3/18/2010	111-147	AKA the “Jobs for Main Street Act,” this “jobs bill” would ”spur job growth and strengthen the private sector.”
2.4	Continuing Extension Act of 2010	$18.1	4/15/2010	111-157	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.5	Homebuyer Assistance and Improvement Act of 2010	$145	7/2/2010	111-198	Extends the deadline for submitting paperwork for homebuyer credit.
2.6	Unemployment Compensation Extension Act of 2010	$33.9	7/22/2010	111-205	Extends unemployment insurance, using borrowed funds so as to provide stimulus.
2.6.1	United States Manufacturing Enhancement Act of 2010	$3	8/11/2010	111-227	Reduces or suspends various import duties.
2.7	Small Business Jobs Act of 2010	$85.4	9/27/2010	111-240	Expands SBA loan programs and provides other small business assistance.
3.0	Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010	$916.8	12/17/2010	111-312	A package of tax breaks, including a cut in the Social Security payroll tax, an extension of the Bush income tax rates, and an extension of unemployment insurance.
3.1	Temporary Payroll Tax Cut Continuation Act of 2011	N/A	12/23/2011	112-78	Extends the Social Security payroll tax cut, extends unemployment insurance, and other provisions.
4.0	Middle Class Tax Relief and Job Creation Act of 2012	$167.6	2/22/2012	112-96	Extends the Social Security payroll tax cut, among other provisions.
SUM:		$2,433.9

That is a truly breathtaking figure - even for someone like me who tracks this stuff pretty closely and has thus become pretty numb to crazy US budget figures.  And this, of course, is on top of the myriad "regular" subsidies (e.g., the billions of taxpayer dollars spent yearly on federal government support for agriculture) that are part of the annual US budget.  It all leaves me with one simple question:

When exactly is this government "stimulation" supposed to pay off?

UPDATE: And just so we're totally clear here, Cato's Tad DeHaven helpfully reminds us today that America's subsidy addiction is a bipartisan affliction:

Last week, the House Energy and Commerce Committee passed the “No More Solyndras Act.” As Taxpayers for Common Sense notes, however, the bill should probably be called the “More Solyndras Act” because it would still allow the Department of Energy to approve loan guarantee applications that were submitted by Dec. 31, 2011....

Sensing an opportunity to embarrass Republicans, Rep. Ed Markey (D-MA) offered an amendment that would have completely ended the Title 17 loan guarantee program. Most of the committee’s Republicans promptly embarrassed themselves by joining all Democrats in voting down the amendment 3-39. Republicans Mike Pompeo (Kansas), Michael Burgess (Texas), and Steve Scalise (Louisiana) were the only members to vote to abolish the program.

This isn’t the first time that Republicans have joined Democrats to save the program. Back in June, an amendment that would have shut down the Title 17 loan guarantee program failed 136-282 with 127 Republicans joining 155 Democrats to defeat it. Only 54 percent of freshmen Republicans from the so-called “Tea Party Class” supported the amendment.

Sigh.

More on Our Horribly Burdensome Business Tax System

A few days ago, I examined how America's byzantine tax code retards domestic job creation by imposing immense burdens on US businesses (particularly relative to other countries), and how the recent proposals of President Obama and congressional Democrats to extend several temporary, targeted tax breaks would do nothing to solve these problems.  On the latter point, I noted that such tax measures--

don't improve America's business climate because (i) prohibit long-term business planning; (ii) increase tax complexity (which disproportionately hurts small businesses that can't afford armies of lawyers and accountants); and (iii) encourage system-gaming and outright fraud, while discouraging business growth (i.e., small businesses becoming larger businesses and thus outgrowing their eligibility for the tax breaks).

Today comes an excellent new story from the Wall Street Journal that provides tons of statistical and anecdotal support for my (admittedly unoriginal) conclusions and shows just how badly our elected officials have failed in reforming the US tax code and creating a business climate that is ripe for job creation.  The entire article is well worth your time, but here are the highlights:

Both [parties] agree the code's complexity is unfair: While small and medium-size companies such as Raine forgo the headaches and the tax savings, bigger companies can more easily afford the specialized accountants and lawyers needed to claim the best breaks and gain a cost advantage...

Complexity is costly. Compliance costs for U.S. businesses and individuals have been rising, and now reach at least 1% of GDP, or about $150 billion last year, and possibly much more, according to congressional researchers.

The Byzantine nature of the tax code also adds to concerns about U.S. competitiveness in a global economy in which many other countries have eased tax rates and rules in recent years....

