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Do High Corporate Taxes in US Drive Mexico Manufacturing Increase?

Do High Corporate Taxes in US Drive Mexico Manufacturing Increase?

As Mexico manufacturing continues to rise, many in the US are troubled that US companies are offshoring due to high corporate taxes they face domestically. They argue for cuts in US corporate taxes to staunch the exodus and bring US jobs back. But others argue that cutting corporate taxes will not benefit the US economy.

Offshoring and Mexico Manufacturing

In an increasingly global economy, Mexico manufacturing has proven to be a valuable part of the North American economic partnership that has been growing since the signing of the NAFTA. Due to a myriad of incentives for foreign countries to open manufacturing facilities in the Latin American country, Mexico provides a source for inexpensive labor and high demand for US-made components. But there is some concern that the rise of Mexico manufacturing is partly due to the high corporate tax levels in the US. Currently, the US has one of the highest corporate tax rates in the world at 35% for the highest bracket. On the other hand, Mexico is closer to the middle with a top bracket at 30%. Neighbor Canada’s is 15%.

Some argue that US companies are moving production to Mexico to take advantage of lower corporate tax rates and that lowering corporate taxes in the US will bring them back and help create US jobs. Offshoring has clearly become the norm in recent years, but could it be the US corporate tax regime contributes to this trend in a negative way? In recent years, it has been noted that corporate tax rules allow US companies manufacturing in Mexico to defer payment of their taxes until that revenue is brought back into the US. What inevitably happens is large corporations typically reinvest that revenue or hold it in tax havens for years at a time. In this way, the US corporate tax structure incentivizes companies who offshore to Mexico or other locations.

Lower US Corporate Taxes: Pros and Cons

Arguments for and against lowering corporate taxes are myriad. The reader is invited to consider the following in determining whether US corporate tax levels contribute to offshoring to Mexico and other locations:

  • Pro: Lower corporate taxes means companies keep more revenue and can reinvest this into jobs domestically.
  • Con: Periods of even higher corporate tax levels in US history seem to actually correspond with periods of higher employment.
  • Pro: In 1987-1991, just after the US lowered corporate taxes, there was a drop in unemployment.
  • Con: This rise in employment coming on the heels of corporate tax reduction might be due to loopholes and deductions companies often leverage to pay less than the full rate.
  • Pro: President Obama’s economic advisory task force linked job growth with lower corporate taxes.
  • Con: Lower corporate taxes mean a higher national deficit, which can hurt jobs.

While arguments may be made on either side, for or against lowering corporate taxes in the US, Mexico manufacturing continues to surge. Taxes remain lower in Mexico, positively impacting the bottom line for thousands of manufacturers doing business there.

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