Why do U.S. companies set up shop in countries such as China? Aside from trying to penetrate foreign markets, most people assume it’s the relatively low-cost labor abroad.

But the head of Intel Corporation, Craig Barrett, testified to Congress yesterday that relative tax costs are crucial to their choices regarding global investment locations.

Barrett said that “a critical issue we must now consider when deciding where to locate a new wafer fabrication plant is that it costs $1 billion more to build, equip, and operate a factory in the U.S. than it does outside the U.S. The largest portion of this cost difference is attributable to taxes.”

Why are taxes the biggest cost for Intel? As Barrett pointed out, “Semiconductor manufacturing is extremely capital intensive,” thus taxes on profits are a more important issue than wage levels.

Barrett noted that when Intel builds a plant in China, the firm get “a five-year tax holiday, followed by 50% of the normal tax rate for five more years. These are in comparison to the U.S., with its 35% corporate tax rate, lack of investment incentives, and relatively uneconomic and uncompetitive depreciation treatment.”

A story in the Wall Street Journal yesterday (sorry, subscriber-only site) noted that even Germany is now planning to sharply cut its corporate tax rate because of competitive pressures. That would leave United States with easily the highest corporate rate in the industrial world.