Tax consultants estimate that eligible businesses obtain as little as 5% of the main domestic tax breaks that they are entitled to claim. That means firms are leaving tens of billions of dollars on the table every year. Out of 1.78 million corporate tax returns in the U.S., only about 20,000 claimed any of the three dozen main business tax credits in the code, according to IRS estimates.

One example of the tough-to-take breaks is the federal Work Opportunity credit. It was designed to reward companies for hiring workers from several disadvantaged groups, including welfare and food stamp recipients, youths seeking summer jobs and ex-felons. The break typically lowers a company's taxes by up to $2,400 per employee. For businesses hiring unemployed veterans, it can be worth as much as $9,600 per worker.

The credit frequently goes unclaimed, largely because it is such a hassle. It requires extensive paperwork for each worker for whom it is claimed and the paperwork can often take a year or more to process. Sarah Hamersma, a University of Florida professor, estimates that companies claim the credit for just 20% to 35% of all eligible workers....

In the latest global rankings of national tax systems by the World Bank and PricewaterhouseCoopers, the U.S. came in 142nd out of 183 countries for the time it takes a hypothetical small manufacturer to calculate its corporate income tax (the higher the rank, the more time it takes)....

The tax thicket has been growing for years. In 1987, there were 128 major tax breaks for both individuals and companies, of which about 100 survive now. Another 100 or so have been created since then.

Many tax breaks, including the Work Opportunity credit, have recently expired but tax experts expect Congress to renew them retroactively by the end of the year, as it has in the past. Meantime, companies are unsure whether they can plan on it.

Another targeted break, the tax deduction for energy-efficient buildings, often requires computer modeling costing as much as $50,000. That leaves business owners weighing whether the credit is worth the expense....

One reason government officials favor the breaks is that they are a politically expedient way to pursue policy goals—and potentially less trouble than a fundamental easing of business tax rates and rules. Because of political pressure to hold down budget deficits, U.S. lawmakers often design tax breaks in ways intended to narrow the number of beneficiaries.

"The more complicated it is…the more [businesses] are going to say it's not worth the candle" to apply, said Dean Zerbe, a former Senate staffer who is now national managing director of alliantgroup, a tax consulting firm.

Because of low subscription rates for many tax breaks, a cottage industry of tax-credit consultants such as alliantgroup has sprung up. Fees tend to range from 15% to 30% of savings, according to consultants, but can be lower for large deals and occasionally higher.

But even with the availability of outside help, many businesses hesitate....

A tax credit that Congress enacted in 2010—for small businesses providing health-care coverage—was claimed by only about 170,300 employers, out of an eligible pool of between 1.4 million and four million businesses, according to the Government Accountability Office.

"The calculation was ridiculous," says Barbara Webber, property manager for Presidential Estates in Quincy, Mass., an owner of apartment complexes. Despite an accounting background, she said, "I struggled with it." In the end, she says, she didn't qualify due to IRS wage restrictions....

While many companies say it is too complicated to claim tax breaks, the ones who try can find themselves embroiled in complex disputes with the Internal Revenue Service.

One source of increasing contention is the federal research credit. Critics say the IRS sometimes demands more documentation than the rules require, and more than most corporate accounting systems can readily provide, in part because of overly aggressive claims by some firms in the 1990s. The result is sometimes lengthy litigation.

Bayer Corp., the U.S. unit of Germany's Bayer AG, BAYN 0.00% finds itself in just such a morass. In a dispute playing out in federal court in Pittsburgh, the IRS has disallowed 17 years worth of Bayer Corp.'s claims for the research credit—$175 million in all—on the grounds that Bayer hasn't adequately documented its expenditures or tied them to specific innovations.

Bayer said in court that it has provided adequate documentation and has gone to great lengths to gather the extra documentation that the government is demanding, but that it will take many years to fully comply with the IRS demand.

The dispute dates back to 1998. As it drags on, company officials worry it is leading their German parent to look elsewhere to conduct new research projects at a time when global competition for research and development, or R&D, dollars is heating up, according to court testimony....

Just a reminder: according the aforementioned World Bank study (also mentioned in my earlier blog post) the United States ranks 72nd in the world in terms of total business tax burden - two spots worse than last year.  And when the President and his party had total control of the US government in 2009 and 2010, they did absolutely nothing to reform the tax code and instead increased tax complexity and imposed new taxes via Obamacare.  Thus, it appears that the only jobs created by the Democrats' tax policies are for tax lawyers and consultants - not exactly an efficient use of finite resources (no offense, tax lawyers).

