Baucus-Camp reforms: Manufacturing has to be key to tax reform

Tue, 08/20/2013

San Jose Mercury News
By Scott Paul
Baucus-Camp reforms: Manufacturing has to be key to tax reform
08/19/2013


Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI) are on the road for a "listening tour" as they work to reform the U.S. tax code, stopping this week in the Bay Area. The outcome of their work will have profound consequences for the ability of the American economy to remain globally competitive and to generate middle-class jobs.

There's a lot that could go wrong.

For instance, in the name of purity, some economists, Wall Street banks and retailers have urged Baucus and Camp to eliminate all corporate tax deductions and credits and to simply lower the corporate tax rate. That sounds like an elegant solution, but its net effect would be to dramatically lower the tax bill for the retail and financial sectors, which face little global competition, while raising the tax bill for manufacturing. It would hurt those who invest the most in domestic job and wealth creation.

Manufacturers face pressures from overseas in a way that most service providers do not. Most of America's global competitors provide rebates for their exporters through a valued-added tax (VAT) system that may confer as much as a 17 percent tax benefit, while slapping a VAT tax on U.S. exports. Since our low tariff rates and foreign investment guarantees have made offshoring increasingly attractive, we need to make sure a reworked tax code creates incentives for manufacturing activity here in the United States.

Manufacturing is capital intensive, which means it often requires substantial borrowing and a long-term horizon for a return on investment. The existing tax code recognizes this through accelerated depreciation and other cost recovery mechanisms. But manufacturing activity ebbs and flows along with the business cycle, which means the tax code should also include mechanisms for allocating losses in a reasonable manner.

There is plenty of evidence suggesting that manufacturing provides a larger positive impact on our overall economy than other forms of economic activity. For example, manufacturing jobs offer more middle-income opportunities for American workers. But the multiplier effect from manufacturing activity -- the number of additional jobs supported by each job in manufacturing -- far exceeds other types of business.

What's more, the relationship between the location of production and R&D is well established: Innovation and manufacturing go hand-in-hand. Goods production accounted for 71 percent of America's exports last year, so if the U.S. wants to continue to lead on innovation, we must figure out how to return to "Made in America."

But lowering the corporate tax rate while also eliminating credits and deductions utilized by goods-producing industries would mean reduced incentives for manufacturing activity.

The American public is interested in job creation and reclaiming the American Dream. That requires a successful production sector. Investments to ensure the success and growth of manufacturing should be a key goal.

As Chairmen Baucus and Camp visit with Silicon Valley entrepreneurs, I hope they will keep one thing in mind: The banks and retailers pushing a simple fix to the tax code have no other place to go. They may face online competition, but it is based in America. Their success depends entirely on how customers respond to their products and services.

Globalization has meant that Bay Area manufacturers face competition not only from around the corner but also from around the world. Unless the tax code recognizes manufacturing's critical role in the economy, America is likely to see another wave of factory jobs lost as a consequence of ill-founded public policy.
Scott Paul is president of the Alliance for American Manufacturing.




 

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