Bringing Manufacturing Back to the USA
Many words are spoken across America about bringing jobs back from overseas, but most of the speeches are made with no real understanding of the issues involved. Take the electronics industry for example. Exactly 0% of electronic components are Made in USA anymore. IC chips, resistors, capacitors, diodes, etc. are all made in Asia, not in America. Some switches and jacks are made in Mexico, but not in the USA. It’s no longer just a case of cheap assembly labor being available in China. In fact, labor rates in China have tripled in the past 5 years. While they are still a lot lower than American rates, that’s not the only drawing card anymore for getting products made in China, or in other Asian countries. The biggest drawing cards are industrial infrastructure and lack of punitive accounting rules.
For example, most factories in China that produce goods for American companies are sub-contract facilities, owned not by American companies, but by Chinese entrepreneurs. Therefore, all the parts, sub-assemblies and work-in-progress are owned by the Chinese company, as are finished units that haven’t been shipped by December 31st. This can represent millions of dollars in inventory that the American company does not need to account for in the COGS equation at year end. By eliminating COGS, American companies producing goods in the USA would be able to expense all parts, sub-assemblies, and even finished goods, benefiting from the tax deduction of those expenses rather than paying punitive income tax on them.
Regarding depreciation, what incentive is there for an American business to purchase a factory building and equipment, when the tax deduction is negligible and the tax penalty is huge? None. It’s a disincentive, especially when Asian factories owned by Asian entrepreneurs are readily available and surrounded by other factories in close proximity to provide all the parts needed for final assembly.
Getting manufacturing to come back to American is no simple thing. But one easy place to start would be to change tax accounting for businesses by eliminating depreciation and COGS. It's hard to know for sure if that would be enough to bring manufacturing back. At the very least, this proposal, if put into full effect, would greatly increase the power of America’s economic engine with all existing businesses in the United States and enable many other new businesses to start and thrive.