Leland Teschler's Editorial: How Legislators Discourage Manufacturing
With the economy in the toilet, there has been a lot of hand wringing over government attitudes toward manufacturers. It’s often said that legislators favor companies that just push money around over firms that make things. The result has been an erosion in the U.S. manufacturing base and, simultaneously, a loss of middle-class jobs.
Now that the campaign season is behind us, it is easier to discuss these issues without being accused of political hyperbole. So it might be worthwhile to analyze what is generally meant by claims of a legislative bias against manufacturers. Trouble is, much of the debate centers on tax policy. The whole discussion can seem pretty dry unless you are a tax accountant.
But it is a subject worth pursuing because there are important differences in how manufacturers get treated compared to businesses oriented around financial transactions. The biggest disparity stems from the fact that manufacturing is capital intensive. Manufacturers have to buy a lot of equipment to make employees productive. This equipment can’t be treated as an expense in the eyes of tax collectors. The robot arms and other automation equipment sitting on factory floors can only be written off little-by-little against company earnings over an extended period of time.
One impact of such policies is that manufacturers must have expectations of high profit margins for a long time to come before they can justify an outlay on expensive investments like this. Worse, financial companies have no such problem because they don’t have much in the way of capital expenses — banks and mortgage brokers buy comparatively few Caterpillar tractors and the like.
However, the main expense that financial companies have — interest on debt —is completely deductible immediately against what they earn. And that fact, say economists, has served as an incentive to create businesses and investments teetering on insolvency. Put another way, it has made more sense tax-wise to make investments by going into hock to your eyeballs rather than by saving up for them ahead of time.
Finally, despite campaign rhetoric to the contrary, corporations in the U.S. are taxed at a much heavier rate than those in other industrial countries. Figures from the nonprofit Tax Foundation show America has the second highest corporate tax rate in the world at 39.3%, calculated as an average of state and federal taxes. Only Japan is slightly higher. Even so, companies in California, New Jersey, and 22 other states enjoy tax rates exceeding those found in Tokyo. The highest is Iowa with a combined rate of 41.6%.
And according to the Paris-based Organization for Economic Cooperation and Development, the lowest corporate tax rates are to be found in Ireland (12.5%). Small wonder, then, that firms set up manufacturing facilities there, and that Ireland’s economy has been growing at twice the rate found in the rest of Europe.
It is not clear whether this data, which is all readily available from public sources, has had an impact on the thinking of legislators. But companies that use a lot of capital equipment are certainly aware of it. Just consider these comments from FedEx CEO Fred Smith, quoted in the Wall Street Journal: “We went out to Boeing… to see the new [Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We’d buy more triple sevens.”
— Leland Teschler, Editor
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Comments
Taxation of Atlas
Manufacturing is the giant that holds up the world. It is only the ideas that get put to human use that are "true" creation of wealth. It is why we can be proud as manufacturers. We create product at profit and now the government is destroying that by removing profit. The service economy is the most evil idea ever created. When only service exists and no true innovation happens we will be the slaves of one another. If you want to know why it is being destroyed slowly in America read Atlas Shrugged by Ayn Rand. May she be your John Galt. Or if you like to read only nonfiction "Why Businessmen need Philosophy."
Corporate Taxes are levied ON PROFITS = ur #s are bogus
There are about a million ways a corporation can whittle down
their tax on profits down to nothing.
Your # are absurd, because "actual amounts" indicate a large
percent of American Corporations end up paying NO corp.
taxes.
And a fair # actually receive Corporate Welfare on top of that,
thanks to various programs to encourage them to do this or that
economic activity.
YOU COULD BE RIGHT re: the need to write laws to encourage
manufacturing here, rather than it is now.
By pushing the big lie that corporations are overtaxed here
vs. a vs. the world, you lose all legitimacy as an advocate for said
change.
Instead you look like another corporate hack trying to
screw everyday Americans by convincing them that it's not
they the everyday American who sacrifices to make this country
great, but our Corporations via high taxes.
Yeah on the books those taxes are high, but thanks to loopholes Corporate lobbyists have spent millions on getting written into their tax laws, the liklihood you could find ONE SINGLE corporation in America who actually pays that is virtually nil.
And please don't blame government.
The corporations love the system as it is now. It's their millions spent on lobbying that created it.
