Local economy doesn’t need Corker’s foreign investment proposition

This four-minute video explains the marvel of mass production at Volkswagen’s Chattanooga plant.

Sen. Bob Corker has introduced a bill in the federal legislature to accomplish what on first sight appears a splendid thing: Foreign investment in the U.S.

The Global Investment in American Jobs Act of 2013 would direct the secretary of commerce to report to Congress how the U.S. can do more to attract “foreign direct investment.”

In Sen. Corker’s premise, it’s good to have foreign companies in Chattanooga, providing jobs, enlarging the pool of people who are employees. “Foreign direct investment can benefit the economy and workforce” in every state, the bill says. About 5.6 million people work for foreign companies “with compensation that is often higher than the national private sector average.”

Is that not gratifying? At first glance, yes. “Volkswagen, Nissan and Electrolux are a few examples of companies that have made significant, long-term investments in Tennessee,” Sen Corker says in a statement, “creating good-paying jobs for Tennesseans and fueling economic development. This bill will help give us the information we need so we can continue to attract more of these kinds of investments throughout the country.”

Exporting profit might not be enriching for city

Think for a moment what Chattanooga would be like if every business in the city were owned by foreigners. Jobs would be created for Chattanoogans. They would have a place to go daily, to work at their callings. Every two weeks they are paid by check or by direct deposit for their 80 hours of work in the period (overtime is paid time-and-a-half).

What are wages? Wages are payment for the value of the work they perform. Wages generally are not beyond the value of any particular worker; underpaid employees move on when they can. Wages under the legal artifice of employment never come wholly to the worker, for they are taxed as if they were profit. About a third of the amount of money a company pays to hire a worker is siphoned out of that relationship in taxes, including the 6 percent that is the “employer’s portion” of social security taxes. Wages are not profit, but are generally understood as if they were, with some expenses for living deducted, counted as not taxed.

Pretend for a moment a scenario in which every business in Chattanooga is owned by a foreign entity, a company outside Hamilton County. Profit that employees, talent, material and natural resources generate is exported to that foreign entity. If money is leaving Chattanooga, we might be uneasy to hear the profit goes to Bangkok or Des Moines, Iowa. It’s a little less worrisome to hear it is going to Nashville, Knoxville or Ringgold, Ga.

The point is, exported profit is profit that does not remain in Chattanooga. A local dollar spent locally multiplies five or six times. This effect is the positive multiplier. Local profit ricochets in the local economy, enriches those it touches. The loss of local profit, I suggest, has a negative multiplier effect. That effect occurs even though the factory’s presence brought other companies that created 9,500 dependent jobs.

So, in my theory, if every dollar of profit were exported from the city because every company was owned by foreigners, aliens, strangers and people far away, Chattanooga would quickly enter into poverty. The city could not support basic public services nor its people have capital to create enterprises.

Apple is a picture of problem

International companies routinely export profits to countries with the lowest tax rate. Last week Apple’s avoidance of federal taxes by keeping its profit in overseas units drew an outcry. The company CEO Tim Cook will testify before a Senate subcommittee about the problem high U.S. taxes causes his company. “He’ll present some 18 pages of prepared testimony touching on everything from the ‘extraordinary’ sums Apple pays annually in corporate income tax to the rationale for its massive foreign cash holdings and a careful rebuttal to allegations that it uses its Irish subsidiary to avoid U.S. taxes,” the Wall Street Journal says.

My point in bringing up Apple and other companies is to account for the idea of exporting profit and the question about its repatriation. Apple hordes profits overseas to avoid paying punitive taxes. The secreting the assets in Ireland is perfectly rational and shows the company is accountable to its stockholders. But Apple represents global economy at its best, in all its glory and power.

Similarly, Pfizer Inc. from 2007 to 2010 showed no profit in its home country. “Abroad, it was another story,” notes Bloomberg. “A Dutch subsidiary more than made up for New York-based Pfizer’s American losses. It reported pretax profits totaling $20.4 billion in 2007 and 2008 — with a tax expense of 5 percent, a seventh of the top U.S. rate. Overseas tax savings increased the drugmaker’s net income by $1 billion last year, according to Robert Willens, a tax consultant in New York.” Federal taxes and aggressive tax planning by executives are behind the exile of corporate profits by other companies as well, from Oracle to Eli Lilly.

Where is profit made?

Our interest, again, is not high federal taxes and the reasonable means companies take to avoid them. It is in profit and where it goes when it is made. A local business in many cases will spend locally from its profit, stimulating local economy. A global business will not spend its profits locally, having no sense of benefit in that and feeling no obligation or connection.

VW earned 1.95 billion euros (or F$3.15 billion) in the quarter ending in March, compared with 3.15 billion euros a year earlier. That is profit that goes to shareholders worldwide. Some of this profit was generated by operations in Chattanooga. Yet none of that profit stayed in the city except for the ledgers of those people who own publicly traded shares.

The local economy argument is that we should encourage local investment, local ownership, local profit, and reduce the glare in our eyes that emanates from the great companies in foreign climes that Sen. Corker wants to build factories here.

Sources: “Sen. Bob Corker co-introduces bill to encourage more global investment in the U.S.,” Nooga.com, May 23, 2013

John Paczkowski, “Here’s What Tim Cook Will Tell Senators About Apple, Offshore Cash and Taxes,” AllthingsD.com, May 20, 2013

“Exporting Profits Imports U.S. Tax Reductions for Pfizer, Lilly, Oracle,” Bloomberg.com, May 13, 2010