Sunday, November 28, 2010

Taxes & Manufacturing

Launching Liberty Ship SS George Washington Carver. E.F. Joseph of US War Information, Public Domain

Due to the exams I have been studying for, I have not been posting here much. However, as I was studying for my Engineering Economy exam today (all the wonderful accounting rules that Industrial Engineers have to know), I stumbled upon something that was simply beyond the pale in what it means for manufacturers.

Very well known is the role labor costs play in driving manufacturers out of the United States. Less well known is the role government policy and bureaucratic red tape that in no way, shape or form benefits our quality of life overall effects manufacturing, and drives still more manufacturers away from our country. Previously, we have discussed the effect of railbanking regulation, excessive accounting standards and nuclear energy moratoriums (see number 4), but today, I want to talk about the way that our tax system favors an America of pizza delivery boys.

Land, with time, generally increases in value, but the property used in manufacturing and transportation deteoriates. We've all experienced this when we sell a car. When your property deteoriates, but you still sell it for more then the government expected, you are taxed at the rate of corporate or personal income (depending upon how your company files.) But when your property increases in value beyond what you purchased it for, as happens with land, you are taxed at a lower rate, called Capital Gains. Literally, when manufacturers do a good job maintaining their factories, they get taxed more then a pizza shop does when they maintain their land. The only exception is when a manufacturer is finally shutting down, then the land is worth more (manufacturing jobs attract people) and they finally get a capital gains tax.

So we see that the government favors manufacturers only when they've finally decided to close shop. In life, they get taxed more then others for their property, period.

This is not the only example. Property taxes allow manufacturers to die when the community they cultivated becomes too good, as their two or three acres of communally important land becomes too expensive for the amount of revenue they generate a year, and the potential of land fluctuations to drive manufacturers out of business massively increases the risk of them and other businesses that rely on borrowed money. Just like the homeowners in Detroit, their loans breathe down their neck, and the potential of things they have no control over to drive them out of town makes it breathe harder.

Think about that, millions of dollars of borrowed money in jeopardy because you might do too well for the community you are in. Beyond the economics, contemplate the morality of that.

Policies like this hurt upstart and cutting edge manufacturers the most, as they must take the biggest, highest interest, and longest-term borrowed capital in order to even begin to produce, as they have no starting capital to begin with. Their entrepreneurs also face the worst consequences should they fail, as no one may well trust them again since they have no good yet on their record to balance it. In developed countries like America, it will be manufacturers like these that create the fastest and most reliable growth, as they need the support services, development capital, and personal connections that a developed, industrialized country like America has to offer.

Further, the establishment too depends on serving the mavericks in order to have reason to remain here, as otherwise, their costs may well be cheaper in Asia, but they too benefit from industrial buccaneering for the innovation, quality workforce, markets, and new activity it creates. It may not show up every year, but it does show up from time to time, and business people have always been gambling men. Friends, let us compete in what we are good at, and take home our first-world wages while we're at it.

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