savingusmanufacturing.com

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 1^st 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 1^st.  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.

Outside of the anomaly of California, the results of the election two weeks ago showed that people were very concerned about jobs, namely, the lack of jobs in the United States and the loss of jobs due to outsourcing offshore in Asia.  Our economy is limping along at monthly average of a 1.5 percent growth rate in our Gross Domestic Product (GDP), which isn’t enough to create the amount of jobs we need.

TV news shows, radio talk shows, newspapers, and magazines are now filled with the opinions of pundits on what we need to do to solve the “jobs” problem and kick-start the economy.   Until the majority of these experts face up to the fact that manufacturing is the foundation of our economy and realize that we must save American manufacturing to provide the higher paying jobs we need, their numerous ideas and recommendations will fall short of solving the problem.

There is a broad spectrum of ideas and recommendations on how we can save American manufacturing presented in my book Can American Manufacturing be Saved?  Why we should and how we can. These ideas and recommendations range from extreme protectionism to reasonable and realistic recommendations.   What can we do right now that will have the most impact on helping American manufacturers and create jobs?

First, we need to stop the bleeding.  By this, I mean we need to put an end to tax policies and laws that are hurting businesses and keeping them from hiring people.  The lame duck Congress needs to stop talking about “extending the Bush tax cuts” and do something about preventing tax hikes from going in effect January 1, 2011.  These tax hikes include raising the capital gains tax, eliminating the R&D tax credit, and raising the Death Tax back up to 55 percent, all of which would be the most harmful to businesses, especially manufacturers.  Paying higher taxes leaves companies with less money to hire new people.  Paying more taxes keeps people from buying goods they want vs. need, which will stimulate the economy and create jobs.

The National Association of Manufacturers has long recommended that the cost of tax complexity and compliance be reduced, focusing on provisions that are particularly complex for manufacturers, such as depreciation calculating cost of good sold, and the corporate alternative minimum tax.

A 121-page report titled “Approaches to Improve the Competitiveness of the U. S. Business Tax System for the 21^st Century” was released on December 20, 2007 by the U. S. Department of the Treasury and could be used to start reforming our tax system.

In the 1980s, the United States had a low corporate tax rate compared to other countries, but now has the second highest.  Japan has had the highest corporate tax rate at 39.54 percent, but the new government has proposed reducing Japan’s corporate tax rate down to 25 percent.  If this reduction goes through, the United States corporate tax rate would be the highest at 39.1 percent (when combining federal and the average of state taxes.)   Other countries are continually changing their tax systems to gain competitive advantage.  According to the Organization for Economic Cooperation and Development (OECD), Ireland’s tax is lowest at 12.5 percent while most of the other major industrial nations have corporate tax rates ranging from 19 to 30 percent.

The Treasury Dept says, “As other nations modernize their business tax systems to recognize the realities of the global economy, U. S companies increasingly suffer a competitive disadvantage. The U. S. business tax system imposes a burden on U. S. companies and U. S. workers by raising the cost of investment in the United States and burdening U. S. firms as they compete with other firms in foreign markets.”

The study concludes that the current system of business taxation in the United States is making the country noncompetitive globally and needs to be overhauled.  A new tax system aimed at improving the global competitiveness of U. S. companies could raise GDP by 2 percent to 2.5 percent.  Rather than present particular recommendations, the report examines the strengths and weaknesses of the three major approaches presented.

The Executive Summary also comments on the importance of the individual income tax rates because roughly 30 percent of all business taxes are paid through the individual income tax on business income earned by owners of flow-through entities (sole proprietorships, partnerships, and S corporations).   These businesses and their owners benefited from the 2001 and 2003 income tax rate reductions.   This sector has more than doubled its share of all business receipts since the early 1980s and plays a more important role in the U. S. economy, accounting for one-third of salaries and wages.

The Executive Summary concludes, “…now is the time for the United States to re-evaluate its business tax system to ensure that U. S. businesses and U. S. workers are as competitive as possible and Americans continue to enjoy rising living standards.”

At the same time, we need to close a huge tax loophole that multinational corporations are enjoying at the expense of American workers and which is a big incentive for U S. firms to invest abroad in countries with low tax rates.   In June 2006, James Kvaal, who had been a policy adviser in the Clinton White House and was then a third-year student at Harvard Law School, published a paper “Shipping Jobs Overseas:  How the Tax Code Subsidized Foreign Investment and How to Fix it.”  In this well-researched paper, Kvaal points out “American multinationals can defer U. S. taxes indefinitely as long as profits are held in a foreign subsidiary.  Taxes are only due when the money is returned to the U. S. parent corporation.  The result is like an IRA for multinationals’ foreign investments:  foreign profits accumulate tax-free.  U. S. taxes are effectively voluntary on foreign investments.”

There’s no rule saying American companies ever have to bring that money home.  As long as they reinvest earnings overseas, they pay only the host country’s (usually lower) tax rate.   Many companies just put the money they make overseas back into their foreign operations, which means more economic growth for other countries, and less here at home.   He wrote “when multinationals choose to return profits to the U. S., they can offset any foreign taxes against their U. S. tax…As a result, the effective tax rate on foreign non-financial income is below 5 percent, well below the statutory rate of 35 percent.”

He recommends changing the tax code to a “partial exemption system” that “would tax foreign income only if a foreign government failed to tax it under a comparable tax system.  As a result, all corporate income would be taxed at a reasonable rate once and only once.”  He opines that this system would reduce incentives to invest in low-tax countries, simplify the taxation of corporate profits, and reduce tax competition by removing the benefit of tax havens.  He urged immediate action “to ensure that our tax code no longer exacerbates incentives to move offshore.”

Taxes play a role in the decision of national and multinational companies about where to invest and create jobs.  The present tax system penalizes productivity and cripples manufacturers in our capitalist economy.  It’s time we had a system where American companies don’t have an incentive to offshore because our tax laws make it impossible for them to compete in the global economy.  Time is running out!  Congress must act now!  Perhaps if you contact your representative in Congress, it will make a difference.