Gavin Howe
The revival of the manufacturing sector in the United States has been a key topic of discussion in recent years, with various policies and initiatives aimed at bringing factories and jobs back to the country. One of the most significant efforts has been the introduction of tariffs on imports, with the goal of making it more expensive to produce goods overseas and incentivizing companies to move their operations back to America. However, this approach has been met with criticism, as some argue that it fails to address the underlying issues and may even drive companies to move more of their operations abroad. To address this, policymakers have also focused on providing tax breaks and incentives for domestic manufacturing, such as the Inflation Reduction Act, which has spurred investments in clean energy manufacturing and created new job opportunities. Despite these efforts, there are still challenges to bringing manufacturing back to the United States, including the time and infrastructure needed to build new factories and the potential impact on supply chains and international relations.
| Characteristics | Values |
|---|---|
| Manufacturing employment as a share of total employment | Declined over recent decades |
| Manufacturing output as a share of total output | Declined over recent decades |
| Bounce-back in manufacturing employment | Since 2010 |
| Tariffs on imports from foreign countries | 10% to 49% |
| Time taken to build a factory in the US | At least 2 years |
| Time taken for a new factory to become efficient | 6 months to a year |
| Tax Reform Act of 1986 | Had a negative impact on economic growth |
| Trump tax cuts | Helped reverse the trend of factory closures |
| Expected rise in investment in the US | 7.4% |
| Inflation Reduction Act | Reviving manufacturing by doubling manufacturing construction |
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What You'll Learn
- The 2017 Trump tax cuts helped revive American manufacturing
- Tax breaks for offshoring hurt the US manufacturing base
- Tariffs on imports may not bring manufacturing back to the US
- The Inflation Reduction Act is reviving manufacturing through tax credits
- The 1986 Tax Reform Act negatively impacted economic growth
The 2017 Trump tax cuts helped revive American manufacturing
The 2017 Trump tax cuts have been credited with reviving American manufacturing by providing significant tax breaks for corporations. The cuts, also known as the Tax Cuts and Jobs Act (TCJA), reduced the corporate tax rate and provided a 20% deduction on qualified business income for many owners of privately held companies. This encouraged investment in domestic manufacturing by increasing after-tax profits.
The tax cuts also allowed for 100% bonus depreciation and increased small business expensing, which helped lower the cost of investing in new equipment, vehicles, and facilities for manufacturers. As a result, manufacturers were incentivized to purchase new, more productive equipment, manned by new employees, driving domestic investment and economic growth.
Several companies have shared their positive experiences since the tax cuts. For example, Quake Manufacturing in Indiana was able to provide its 12 employees with long-term disability, short-term disability, dental insurance, $1,000 bonuses, and paid gym memberships. Cranston Material Handling Equipment Corp in Pennsylvania could purchase new equipment, build a new website, and invest in training. Power Curbers, Inc. experienced growth in employment and invested heavily in R&D.
The 2017 tax cuts also dramatically reshaped how the US taxes the foreign profits of domestic multinational corporations. The Global Intangible Low-Taxed Income (GILTI) regime introduced a groundbreaking new minimum tax on almost all foreign profits of American companies, due immediately in the same year. However, GILTI also provided new incentives for offshoring, as it only targeted profits derived from intangible assets, and provided a flat percentage discount based on the value of tangible assets in foreign jurisdictions.
Overall, the 2017 Trump tax cuts were intended to make the United States a more competitive place to do business and reverse the decades-long trend of manufacturing decline. While there are mixed opinions on the effectiveness of the tax cuts, with some critics arguing they may encourage offshoring, the cuts have provided a boost to domestic manufacturing investment and growth.
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Tax breaks for offshoring hurt the US manufacturing base
The US manufacturing base has been in a decades-long collapse, with large US companies increasingly shifting production overseas in search of cheaper labour and bigger tax breaks. The US tax code has, for decades, incentivized offshoring by offering tax breaks to companies that produce overseas.
The 2017 tax reform, for example, established a substantially lower tax rate for foreign income, with GILTI (a tax on intangible assets like patents and copyrights) taxable at just half the rate that would apply if the income were domestic. This means that companies get a big discount on GILTI due to their heavy investment in foreign production facilities. As a result, they have no incentive to re-shore production. The more that American companies invest in jobs and production abroad, the bigger their US tax break.
In addition, the Tax Reform Act of 1986 negatively impacted economic growth by prioritizing a lower corporate tax rate over better cost recovery for investment. This resulted in a tax cut for both new and old investments, rather than just new investments.
The Trump Administration's tariffs on imports from foreign countries aim to bring manufacturing back to the United States. However, these tariffs may have the opposite effect, as they increase the cost of doing business for American companies and make it more expensive to build factories in the United States. This could further incentivize offshoring and hurt the US manufacturing base.
To encourage domestic manufacturing and bring jobs back to America, the US government should eliminate tax breaks for offshoring and address the incentives in the corporate tax code that encourage companies to move their operations overseas.
