Max Baucus’s Corporate Tax Reform Could Stymie the Manufacturing Revival

by Reihan Salam

Ramesh Ponnuru argues against Montana Sen. Max Baucus’s corporate tax reform proposal:

To pay for the reduction in the tax rate, the Baucus plan slows the rate at which companies can write off the cost of investment. This trade-off may have been made merely to get the numbers to work, but its effect is to favor past investments over future ones.

And as Jim Pethokoukis observes, this implies that the corporate tax code will be even friendlier to incumbents relative to new entrants under Baucus’s reform than it is today, drawing on an analysis by Alan Viard:

First, we shower windfalls on investments that have already been made by giving companies tax savings that they were never promised. This reward for past investment is senseless – we can’t change the past. Then, we turn around and raise the tax penalty on new investments, which can still be changed. And they will be changed – the stiffer penalty will discourage investment and slow economic growth.

To understand why this matters, consider Mark Mills on the prospects for a domestic manufacturing revival:

In a remarkably little-noticed report this past summer the American Chemical Council (ACS) catalogued nearly 100 chemical industry investments valued at over $70 billion that are coming on-line by 2017.  This will generate over one million jobs and add over $300 billion to the GDP.

The effects of the boom in the energy-intensive manufacturing ecosystem will inevitably ripple out, catalyzing more manufacturing both upstream and downstream.  New less energy-intensive manufacturing businesses will take advantage of the proximity to low-cost high-reliability supplies and suppliers  as well as the growth in labor force skills and the advances and investments in new underlying technologies.   That’s how industrial and economic ecosystems work.  And that’s precisely what policymakers hope will happen when they try to “stimulate” such outcomes.  But none of this requires taxpayer money.  In this case, all activity is adding to state and federal treasuries.

This manufacturing resurgence comes at a critical time.  Manufacturing is not part of yesterday’s economy despite the prevalence of the post-industrial trope.  Manufacturing underlies everything we use daily to survive, prosper or enjoy.  Everything.

The App revolution (about which more here) that is unleashing productivity in everything from retail to healthcare services is anchored in hardware.  Computers and smartphones are made possible by manufacturing processes: the conversion of sand into silicon, bauxite into aluminum, manganese and a mélange of magnetic elements into memory, oil into plastics, and coal into electricity.  How Amazon operates and what it delivers are all firmly anchored in manufacturing.  Ditto WalMart and FedEx.  Quite literally everything around us that makes possible all we do every day is manufactured from the material world.  The vaunted rise of the “service economy” is inseparable from manufacturing, except in the minds of post-industrialists,

The embedded feedback loop that is part of the innovation ecosystem linking “services” and “manufacturing” has been lucidly argued by Intel’s legendary Andy Grove.  For example, software (supposedly in “services”) for semiconductor manufacturing, is an inextricably integral part of every stage from design to production and operation. 

This seems like the wrong moment to raise taxes on new capital to finance lower taxes for old capital.


The Agenda

NRO’s domestic-policy blog, by Reihan Salam.