Being their creation, they know how to manipulate the political levers while getting away with pretending to be victims of Americas high taxes topped off with misleading editorials like yours helping to push their agenda to lower they're "supposedly super high taxes" when said taxes you speak about are on PROFITS, NOT GROSS like American individuals have their
tax burden calculated upon.
Individuals do pay those big #s.
You'll not find one single major or minor American corporation who employs a tax accountant who more than a fraction of that large amount you use to make your argument.
You are full of ****
Obviously your are more involved in bigger business and not very familiar with the small business sector that supports and supplies up to 80% of jobs in this country. It might do you some good to go out in AMerica and work at some of these struggling manufacturing companies to get a better view on what is really happening out there in the REAL working world, where the small business owner is protected or hiding behind some bigger bureacrocy and lobbyisy for their own personal gain. You oo have lost touch with the American dream and small business. Re-educate yourself before you speak next time.
I believe Mr. Teschler's
I believe Mr. Teschler's discussion was about tax law favoring service corps. over manufacturing corps., not a discussion of corporate vs. individual tax. Perhaps you should re-read.
By the way, I own the majority of shares in a small American manufacturing corporation who pays my taxes due on profits earned, at the high rate they are imposed, without lobbyists or loopholes whittling my liability to nothing as you state ALL corporations do. Not only do I pay taxes on profits, but I pay taxes on payrolls spent to support 26 families and thier health care, vacation, retirement funds, ect. in exchange for their skilled labor. I also stimulate the economy with my purchases of supplies and equipment - of course equipment purchases are not 100% tax deductible, so I must limit these contributions to after tax profits.
America is greatly supported by small businesses who cannot easily relocate to third world nations or move from Illinois to lesser taxed states without incurring great expense while losing all skilled employees that don't care to move with us. Many of my small business associates say they are in the same shoes as I, though I cannot vouch with complete certainty as I am not privy to their books and tax returns as you seem to be privy to all America's.
At any rate, I wish I was privy to all the Corporate Welfare programs and loopholes that make it so easy to run a business these days. I was unaware they existed. And since now I know they do, I wonder why all those business owners earning so much untaxed profit are closing thier doors after they claim to have depleted their personal savings in pursuit of the American dream? Where are they hiding all that untaxed money? In the increasing numbers of vacant lots and empty store fronts?
re: ur #s are bogus
The way companies pay no taxes is by making no money.
Any talk of corporate tax rates must recognize that companies can and do move to locales where they figure they get the best deal. That decision often involves where to get lower tax rates. If moving offshore to get lower taxes makes financial sense, many companies would make the move.
In fact, several offshore oil drilling companies have done so recently, including Transocean and Weatherford International. Noble Energy is also now moving to Switzerland, again for a lower tax rate.
How legislators discourage manufacturing
Mr. Teschler,
I found your editorial most insightful. I have been in the marketing business since 1969 in the Chicago area and have been watching the steady decline of manufacturing. The local governments including the city of Chicago, did not find the manufacturing exodus from the area alarming. As a matter of fact the manufacturers who stayed in the city were hit with an employee head tax. That did not go over too well, as you can imagine, so the dropped that in favor of a square footage tax, which also went over like a lead balloon. With each tax the city lost more manufacturing. The theme message from business analysts, most likely working in the financial sector, was that the American economy was going to become a services economy. Let those third-world nations manufacture stuff. Well, we all know now how successful that business logic turned out.
I enjoy your magazine very much and every chance I get I talk up the need for our country to re-establish a solid manufacturing base. We know what our reliance on the financial services sector as a driver for our economy has gotten us. A friend of mine put it quite well: "Financial services is akin I'll do your laundry if you do mine." Very little new wealth is generated.
Keep up the great work and a very merry Christmas and a prosperous New Year to you and your fine magazine.
Corporate Taxation
Good article. What is the best approach to contact legislators and which one's?
Ron Samoska
rsamoska@pressline.net
Taxation rates on manufacturers
When comparing tax rates against other countries we routinely ignore the VAT tax
http://www.worldwide-tax.com/ireland/ire_other.asp
The VAT tax is one of the biggest ways that other countries ensure that their taxes on their manufacturing base is reduced while managing to capture the taxes on companies that choose to outsource and cut jobs. And it isn't classified as a duty because everyone pays it.
Because the the VAT a company pays is deducted from the VAT that they owe - Domestic manufacturers are not forced to add a mark-up that is not shown on imports.
While the downside is that people who purchase the goods wind up paying a consumption tax - it could be offset with a rebate based on income.
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