Distorting the Economy Is the Whole Point

What does Barack Obama mean when he advocates "tax reform"? Sometimes he simply uses the phrase as a euphemism for tax hikes. But he also claims to favor simplifying the hideously complex corporate and individual income tax codes, lowering rates while broadening the base by eliminating special breaks. In his budget message last week, he condemned "special interest loopholes" and complained that "for too long we have tolerated a tax system that's a complex, inefficient, and loophole-riddled mess." He urged Congress to "immediately begin work on corporate tax reform that will close loopholes, lower the overall rate, encourage investment here at home, simplify taxes for America’s small businesses, and not add a dime to the deficit." But because Obama is not willing to stop using the tax code as an instrument of economic meddling and social engineering, his reforms add new tax breaks while eliminating old ones. Yesterday Peter Suderman noted that Obama's corporate tax reform plan includes special preferences for manufacturing. Why? Because Obama knows that assembling things is better for the economy than dealing in less tangible goods and services. NPR explains:

Economists note that Obama's plan would upturn the very playing field the administration says it wants to level. It would give manufacturers preferential treatment: Tax breaks would effectively cap their rate at 25 percent. Other companies would pay up to 28 percent....

Some say such varying rates can distort the economy by diverting investment into some industries and away from others that might pack a bigger economic punch.

"The administration is not making sense," says Martin Sullivan, contributing editor at publisher Tax Analysts. "The whole idea of corporate tax reform is to get rid of loopholes, and this plan is adding loopholes back in."...

The White House argues that tax breaks for manufacturers could ultimately pay off for the economy. When factories expand, for example, the benefits tend to spill into other businesses: Shipping companies and warehouses must add jobs, too, to transport and store the goods that manufacturers are producing.

Economists also note that manufacturers account for a disproportionate amount of the research and development that create innovative products and new ways of doing business. The National Science Foundation has found that manufacturing companies are nearly three times likelier to introduce a new or significantly improved product than other companies are.

"Does manufacturing deserve special treatment? This is a hot debate," says Elisabeth Reynolds, executive director of the Industrial Performance Center at the Massachusetts Institute of Technology. "A case can be made that there's a reason to encourage more manufacturing in the United States because of its links to innovation."

Other economists say that argument is overstated. Among the skeptics is Obama's own former economic adviser, Christina Romer, an economics professor at the University of California, Berkeley. In a column this month in The New York Times, Romer argued that there was no economic justification for the government to favor manufacturers over service-oriented companies.

"Our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada," Romer wrote.

As I noted in a column last July, everyone who benefits from a tax break has a justification for his. Even corporate jet manufacturers, whose "preferred treatment" Obama used to support but now loves to attack,  will tell you the accelerated depreciation schedule that encourages companies to buy their airplanes is good for the economy, stimulating spending and creating jobs. Obama's arbitrary preference for manufacturers is based on that same argument at a higher level of abstraction.

Distorting the economy is not, as NPR suggests, an unwanted side effect of Obama's proposals; it is his avowed aim, because he thinks he knows how resources should be distributed better than the market does. As long as we have leaders with this kind of overblown faith in their own knowledge, wisdom, and competence, we will have "a tax system that's a complex, inefficient, and loophole-riddled mess."

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  • Scott||

    I am curious as to whether American companies engaging in manufacturing are more likely to be unionized compared to service-oriented companies.

  • protefeed||

    I think companies engaging in manufacturing are more likely to be in swing states Obama needs to win to be reelected. It's a bonus for him if they are disproportionately unionized, too.

  • Invisible Finger||

    I think he's trying to make it easier for the unions to get a foothold in non-union shops. With less of a tax bite, the companies may not fight unionization as hard.

    In any event, it's amazing how one immediately tries to think about Obama's "real" motives because his words are so untrustworthy.

  • tarran||

    Why would anybody open a factory in the rust belt?

    It's like trying to plant your crops in fields that the Romans sowed salt in two years ago.

  • yy||

    My neighbor just met a bisexual man on ---datebi*cOMit’s where for men and women looking
    for bisexual and bi-curious individuals to meet in a friendly and comfortable environment.
    It’s a nice place for the people who have the same sexual orientation.

  • Joe R.||

    Unless his address is 1590 Pennsylvania Avenue, nobody gives a shit.

  • Barack Obama||

    Let me be clear: Lowering the corporate tax rate played well with focus groups of likely voters, and will be a great sound bite in my upcoming ads. That's all I really care about right now.

