Manufacturing has led the recovery since the recession ended in June 2009 and has created more net jobs than any other industry segment. In other words, the manufacturing industry is the goose that lays golden eggs in the form of products for domestic use and export and the jobs it takes to produce them.
In the June report issued on July 1st by the Institute for Supply Management™ Manufacturing Business Survey Committee, Chair Bradley J. Holcomb, CPSM, CPSD, said, “The PMI registered 55.3 percent, an increase of 1.8 percentage points from May, indicating expansion in the manufacturing sector for the 23rd consecutive month. New orders and production were both modestly up from last month, and employment showed continued strength with an increase of 1.7 percentage points to 59.9 percent.”
Dean Maki, chief U.S. economist at Barclays Capital Inc., said, “Manufacturing is driving U.S. recovery” when he spoke with Bloomberg’s Mark Crumpton about U.S. manufacturing and housing data and the outlook for the economy and Federal Reserve monetary policy.
The “Seventh Quarterly Report,” written by the White House’s Council of Economic Advisors, a group of three economists who were all handpicked by Obama, was released on July 1st. The report chronicles the economic impact of the “stimulus” in adding or saving jobs. “The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus” (which it describes as a “natural way to estimate the effects of” the legislation), the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job.”
This means that “the government could simply have cut a $100,000 check to everyone whose employment was allegedly made possible by the “stimulus,” and taxpayers would have come out $427 billion ahead.”
We need to be adding thousands more jobs than the 18,000 nonfarm jobs added in June, and the 25,000 jobs added in May to absorb the millions of workers that a 9.2 percent unemployment rate represents. Economists say that about 100,000 jobs are needed each month just to keep up with the normal growth of the labor force and hold the unemployment rate steady.
With this weak job picture, the last thing we need government to do is raise taxes or create new taxes to be paid on specific products, such as a tax on “biz jets” and yachts.
While some business jets are converted airliners often used by celebrities with a large entourage or press corps, or by sports teams, they face operational restrictions based on runway length or local noise restrictions at smaller airports. Thus, there is emerging market for so-called “very light jets” and “personal jets, which are smaller and far cheaper than current models of business jets. Many of the very light jets (VLJ) are used by the air taxi industry.
Cessna has developed the Mustang, a six-place twinjet (2 crew + 4 passengers) available for $2.55 million USD. A number of smaller manufacturers have planned even cheaper jets, and it remains to be seen whether the new jet manufacturers will complete their designs or find the market required to sell their jets at the low prices planned.
Business jets and yachts represent companies in the aircraft and boat building industries that provide jobs for thousands of people. There are approximately 11,000 business jets in the worldwide fleet with the vast majority of them based in the United States or owned by U. S. companies. The European market is the next largest, with growing activity in the Middle East, Asia, and Central America. Business and private jets are one of the high technology products that the United States exports to the rest of the world. Increasing production of these classifications of aircraft would help achieve President Obama’s goal of doubling exports.
When you increase taxes on a particular product, it causes sales to drop, so if you increase taxes on business aircraft for all of the U. S. manufacturers, you would decrease sales for these aircraft and give an advantage to foreign aircraft manufacturers. Because of their low-volume productions and long lead times, new aircraft orders can take two to three years for delivery. This results in a large pre-owned marketplace, with aircraft available immediately.
The loss of jobs wouldn’t be limited to the aircraft and yacht manufacturers; it would affect their vendors, such as engine manufactures, avionics and electronics manufacturers, and interior manufacturers.
Large corporations such as Ford Motor Company and Chrysler have their own flight departments that manage all aspects of aircraft operation and maintenance. Charter operators own or simply manage all aspects of operation and maintenance of private jets for multiple clients.
