Technology and Taxes

Technology and Taxes

January 29, 2007

I heard from my good friend Dan Caprio today. Dan is President of the Progress and Freedom Foundation, where I serve as a board member. Dan wrote that he had recently read a report saying that China was repealing some of the tax incentives they put in place to attract capital and asked for the inside skinny on the story.

Like most stories that come out, the one Dan is referring to is about half right. the Chinese authorities have announced a series of tax changes in recent weeks which they refer to as “equalizing” the tax rates paid by domestic and foreign firms to do the same work. Of course with taxes the devil is always in the details so broad answers are not very useful for real businesses.

It’s the story under the story that is interesting to me. China’s growth and foreign direct investment (FDI) over the past 20 years has been heavily dependent on manufacturing. As a result, manufacturing makes up a larger share of Chinese GDP than any other major country.

By one account, half the manufacturing capacity in the world is in China. That has made a tremendous impact on the lives of Chinese people; average incomes have roughly quadrupled since the reforms began almost 30 years ago. But it had also led to worsening air and water quality, a widening rural-urban income gap, and worries over the security of future energy supplies.

China’s government has decided to attack the problems head-on. They are pushing energy conservation. They are increasing energy supplies and investing heavily in renewable energy projects. Both measures are important, but they only buy time. The real answer is their shift of focus from manufacturing to technology to drive growth.

This is where the tax changes come into the argument. China has increased taxes on steel and other heavy manufacturing industries, but has lowered taxes on information and communications technology companies. And they are aggressively courting tech companies to relocate R&D facilities to China with tax breaks and other subsidies. The biggest carrot of all is China’s massive investments in math and science education and aggressive English language education programs.

These are exactly the policies we should be pursuing in the United States. Instead, our Congress couldn’t even pass the telecom reform bill last year that would have triggered billions of dollars in new investment. They failed to pass video franchise legislation that would have allowed a massive rollout of optical fiber to homes. And they flirted with price controls to protect the current market cap of the big internet providers under the misleading heading of ‘net neutrality.” It was a shameful year for US technology policy.

Instead of competing for high-tech capital, we tax and regulate it out of the country–US companies bear a 22% excess overhead load ccompared with overseas competitors. And we tax communications services–the central nervous system of the economy–as if it were a sin to talk with your customer or supplier, or even your family, on the phone. Depending on where you live in America, between 15-30% of your wireless phone bill goes to excise taxes.

Meanwhile in Shanghai last week a pilot project was announced to provide 4G mobile services which would allow selected customers to transmit content at speeds greater than enjoyed by most fiber optic users in the US.

We need to wise up and do the things now to make our technology companies believe they should build their businesses here. We don’t have a lot of time to waste.

JR

John Rutledge

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