And yet we're talking about Bain Capital pushing US companies and jobs offshore?  Really?

Just Who's the Real Outsourcer-in-Chief? (UPDATED)

Over the last few weeks, the Obama and Romney campaigns have waged a massive multimedia war over who is the biggest "outsourcer."  Perhaps unsurprisingly, the majority of this political debate is depressingly nonsensical - each side accusing the other of supporting supposedly-awful policies that "ship American jobs overseas" without ever acknowledging the fundamental and repeatedly-proven economic and moral truths about outsourcing and offshoring in America.  I will not waste your time repeating those truths tonight (you can go here and spend a few days reading up, if you'd like) and instead want to look at one aspect of this debate that's been mostly overlooked but, unlike the pablum referenced above, actually does affect private companies' decisions to move certain business activities offshore: whether the economic policies of President Obama and his fellow Democrats have made the United States a more or less attractive place to do business, relative to other countries.

The Washington Examiner's Conn Carroll today picks up on this important point in a great new article.  After warning against wallowing in protectionist ignorance about outsourcing, Carroll notes:

Romney should make the case that Obama ships jobs overseas not just with clumsy green energy investments, but by keeping the U.S. corporate tax rate as the highest rate in the world. His impending Environmental Protection Agency global warming regulations are not helping either. Neither is Obama’s impending tax hike, which is more than double the size of President Clinton’s 1993 tax hike.

This is exactly right, and it's something I'd like to expand upon tonight.  Whether Obama's policies have increased the cost of doing business in the United States is far more important than, for example, whether Bain Capital helped a few companies outsource certain business operations to other countries or whether some stimulus dollars were spent in foreign countries, because such policies actually can encourage - or even force - businesses to locate certain operations and jobs in more hospitable jurisdictions.  And, unlike biased, misinformed pieces from supposedly unbiased newspapers or the campaigns themselves, there are actually two independent, annual studies - one from the World Bank and the other from the World Economic Forum - that measure the relative burdens of business regulations on job creators in pretty much every country in the world.

The evidence from these two reports is abundantly clear: since President Obama and congressional Democrats took charge in 2009, the United States has become an increasingly hostile business environment.  The US government has increased a wide range of tax and regulatory burdens, thereby causing the United States to decline relative to other countries in terms of its ability to attract and retain companies and jobs.  Thus, it appears that President Obama, not Governor Romney, more aptly deserves the title of "outsourcer-in-chief."

That's a pretty significant accusation, so let's dig into the studies.  First up is the World Economic Forum's Global Competitiveness Index, which describes itself as follows:

The GCI comprises 12 categories – the pillars of competitiveness – which together provide a comprehensive picture of a country’s competitiveness landscape. The pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.  The rankings are calculated from both publicly available data and the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum with its network of Partner Institutes. This year, over 14,000 business leaders were polled in a record 142 economies. The survey is designed to capture a broad range of factors affecting an economy’s business climate.

The latest GCI is a depressing read for the United States.  It finds that America's overall global "competitiveness landscape" dropped from 2nd in 2009-10 (reflecting policies from the previous year), to 4th in 2010-11 to 5th this year.  According to the country fact sheet accompanying the latest GCI (emphasis mine):

The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive. 

On the other hand, there are some weaknesses in particular areas that have deepened since past assessments.  The business community continues to be critical toward public and private institutions (39th). In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th). A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar.

In short, the US government's dramatic and widespread fiscal mismanagement and heightened regulatory burdens have caused a significant drop in America's business environment, and only certain systemic, non-governmental factors prevent us from falling even further.  Moreover, according to the surveyed CEOs, four of the top five "most problematic factors for doing business" in the United States are directly related to the government's fiscal policy: Tax rates (14.8% of respondents); Inefficient government bureaucracy (13.2%); Tax regulations (10.9%); and Inflation (9.8%).  (Access to financing (12.9%) was the other major concern.)

Unfortunately, the World Bank's Doing Business Report tells a similar story.  I described the Report's methodology in an earlier blog post as follows:

[The Report] ranks 183 national economies on their ease of doing business based on an analysis of ten economic factors: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving Insolvency. As the Bank explains, "a high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm." In short, the higher a country is on the list, the better its business environment.