  • Joe M||

    This makes me think of the line Clinton and Co. used back in the 1990s about "targeted" tax cuts. That just meant behavior manipulation via the tax code.

  • ||

    The Democrat zeal for "targeted" tax cuts goes back to at least Jimmy Carter.

    That was the main issue in the 1980 election. Reagan promised across the board tax cuts in every bracket while Carter promised "targeted" tax cuts which he was sure would just make everything right.

  • ||

    Issac, I would only add to your comment that Carter's action (like Obama's) demonstrates their core belief in government control of the economy (in these instances by taxation) versus Reagan's belief in the market and so the people themselves to manage the economy.

  • romulus augustus||

    Obama's corp. tax reductions are piffle. Cut the corp. tax rate to zero and tax dividends as ordinary income. Companies all over the world will re-consider their decisions not to make goods in America because their
    new ROI calculations will be so much better.

  • ||

    "The White House argues that tax breaks for manufacturers could ultimately pay off for the economy. When factories expand, for example, the benefits tend to spill into other businesses: Shipping companies and warehouses must add jobs, too, to transport and store the goods that manufacturers are producing."

    Say you are a parrot seller. Parrot selling could ultimately pay off for the economy. When parrot sellers expand, for example, the benefits tend to spill into other businesses: Bird seed companies and parrot warehouses must add jobs, too, to transport and store the parrots that ...uh, parrots are producing.
    Parrot videos on YouTube ensure hilarity and gets people's minds off the economic collapse we are in - so the advantages are myriad...
    http://www.youtube.com/watch?v=NdhlPHEIkss

  • ||

    When did Michael Caine get a bird?

  • ||

    Here's an experiment for you:

    You are a US multinational, with, say, 50% of your profit from overseas.

    That overseas profit is taxed overseas, of course, and that isn't going to change.

    However, Barack wants that overseas profit to also be taxed by the US.

    Do you (a) stay in the US and pay double taxes on half your revenue?, or do you (b) move overseas so your company doesn't pay double taxes on any of its revenue?

    What would be required, I wonder, for a US-based company to "relocate" sufficiently to escape the double taxation Barack wants to impose?

  • Joe M||

    Seriously, that is one of the stupidest ideas he's had yet. Rather than just lower the tax burden here to encourage domestic production, he's going to double down. It's almost like some bizarre form of protectionism.

  • Paul||

    Why do you hate fairness?

  • ||

    Why do you hate using words that mean something specific?

  • ||

    One of the oilfield services companies, Weatherford, "redomesticated" from Houston to Switzerland. Supposedly that was more for geographic, market-serving reasons, but they are now considered a Swiss company. Their history would probably answer your qustion.

  • General Ist||

    "A case can be made that there's a reason to encourage more manufacturing [insert whatever: service, logistics, yoga, porn, ....] in the United States because of its links to innovation."

  • ||

    "Our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada," Romer wrote.

    Yes, but do engineers and architects deliver votes to the Demagogue Party the way the UAW does?

  • General Ist||

    "Our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada," Romer wrote.

    Yes, but much, much smaller.

  • GM||

    I remember how much our earnings were when we exported cars to... pretty much everywhere.

  • ||

    actually, until they were bailed out GM and Chrysler where losing money on every car exported to Canada ... so no, for years one architectural plan sale to Shanghi made more profit than either of those companies ...

  • ||

    I manufacture outrage for export.

  • ||

    That's a pretty saturated market.

  • Santorum||

    Saturated?Not in the middle east my simple minded friend,If elected I can engineer a minimum 300% increase in that market.

  • Incredulous||

    More proof that Obama only spouts BS.

    It's now obvious that Obama's "corporate tax reform" resembles his so-called "health care reform."

    Why does anyone even listen to anything this pathological liar says?

  • Cool College Kid||

    Because he's cool and it isn't his fault!!11

  • ||

    We are!

  • Michael||

    I dig the thinking pose.

  • Colonel_Angus||

    "The White House argues that tax breaks for manufacturers could ultimately pay off for the economy. When factories expand, for example, the benefits tend to spill into other businesses: Shipping companies and warehouses must add jobs, too, to transport and store the goods that manufacturers are producing."

    Then the same "pay off" would happen if the same proposed rate for manufacturing were applied to all businesses, and those services would be cheaper for the manufacturers to use.

  • ||

    It's bad enough that they believe they can run the economy with their central planning schemes. What makes it worse is that their central plan is utterly incoherent.

  • Michael||

    What makes it worse is that their central plan is utterly incoherent.

    Understand that to them typical central planner the means is the end. Coherence? Who cares?