Since 1996, the term “fractional jet” has been used in connection with business aircraft owned by a consortium of companies. Costly overheads such as a flight crew, a hangar, and maintenance can be shared by the consortium. Fractional Ownership is commonly known in the industry as “time share.” An individual or corporation pays an upfront equity share for the cost of an aircraft, such as 1/4 of the aircraft price, known in the industry as a “quarter share.” The individual or corporation is now an equity owner in that aircraft and can sell their equity position if necessary. This entitles the new owner to 100 hours of flight time on that aircraft, or any comparable aircraft in the fleet. Additional fees include monthly management fees and incidentals like catering and ground transportation.
President Obama may have forgotten that Congress tried to increase revenue by imposing a luxury tax on private planes and yachts once before. In the 1990 deal between President George H.W. Bush and a Democratic Congress, yacht and private plane owners were the designated villains. Yachts and private planes were, after all, owned by “millionaires and billionaires” who didn’t pay their fair share of taxes. Who could object to taxing these “fat cat” rich people a bit more? So Congress passed a 10 percent luxury tax on yachts priced at more than $100,000 and on private planes that cost more than $250,000.
After the tax took effect in January 1990, “hundreds of builders of large and small boats spoke of it as a stake driven into the heart of an industry already suffering from the effects of the recession 1990-91 and tighter bank rules on financing and fallout from the gulf war.”
The result was the virtual destruction of the domestic boat-building industry. Sales of luxury boats dropped 70 percent within a year. In the subsequent two years, about 100 builders of luxury boats cut their operations severely, and more than 25,000 workers lost their jobs. Several manufacturers filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code. Predictably, the tax didn’t even generate much new revenue because so few boats were sold. Finally, President Bush asked Congress to repeal the 10 percent luxury tax, and the tax was repealed by a bipartisan vote in 1993.
“At the end of the day, the millionaires and billionaires were still rich, but thousands of hardworking middle-class Americans ended up out of work.”
When discussing this tax issue with my adult son, he asked why “fat cat” rich people couldn’t afford to pay more taxes. I explained that it isn’t just rich people that own jets and yachts. Most owners are business people that have valid reasons for owning a jet or a yacht. For example, a company that has to send teams of three or more people around the country to do specific jobs such as land survey may find it less expensive to own their own jet to fly to smaller towns instead of flying to “hub” cities and renting cars and vans to travel to the smaller towns.
“Yacht” is just a fancy name for a boat that costs more than $100,000, and there are many business reasons for owning a boat, such as sport fishing and vacation rentals in destination cities like San Diego and Miami. In addition, many people live on yachts in harbors where you can’t buy a condo, much less a house, for under $300,000.
Michael Tanner, a Cato Institute senior fellow, wrote that “the French economist and philosopher Frederic Bastiat addressed Obama’s fallacy some 250 years ago, describing “the seen and the unseen,” or in other words, unintended consequences.
“Bastiat referred to the example of a farmer who plans to hire a worker to dig a ditch on his property, but is unable to do so because the money he’d have used to pay the ditch-digger went instead to pay taxes. A government bureaucrat is able to use those taxes to spend on various projects. Of course, everyone can see the results of that spending, which undoubtedly makes the bureaucrat popular. But what goes unseen is the loss suffered by the poor ditch digger.”
President Obama and others like my son seem to think if someone is wealthy, his or her money just sits around. In reality, people either spend their money or save and invest it. If they spend it, it helps provide jobs for the people who make and sell whatever it is they buy. If they save or invest their money, it provides the capital that is needed for entrepreneurs to start businesses and hire workers.
People need to realize that every dollar that the government takes in taxes or borrows as debt is one less dollar that someone in the private sector has to spend, save or invest. The government then spends the money on the popular programs such as student loans, medical research, Medicare, etc., but this comes at a cost of the lost jobs and slower economic growth that result from the higher taxes.
As a nation, we can’t allow government to kill the goose that lays the golden eggs, which would result in slower economic growth and lost jobs. We certainly don’t need higher taxes for any selected group of businesses or individuals, such as business jet and yacht purchasers. We already have the second highest corporate tax rate in the world, and states like California in which I reside, have additional high corporate and personal tax rates. Instead, we need a tax code that is simpler and flatter, with low marginal rates and few deductions and tax loopholes.