The World Bank Report only started doing relative rankings in 2011.  This year's version - which covers regulations measured from June 2010 through May 2011 - showed that the United States stayed steady in fourth place overall between 2009-10 and 2010-11 - President Obama's first two years in office.  However, the breakdown of the US score reveals that we dropped in five of the ten economic categories listed above, didn't improve in any category, and rank in the top ten globally in only three:

TOPIC RANKINGS	DB 2012 Rank	DB 2011 Rank	Change in Rank
Starting a Business	13	11	-2
Dealing with Construction Permits	17	17	No change
Getting Electricity	17	16	-1
Registering Property	16	11	-5
Getting Credit	4	4	No change
Protecting Investors	5	5	No change
Paying Taxes	72	70	-2
Trading Across Borders	20	20	No change
Enforcing Contracts	7	7	No change
Resolving Insolvency	15	14	-1

As with the World Bank, the things that the United States does well - enforcing contracts, getting credit and protecting investors - aren't really affected fiscal policies and instead relate to longstanding systemic and legal matters.  On the other hand, one issue that has been in the news a lot recently and most definitely is a fiscal policy matter is the United States' dismal, and dropping, 72nd place ranking in "paying taxes," which the Bank defines as "the taxes and mandatory contributions that a medium-size company must pay in a given year as well as... the administrative burden of paying taxes and contributions."  I explained at the time the ranking came out that--

Basically, US companies pay higher taxes - and have a more difficult time paying them - than 71 other countries. Such a tax burden has a crippling effect on American companies global competitiveness, and the World Bank study is further proof of just how desperately the current US tax system needs a fundamental overhaul.

As Carroll notes above, the United States now has the industrialized world's highest statutory corporate tax rate.  It also has one of the highest effective rates, and the complexity of our existing tax system further increases the immense burden on American businesses.  For example, according to the World Bank's breakdown, the average business located in New York City (the only city surveyed) makes 11 different tax payments, costing 187 hours of preparation time and a whopping 46.7% of its profits (over 25% in federal taxes).  Assuming a 40-hour workweek, this means that the typical New York businessman must dedicate a little under 5 weeks and almost half of his profits to meeting his annual tax obligations.

Yet when they had total control of the US government in 2009 and 2010, President Obama and Congressional Democrats did nothing to reform these long-term tax burdens and instead fought tooth and nail to increase them, most notably through the myriad new taxes in Obamacare.

And just this past week, the President and his fellow Democrats have sought to make things even worse by seeking to raise taxes on over 900,000 small businessmen who pay taxes at the individual level (while maintaining current rates for all others) and to pass short-term extensions of piecemeal tax breaks for certain small businesses.  The latter measures are intended to "help" small businesses but, as most economists will tell you, don't improve America's business climate because (i) prohibit long-term business planning; (ii) increase tax complexity (which disproportionately hurts small businesses that can't afford armies of lawyers and accountants); and (iii) encourage system-gaming and outright fraud, while discouraging business growth (i.e., small businesses becoming larger businesses and thus outgrowing their eligibility for the tax breaks).

We rank 72nd in the world – 72nd – in terms of total business tax burden, yet this is President Obama's latest plan?  But I digress...

As I've repeatedly explained here, a private company's decision to move certain business activities offshore is a complex determination of whether the total cost of doing business - including things like labor costs, transportation, and regulatory burdens - is higher in a foreign jurisdiction or in the United States.  When these costs become unbearable here, the company is faced with two choices: end the business activity or move offshore to a more hospitable environment.  Two detailed, independent and well-regarded studies show unequivocally that, over the last three years, the tax and other regulatory policies of President Obama and his fellow congressional Democrats have significantly increased the cost of doing business in the United States, thereby creating a job-killing riptide that pulls US companies offshore.  It's simply beyond the pale for them to now condemn any private company for going with the flow.

UPDATE 1:  In an amazing coincidence, Cato's Dan Ikenson this morning (Thurs) publishes an epic rant about this very same issue and, in the process, takes a fun jab at one of my favorite protectionist punching bags - the Economic Policy Institute.  I highly recommend you check Ikenson's article out.

UPDATE 2:  Also today, the Washington Post's wonkbook notes the publication of a new study on manufacturing offshoring in the United States.  Main conclusion:

[T]he researchers found that increasing offshore jobs by 1 percent is linked to a 1.72 percent increase in overall U.S. employment of native workers, though they describe the effect as neutral overall because the 0.72 percent difference is too small to be statistically significant. Offshoring also tends to push native U.S. workers toward more complex jobs, while offshore workers tend to specialize in less-skilled employment.

This, of course, is consistent with every other reputable study out there on the subject (sorry, EPI).  My only question: when will the wonkbook folks talk with their WaPo colleagues who ignorantly published this nonsense about the supposed harms of outsourcing?