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TEXT AVAILABLE OF TESTIMONY ON CFC INCOME BY AFL-CIO'S CUNNINGHAM.

OCT. 3, 1991

TEXT AVAILABLE OF TESTIMONY ON CFC INCOME BY AFL-CIO'S CUNNINGHAM.

DATED OCT. 3, 1991
DOCUMENT ATTRIBUTES
  • Authors
    Cunningham, William J.
  • Institutional Authors
    American Federation of Labor and Congress of Industrial Organizations
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    CFCs
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-8418
  • Tax Analysts Electronic Citation
    91 TNT 206-20
TESTIMONY OF WILLIAM J. CUNNINGHAM, LEGISLATIVE REPRESENTATIVE DEPARTMENT OF LEGISLATION AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES ON H.R. 2889, THE AMERICAN JOBS AND MANUFACTURING PRESERVATION ACT OF 1991

 

=============== FULL TEXT ===============

 

October 3, 1991

It is a pleasure to testify on behalf of the AFL-CIO in favor of H.R. 2889, the American Jobs and Manufacturing Preservation Act of 1991.

The bill represents a necessary improvement in the Internal Revenue Code that will help to preserve American jobs. Congressmen Dorgan and Obey are to be commended on introducing this bill, which is similar to provisions passed by the House of Representatives in 1987, but dropped in conference with the Senate.

The basic feature of H.R. 2889 is a provision to impose a current tax on U.S. shareholders of a controlled foreign corporation to the extent the corporation has imported property income, that is income derived, among other things, from manufacturing. The bill would also add a new separate foreign tax credit limitation for imported property income, whether earned by controlled foreign corporations or directly by U.S. taxpayers.

The importance of the bill is that it would place domestic firms producing for the American market on a more equal footing with controlled foreign corporations -- runaway firms -- owned by U.S. shareholders and importing goods into the U.S. market.

At present U.S. persons that conduct foreign operations through a foreign corporation generally pay no U.S. tax on the income from those operations until the foreign corporation pays a dividend to its U.S. owners.

These runaway firms import goods into the U.S. economy, and enjoy deferral of U.S. income taxes while often paying low foreign taxes, and experiencing little regulation and cheap labor. Domestic firms producing for the domestic market, on the other hand, do not enjoy the deferral of U.S. income taxes. Thus domestic firms lose business. Workers lose jobs and wages and federal, state and local governments suffer from an increased unemployment and added governmental costs.

According to the 1989 U.S. Budget, Schedule G, the deferral of income from controlled foreign corporations represents a significant tax expenditure, $350 million in 1992. In 1987, the Joint Tax Committee estimated the tax deferral benefit provided to U.S. companies that locate overseas, but manufacture for sale in the U.S. Market, to be about $600 million over three years.

Thus, this tax expenditure, taken over a number of years, quickly rises to the billion dollar range.

Aside from the tax equity aspect, jobs are at stake. This measure would force runaway firms to pay corporate income taxes in the same way U.S. firms do, ending an incentive to place jobs out of the country.

This is important since many closed domestic plants are a direct result of opening identical plants overseas to serve the U.S. market. This pattern is sure to continue if there is a badly negotiated Mexican free trade agreement since many U.S. corporations have expressed an interest in taking advantage of cheap Mexican labor and weak environmental laws and these two comparative advantages would be increased if there was also a U.S. tax benefit associated with relocation to Mexico.

Over the years jobs have been shifted to foreign subsidiaries in a number of industries. As an example, the International Brotherhood of Electrical Workers estimates that between 1985 and 1990 about 25,000 IBEW members lost their jobs due to transfer of work from the U.S. to Mexican Maquiladora factories.

Attached is a recently compiled partial list of examples of IBEW job losses to Mexico. It suggests the scope of the problem of runaway industries and the impact these job losses have on workers and their communities and the weakening of America's industrial base.

Millions of well-paying and high-quality job opportunities in the middle tier of the nation's income structure have been sacrificed as a result of America's trade policies. Jobs lost include electrical worker jobs, but also jobs in autos and in other industries as well. Stemming this flow is vital to the U.S. manufacturing base and to workers.

In the last twenty years the U.S. has experienced a rapid economic restructuring of industry, a deindustrialization, with the number of manufacturing jobs declining in absolute numbers and as a percent of all jobs.

The U.S. is losing its standing in autos, steel, electronics and other basic industries important to a world-class economy.

There are fewer manufacturing jobs now than there were in 1969 and during the 1973-74 period. The number of U.S. manufacturing jobs declined from over 20 million in these earlier years down to just over 19 million in 1990 and 18.4 million last August. With the growth of the service sector, the number of U.S. jobs has grown by over 50 percent since 1969, thus reducing the share of manufacturing from almost 30 percent of jobs in 1969 down to 17 percent last year.

Many of the job losses have occurred in import sensitive areas. Manufacturing imports, $389 billion in 1990, are dominated by imports of electrical goods, motor vehicles and parts, clothing and textiles, machinery and steel. These products account for about two-thirds of all imports of manufactured goods.

Adding to the long term loss of jobs is the loss of manufacturing employment during the current recession. In the period from January 1989 to the present, there has been a loss of 1.2 million manufacturing jobs. There have been heavy losses in electrical, transportation, machinery production along with some losses in textiles, apparel, printing, leather and other areas. Many of these jobs will not come back with the resumption of economic growth.

The reform in H.R. 2889 would help to stem the export of jobs by requiring runaway firms to pay taxes on income on the same basis as U.S. firms producing domestically.

We believe that the adoption of the tax reform in this bill will reduce tax expenditures and free up funds for some programs and activity needed to promote economic growth and development such as education, training, retraining, infrastructure and other areas. Such investments are now neglected because of federal, state, and local budget restrictions.

In conclusion, Mr. Chairman, we hope that this committee will not look only at the Dorgan bill but review the entire area of foreign source income because we sincerely believe that this area provides incentives to relocate overseas. Therefore the Internal Revenue Code helps bias production location decisions in favor of foreign locations.

DOCUMENT ATTRIBUTES
  • Authors
    Cunningham, William J.
  • Institutional Authors
    American Federation of Labor and Congress of Industrial Organizations
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    CFCs
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-8418
  • Tax Analysts Electronic Citation
    91 TNT 206-20
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