Effect of the U.S. Tax Code on Domestic Manufacturing,

Finance: Made in America: Effect of the U.S. Tax Code on Domestic Manufacturing, March 16, 2021

The public discourse on manufacturing uses large corporations as a stand in for capitalism. Talking about capitalism carries Cold War connotations. For those who are confused, and many are, the Soviet Union was dissolved over twenty years ago. It had not been socialist since the time of the revolution. Because Marx believed that workers would figure everything out, little thought was given to how it would work. It truly has never been tried. The system of state capitalism in the Soviet era has been supplanted by oligarchy in Russia (six on one, half dozen of the other) and it is thriving in China.

Marx focused on capitalism. His main contribution was describing the exploitation of factory workers. In a modern enterprise, creative branding is as important as design and more important than production. Sales is always important, as are company services. The explosion of innovation centers in China are now competing with America on all fronts, not just manufacturing. 

In October of last year, we delivered comments to the House Ways and Means Oversight Subcommittee on tax fairness. In it we discuss the causes of the decline in wages as compared to productivity. This started in 1965, which cut post-war high marginal tax rates from 91% to 70%. This cut took away the disincentive for wage theft by the CEO class. This  accelerated with the Reagan tax cuts. 

The 1986 tax reform gave us the current system. It has changed round the edges since then, but has not been significantly reformed. The Clinton and Bush to capital gains and dividend rates set up the 2008 Great Recession, delivering too much money to the speculation sector (it is not investment as understood as a factor of GDP. President Obama reversed the Bush cuts and the economy recovered because of them. 

The Ryan-Brady-Ryan cuts started us back the other way, but seem to have shown enough restraint to indicate there was more bipartisanship involved than anyone will admit. The main contribution of the Act was bringing corporate and business rates into relative parity. It did nothing for workers and did not bring money home, as promised. No studies have been  done on executive compensation subsequent to the Act, although the growth rate one year after passage fell by one whole point of GDP before the Pandemic. 

As in the 2000s, monetary policy was providing us with the perfect storm of tax cuts leveraging speculation, this time in Cryptocurrency and securities created so that providers of single family rental housing (which boomed in the foreclosure crisis) could cash out, with these funds packaged, again as AAA bonds, into Exchange Traded Funds. As we exit the pandemic, expect a financial crisis having nothing to do with COVID. This crisis will be used as an excuse to further move operations off-shore. 

The President has put forwarded reasonable rate corrections that may stop the coming crisis, or make it less severe. Still, the proposals are nibbling around the edges. More basic reform is needed.

Loading almost all taxation into payroll and income taxes continues the advantages of the CEO donor class. Splitting the elements of these taxes into a system of consumption and asset value added tax, as we propose in Attachment Three, extracts revenue at multiple points. Most taxpayers will only be hit once by goods and services and employee payroll OASI taxes and will benefit from making American Recovery Act subsidies for families both permanent and more generous. 

Higher tier subtraction VAT rates and residual income surtaxes will reduce wage theft. Offering high income taxpayers an opportunity to purchase tax prepayment bonds, and generally using salary surtaxes to pay down the debt is essential to making sure our economy is competitive when other nations duplicate our system of tax backed debt backing currency. These bonds also avoid interest payments - the item which causes most of the danger of an expanding debt.

Our proposed Asset Value Added Tax simplifies income tax filing greatly and expands tax breaks for funding Employee Stock Ownership Programs (as well as Cooperatives - which are simply an ESOP with one voting share per employee-owner, with the balance of ownership in preferred shares.) Currently, only sole proprietors can take advantage of the ESOP exclusion from Capital Gains Taxes. allowing shareholders the same privilege, especially heirs whose Asset VATs are marked to market when sold, will accelerate employee-ownership.

Attachment Four discusses how tax reform affects trade, both in terms of union rights and in joining everyone else in using the zero rating of value added taxes for export, making American manufacturing more attractive. We also note how internationally based employee ownership of both subsidiaries and supply chains discourages wage and currency arbitrage, which is the best way to share the gains of reform with workers internationally while removing the incentive to send production outside our borders.

Attachment: Large Corporations

Attachment: Tax Fairness

Attachment: Tax Reform

Attachment: Trade Policy