Automakers don’t offer brand-new versions of each model every year; instead, they add a feature or two and call it a “refresh.” Similarly, President Obama’s “blueprint” for U.S.-based manufacturing, unveiled in his State of the Union address, updated arguments he has offered before. Was this version persuasive?
First, the big picture: Though the United States remains the world’s biggest producer of manufactured goods, the percentage of its workforce engaged in factory work has steadily shrunk over the past six decades. This long-term trend reflects powerful market forces, among which are not only increased imports but also changes in U.S. consumer demand and increasing U.S. productivity.
U.S.-based factories have added hundreds of thousands of jobs recently, as the president noted — with more “insourcing” likely as production costs rise in China. But it’s unrealistic to imagine a return to the relatively high levels of manufacturing employment and wages that the United States enjoyed in the 1950s. Nor would it be cost-effective for government to pursue that goal.
Certainly some policies that President Obama suggested in his speech don’t pass the cost-benefit test. He proposed getting rid of companies’ tax deductions for moving expenses related to shifting facilities overseas, replacing them with a tax credit for the costs of coming back to the United States. This would add complexity to an already complex corporate tax code for the sake of a marginal tilt in incentives that, by the president’s own account, already favor “insourcing.”
The same goes for the president’s proposed lower tax rate for manufacturers and increased deduction for “high-tech” manufacturers. Steering resources to government-favored industries through tax breaks is a poor way to stimulate economic growth. Of course, the proposal might stimulate a lobbying scramble by companies seeking to qualify for the new goodies.
More interesting is President Obama’s call for reforming tax laws that arguably provide incentives for U.S. multinationals to move production overseas and keep their profits there. To cut a long, arcane story short, this happens because the U.S. corporate tax rate of 35 percent is higher than the rate in many other developed countries — and U.S. law lets firms “defer” repatriation of income they earn in lower-tax nations.
On balance, this wrinkle in the tax code probably encourages overseas investment by U.S. companies, but the impact on U.S. workers is murky at best. Many tax experts agree that the current system is less than ideal, but there is no agreement on how to fix it. Should the United States end the deferral of tax payments on foreign-earned income and tax it immediately at the U.S. rate (minus a credit for foreign taxes paid)? Or should the United States free foreign-earned income from U.S. taxes completely and tax only what companies earn here (which is the approach most U.S. trading partners take)? As you listen to the debate, remember that the existing rules create both winners and losers among the labor unions and corporations that tend to dominate the discussion.
The president seems to favor a hybrid approach: Eliminate tax deferral and replace it with a minimum tax on overseas earnings — in return for a lower overall corporate rate. Details are still to come. The trick will be to eliminate clearly perverse incentives and unjustifiable revenue losses without stifling free movement of capital. It won’t be easy.
The Washington Post (Jan.28)