  • ||

    Did they argue that these spillovers are exclusive to manufacturing?

    No?

    Funny, that.

  • Colonel_Angus||

    Depreciation schedules should be abolished too. If corporate net profit must be taxed, it should just be total money in minus total money out. Shit doesn't lose value according to a table.

  • ||

    I don't think shit has any value to start with, so I doubt it loses any. However, capital assets DO tend to lose value over time. A digital printer that is 10 years old has suffered the double whammy of aging mechanical parts and obsolesence. If there were a zero tax rate, we would still depreciate capital assets, because (don't laugh) accounting is an attempt to reflect the reality of a business's operations.

  • Fitzroy||

    That would fuck up low margin business, even a small corporate tax would make entire sectors disappear. Regardless, depreciation schedules are useful when calculating the value of a company as well, so it's not going anywhere even with no tax.

  • Colonel_Angus||

    The feds have a set of depreciation schedules for diferent types of capital assets as part of corporate taxes. It is a retarded system that doesn't very well reflect the assessments businesses would use if there were no corporate taxation, or at least if the government didn't play around with depreciation in the tax scheme. Of course businesses would still use their own assessments, which is not what I was talking about.

  • Michael||

    The Obama 2012 team should focus on figuring out how to work this into a central campaign theme; something like a promise of forty weekly hours performing menial, repetitive tasks at an assembly line and a chicken in every pot. That should prove wildly popular among the electorate.

  • David@Engage_America||

    As the article says, giving manufacturers a lower tax rate than other industries gives the tax code ability it shouldn't have, the ability to pick winners and losers.

    Another problem with the proposal is that it would put a minimum tax on foreign profits. This change would move the U.S. in the opposite direction of how our international trading partners treat foreign income.

    Experts agree that these are not the types of reforms Congress should make to the corporate tax code. http://bit.ly/wkIlN5

  • ||

    What is a manufacturing company? If a mining company also bags up some gravel and sells it to a hardware store, is it no a manufacturing company? Many companies have diverse operations which make/do all sorts of things. DuPont, clearly a manufacturing company, also used to (maybe still does) have a consulting arm. If you write software, is that a "manufacture"? It defies logic how it would be sorted out.

  • ||

    "manufacturing companies are nearly 3 times likelier to introduce a new or significantly improved product than other companies."

    How the hell do you compare what is "new" across widely variant industries? Movie companies, for example, rely almost entirely on new (less than a year old) product for revenue. Does that count as "new," or are they basically doing the same thing (making movies) every year? And how do you decide whether the new model update from GM is more or less "new" than the new version of Microsoft Excel or Turbotax, or the newest antidepressant, or the latest reformulation of motor oil?

    And even if you could do so, why are new products clearly better than products with lowered costs? In other contexts, meddling statists love to complain that we have too much variety and wasteful duplication, such as in supermarket products, pharmaceuticals, and yes, even automobiles.

  • J. H. Colter||

    "Overblown faith"? Give me a break, this is a guy who believes He is smarter than the collective intelligence of 310M Americans. That is not "overblown faith," that is hubris of a breathtakingly incomprehensible level.

  • Jerryskids||

    Balderdash. If Obama thinks He is wiser than us, it is because He is. Sometimes we must be forced to see His wisdom.

    For example, most people thought GM and Chrysler products were over-priced crap made by badly-run companies and decided to buy other products. GM and Chrysler couldn't get us to give them our money in exchange for their products, so Obama simply took our money and gave it to them in exchange for nothing for us, votes and campaign cash and media hosannas for Himself.

    So who was the smart one there?

  • Rapstallion||

    Cut to: Radio Pacifica (NPR). A windswept night. A young woman named Stanley, huddled away from the watchful eyes of the patriarchy, gives birth to man-child she would name only: "Barack".

    A hush rose to fill the starry skies.

    A more socially just and verdant future was already being born, much like the universe, nanoseconds after the big-bang, or perhaps like the next hipster-rock-rap fusion album slowly filllling the ears of white middlebrow mothers in Ohio during the closing minutes of "All Things Considered"....

    Nevertheless, little did anyone know that the man-child Barack would bring the end of racism, the end of economic injustice and student loan access to every creed.

    A Food Pyramid was created that all could gather around. Cash 4 Clunkers would lead the shining path toward energy independence.

    All Hail Our Leader!
    Hail!

    All Hail Nobel Prize Winner Barack Obama!

  • charles austin||

    If you are going to claim that picking winners is an appropriate economic strategy, shouldn't you be better at actually, you know, picking winners?

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