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."