Alternatives to Tariffs: Part Four

 

I am not a fan of tariffs as public policy due to two flaws of theirs: They are a significant tax upon consumers and they do nothing to address the structural matters that truly impact the competitiveness of domestic producers that face threats from abroad.

For the past month in this column, I’ve been offering suggestions of public policy and investments that could provide the necessary support to manufacturers and, in turn, the US economy. The series concludes today with a look at cost certainty, specifically when it comes to taxes.

 

The so-called Trump Tax Cuts, more accurately identified as the Tax Cuts and Jobs Act of 2017 (TCJA), brought significant changes to business taxation, such as a reduction in the corporate income tax rate from 35% to 21%, an increase in the estate tax threshold, and modifications to the individual income tax system that reduced taxes for pass-through businesses.

 

Certain TCJA provisions related to corporations, globally engaged companies, and individuals (including the aforementioned pass-throughs) changed or started to phase out in 2022, which concludes with expirations scheduled for the end of 2025. Every one of those changes has resulted or will result in significant adverse impacts on manufacturers throughout the United States. According to studies commissioned by the National Association of Manufacturers, if all the expirable aspects of TCJA did sunset, manufacturers would be forced to cut 1.1 million jobs while $248 billion would be stripped from the gross domestic product.

 

The President and many Republicans are looking to extend all parts of the TCJA, while some in his party want to make them permanent and others among the GOP, the deficit hawks, might not be too keen on renewing them at all, which in a House of Representatives split 218-215, could spell the end of the TCJA.

 

Given that division, it might be somewhat of a tough fight but certain parts certainly do deserve extension, whether they concern research and development credits (especially given US manufacturers’ innovation race with China), the estate tax threshold (which impacts many factories -- and farms -- because many of those operations can be asset rich, in terms of machinery and property, yet cash poor), and the 20% pass-through deduction (S-corporations, partnerships, LLCs, and sole proprietorships account for 50% of total private payrolls in the United States).

 

An important component of the TCJA that does not need attention in 2025 is the corporate tax rate. It will stay at the lower 21% even as all of the TCJA expires. But, an act of Congress could cause it to increase. The future is never certain as, for example, presidential candidate Kamala Harris campaigned on taking it up to 28% as did Joe Biden before he was unceremoniously dumped by his party.

 

Those against keeping it at 21% claim it didn’t result in trickle-down economics because large corporations didn’t pass the savings on to their workers and the greater economy. It’s a false, failed narrative because they fail to realize that, by design, through intense lobbying of and crony capitalism by Republicans and Democrats alike, our nation’s tax code has loopholes galore that keeps the big boys from ever paying those taxes to begin with: 35%, 28%, 21%, it doesn’t matter to them, they’ll find a way out. For example, for the five years ending in 2022, Ford’s federal income tax rate was -0.2% while General Motors saw 1.3%.

 

It’s the smaller manufacturers – like the machine shops in your town, or my company – that actually pay corporate taxes and therefore see huge benefits across their entire food chain and practice trickle-down in all forms with the tax rate at 21%.

 

This aspect of the Trump Tax cut was a game changer for Confer Plastics in recent years. Having access to more of our money was a big reason why we became debt-free, were able to buy two molding machines without incurring debt, and could, at the same time, issue substantial bonuses to our whole team….giving us the best financial position, technology, and people to compete in this great big world.

 

Producers need certainty. Tariffs don’t provide that. They’re a temporary, variable, and somewhat emotional response to trade issues. Tax cuts, like those launched in 2017, are a more reasoned approach that look at cost factors that can be mitigated to allow our nation’s manufacturing base to hang with China and other powerhouses. They should be a part of our trade war weaponry, as should be the things that were mentioned in recent columns, like a culture around and protections for intellectual property, investment in energy, and the fostering of supply chains for minerals, metals, and rare earths.  

 

 

 

From the 15 February 2025 Greater Niagara Newspapers and Wellsville Sun