Machine Design

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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