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$32.45
Tariffs on imports may not bring manufacturing back to the US
Firstly, tariffs on imports may not bring manufacturing back to the US because of the time lag in manufacturing. It takes time to build factories and make products, and in the meantime, tariffs must be paid on imported components and machinery. This increases costs for manufacturers, and may even bankrupt them before they can establish efficient operations in the US.
Secondly, the US tax code has, for decades, rewarded offshoring by providing tax breaks for companies that produce goods in foreign countries. This has incentivized companies to manufacture their products abroad, even when they plan to sell those products to American consumers.
Thirdly, the US has lost the most jobs in low-tech industries like textiles, where many hours of hard work go into final products that don't sell for very much money. Bringing back these types of manufacturing jobs may not be possible or even desirable.
Finally, instead of moving supply chains back to the US, it would be more cost-effective for companies to relocate them to lower-tariff countries. This could result in a global search for low-tariff regimes, rather than a reshoring boom as intended.
In conclusion, while the stated goal of tariffs on imports is to bring manufacturing back to the US, this approach may not be effective and may even be detrimental. Other factors such as the time lag in manufacturing, tax breaks for offshoring, the loss of low-tech jobs, and the availability of lower-cost locations must be considered when attempting to bring manufacturing back to the US.
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The Inflation Reduction Act is reviving manufacturing through tax credits
The Inflation Reduction Act (IRA) has sparked a manufacturing and clean energy boom across the United States. The Act, signed into law by President Joe Biden in August 2022, has mobilised historic investments in clean energy, electric vehicles, energy efficiency, environmental justice, and other green initiatives.
The IRA has provided tax credits and incentives to encourage investment in clean energy projects and advanced manufacturing. These include the Production Tax Credit, which offers a 10% bonus credit for qualifying clean energy production in energy communities, and the Advanced Energy Project Credit, which provides at least $4 billion in allocated credits of up to 30% for advanced energy manufacturing investments in areas that have seen the closure of coal mines or the retirement of coal-fired power plants.
The tax credits and incentives offered by the IRA have attracted significant investment from both domestic and foreign companies. As of January 2023, half of the manufacturing investments from the IRA came from foreign companies. The law has unleashed a manufacturing renaissance, with tens of billions of dollars of new investments announced, and forecasts of even higher growth in the coming years.
The clean energy and manufacturing revival spurred by the IRA is creating new job opportunities in many small towns and rural areas throughout the United States. Between August 2022 and July 2023, 272 new clean energy projects were announced in 44 states, expected to generate more than 170,000 new jobs. The IRA is also expected to create millions of well-paying jobs in the energy and manufacturing sectors over the next decade.
The IRA's emphasis on renewable energy and electric vehicles has prompted investments across the country, bringing manufacturing back to America while combating climate change. The Act has also made solar and wind energy more affordable, and tax credits for electric vehicles are promoting their use.
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The 1986 Tax Reform Act negatively impacted economic growth
The Tax Reform Act of 1986 was passed into law by US Congress and President Ronald Reagan to simplify the income tax code, broaden the tax base, and eliminate many tax shelters and preferences. The act was intended to be revenue-neutral, but it ended up shifting some of the tax burdens from individuals to businesses.
While the 1986 Tax Reform Act did include a corporate tax cut, from 46% to 34%-35%, it also raised taxes on capital. The act eliminated the distinction between long-term capital gains and ordinary income, taxing capital gains at the same rate as ordinary income. This raised the effective tax rate on capital, reducing long-run GDP. The act also eliminated the investment tax credit and lengthened depreciation schedules for business investment, further increasing taxes on capital. These provisions counteracted the reduction in corporate tax rates, resulting in a negligible impact on long-run GDP overall.
The 1986 Tax Reform Act also eliminated certain tax shelters, such as deductions for rental housing, individual retirement accounts, and depreciation. Prior to the act, passive investors could use real estate losses to offset taxable income. When these deductions were no longer allowed, many investors sold their assets, contributing to sinking real estate prices and ending the real estate boom of the early to mid-1980s.
Additionally, the act increased the alternative minimum tax (AMT), which targeted a broader set of deductions that most Americans receive. This change impacted families who owned homes in high-tax states and further contributed to the negative impact on economic growth. Overall, while the 1986 Tax Reform Act had various provisions and intentions, its impact on economic growth was limited, and in some cases, negative.
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Frequently asked questions
It is hard to say exactly how many factories have returned to the U.S. since the 2017 Trump tax cuts, but the tax cuts have helped to revive American manufacturing and have incentivized companies to bring their manufacturing operations back to the U.S.
The 2017 Trump tax cuts included policies like 100% bonus depreciation and increased small business expensing, which allowed manufacturers to expand operations and lowered the cost of investing in new equipment, vehicles, and facilities.
The 2017 Trump tax cuts helped to revive American manufacturing and incentivized companies to bring their manufacturing operations back to the U.S. by making it more attractive to set up shop in the country. The tax cuts also helped to create new jobs and fuel economic growth.
Critics argue that the 2017 Trump tax cuts may have made it more attractive for companies to locate factories abroad, particularly in countries with cheaper labor and bigger tax breaks. Additionally, there is criticism that the tax cuts primarily benefit big businesses and that the manufacturing boom may be short-lived if the tax cuts are not extended.
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