The President has offered a new “grand bargain” on taxes. While cutting corporate rates, it would be structured to generate a bunch of new revenue to finance yet another “jobs” program. While details weren’t offered, expect pretty much the same package of deduction cutbacks and international tax increases that he has offered every year. LIFO inventories are surely part of the package. Some bargain.
One item that would be in the package would be a 28% corporation top rate, with a 25% top rate for manufacturers. The President’s offer isn’t serious, so there’s no point spending a lot of time analyzing it, but it includes disorganized thinking that is found in both parties in the tax debate.
The President’s special rate for manufacturers assumes that one sort of economic activity is special and more worthy of favor than others. (The current foolish Section 199 does the same thing). There are two big problems with this:
1. Why is manufacturing something inherently better than other things? Is it better to make a Whoopie Cushion in America than, say, save a life with a kidney transplant? Is making an IPhone more worthy than relieving chronic pain with a hip operation? More worthy than making someone’s life a little more beautiful by playing music?
2. Where does manufacturing stop? Yes, somebody on the assembly line is manufacturing. But he wouldn’t be able to do it very long without trucks delivering raw materials and driving off with finished products. It wouldn’t work without trains delivering coal to the powerplant that feeds the machinery. It wouldn’t run without lawyers keeping the company from being sued to death, or without accountants balancing the books and preparing tax returns. Yet only the guy on the assembly line is considered “manufacturing.” It’s a futile and false distinction.
This is just part of a bigger problem: trying to do too much with the tax law. As anybody who has taken their first corporation tax accounting course will tell you, it’s hard enough to determine taxable income. When you ask the tax law to finance research, provide health insurance, run the pension system, oversee national housing policy, and be a welfare program, you are asking too much.
Bruce Braley does the same thing in his Des Moines Register op-ed, Tax reform should provide incentives for innovation. No, the tax law needs to collect revenue. The biggest incentive for innovation would be to simplify the tax law and let innovators use the money not spent on tax advisors to pay for their own innovation. The ability to make money after tax is all the incentive people need.
The fallacy that the government should be micromanaging the economy through “incentives” — really, tax breaks for the well-connected and well-lobbied — is bipartisan, as Iowa GOP State Senator Randy Feenstra illustrates in “Attacks on incentives harm state “:
They failed to check the facts before delving into the discussion. The tax credits being offered to the Iowa Fertilizer Company are not new. The tax credits were always part of the good faith understanding between the company and the state and were necessary to ensure that the new jobs and investment occurred in Iowa.
I am not sure what Senate Democrats are taking issue with most, if it is the 165 jobs being created or the $1.8 billion investment being made in a county struggling to lower unemployment rates. However, I take great issue with the attack on this company investing in our state, amid a history of Democratic support of tax credit programs.
Sen. Feenstra falls victim to the fallacy that the tax credits being spent on the fertilizer company are some kind of cost-free pixie dust that magically creates jobs. Yet they are really tax dollars taken from everybody else in the state and sent to a company with connections. If they hadn’t been taken from the rest of us, these dollars would have been used by taxpayers to buy and to invest in ways that would have been just as real, but which would have not given politicians any excuses for press releases. It’s just another version of the broken window fallacy.
The only tax reform worthy of the name is one where politicians get out of the business of playing favorites for certain businesses and activities — something like the Tax Update’s Quick and Dirty Iowa Tax Reform Plan. Anything else is just blowing smoke.