Low taxes on corporations and higher taxes on the execs who run them could stimulate US manufacturing
American progressives call for higher corporate and personal taxes. Conservatives want no tax increases. Given that President-elect Joe Biden’s “green energy” plan requires a robust American manufacturing sector, we need a more nuanced tax scenario.
The Biden campaign proposal to increase the nation’s corporate tax rate to 28 percent would leave that rate below pre-Trump corporate tax levels but still put the United States above most European rates and leave American manufacturing at a competitive disadvantage.
Would federal policies that mandate the purchase of U.S.-made products offset this disadvantage? Mandates work mainly for subsidized activities. These tend to promote insider contracts rather than entrepreneurship. Germany has become an international manufacturing powerhouse – with large foreign exchange surpluses but industrial wage and benefit levels nearly double what U.S. corporations provide – without such mandates. Germany has a corporate tax rate of 15 percent, plus a 5.5 percent “solidarity” assessment.
On personal taxes, we have counterintuitive reasons for increasing progressivity in personal income taxes beyond Biden’s 39.6 percent. In the 1970s the United States suffered disproportionate deindustrialization. We hemorrhaged products and industries where we had traditionally excelled. Other European nations didn’t abandon traditional and new industries. Finland produces those beautiful cruise liners. Italy retains its shoe and clothing industries and leads in popular granite tabletops and other stoneware. Sweden’s IKEA is the world’s leading home furnishings company and Volvo ranks as the second-biggest truck maker after German Daimler. Sweden also shares with Denmark the distinction of having the world’s highest personal tax rates on high incomes. In the United States, we have one of the lowest.
Back in the 1980s, the Reagan administration’s relegitimization of business may have been timely. But its reduction of top personal taxes from 70 percent to 28 percent led to executive pay becoming linked to corporate profits. This stimulated exponential increases in executive compensation, and those increases, in turn, encouraged corporate executives to pursue short-term profits over long-term goals.
No U.S. top executive pursued short-term profits with more zest and celebrity than General Electric’s (GE) CEO, Jack Welch, who retired in 2001 with a record severance of $417 million. The culture Welch installed at GE created bubble growth and an ultimate crash for the historic manufacturing company.
In 2014 GE contracted to sell the last major U.S. suite of household appliances – its appliance division – to Sweden’s Electrolux, a move designed to gain cash for more profitable investments. Such investments earlier included high-finance and real estate ventures that brought GE profits along with a deemphasis on making products and meeting U.S. technological needs.
GE’s German counterpart, Siemens, took a different course. It continued its traditional long-term strategies and today rates as a major global player across the technological spectrum, as well as a key partner in Germany’s proactive climate-change policies.
The learning I take from all this: America’s astoundingly high top incomes have a negative effect on our national productivity. Top earners buy expensive real estate like Bill Gates’ $147 million primary residence. They purchase foreign properties and luxury goods, art objects and Lear Jets, and expensive security and financial services. They invest for personal income security and growth, but their investments for the highest possible returns do not necessarily serve national needs.
The incomes of our top earners do, on the other hand, have additional negative impacts. They grow our nation’s unsupportable inequality. Among advanced nations, we have the greatest disparity between rich and poor. Before 1970 the lowest income quintiles in the United States saw the fastest growth. In a post-war America where top-bracket personal tax rates never dipped below 70 percent, blue-collar breadwinners could support families on one income. Since 1970 incomes in our lowest quintile income have remained nearly flat in inflation-adjusted terms, with our bottom 50 percent owning a mere 1.9 percent of the nation’s wealth. Older families, the St. Louis Federal Reserve Bank reports, have 12 times the wealth of younger families.
These extremes have triggered record public support for more radical political policies, with disaffection concentrated among younger voters. We will have no economic and political stability in the United States until we correct these imbalances.
Frank Manheim is an affiliate professor and distinguished research fellow at George Mason University’s Schar School of Policy and Government. Manheim is a former senior ocean and earth scientist with the U.S. Geological Survey. This op-ed draws on his recently released research paper for a conference sponsored by the Boyden Gray Center Study for the Administrative State, George Mason University.