Corporate taxes are killing the US auto industry

Sustained losses in the U.S. auto industry raised the likelihood of a government bailout. The U.S. auto industry's failure to keep up with competition and adjust to new market demands is worsened by a tax structure that discourages production. Rather than pouring government money into an anaemic industry to revive it, the corporate tax should be restructured to make it attractive for investors to turn these companies into profitable entities, says the American Enterprise Institute.

While automakers have enormous sales, they have losses rather than profits. The companies are worth so little because investors want to own profitable businesses. Lately, the losses have been frightful:

General Motors posted a $15.5 billion loss in the second quarter of 2008 and is haemorrhaging money at the rate of about a billion dollars a month; the automaker only has roughly $20 billion on hand.

During the past five years, Ford's tax bill was on average negative, meaning its losses were so large that the company was refunded taxes paid in previous years.

Ford and Chevy products have regularly received lower-quality scores from J.D. Power and Associates than Honda and Toyota, and their less-desirable product is manufactured by an extremely costly unionised workforce.

To make matters worse, the main competitors that aren't Japanese all operate out of countries with much lower tax rates than the United States.

Bottom line: any company that has a more costly product that offers lower quality than the competition will have trouble making a profit. A manufacturer could price the profit out of its product, but doing so would require both a radical improvement in product quality and a sharp rationalisation of the production process, says AEI.

However, if the U.S. stays a high-tax environment, then investors may decide that it is just not profitable to base an auto manufacturer in the country, concludes AEI.

Source: Kevin A. Hassett, Corporate Taxes Are Killing the U.S. Auto Industry, American Enterprise Institute, August 2008.

For text: http://www.aei.org/publications/filter.all,pubID.28521/pub_detail.asp

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 04 November 2008