Wednesday, May 12, 2004

You Call This Progress? 

Gotta love that US Senate. Faced with an unfavorable WTO ruling holding that current US tax law illegally subsidizes exporters, "the world's greatest deliberative body" has come up with this response:
The US Senate has passed a package of tax breaks worth $170bn (£97bn), which it hopes will help patch up a long-running trade dispute with Europe. At the heart of the package is a lower tax rate for manufacturers, which have struggled to compete in global markets. The bill also aims to balance out tax breaks by closing a mass of loopholes, in particular for US multinationals. Crucially, it repeals $5bn in export tax breaks which Brussels insists are a disguised subsidy for US firms. European Trade Commissioner Pascal Lamy confirmed that final passage of the bill will spell an end to the EU sanctions currently in place on some imports from the US.
Sounds good, right? Free-traders can applaud acceptance of a WTO ruling and removal of some distortionary subsidies. Populists and liberals worried about America's declining industrial base can cheer as someone finally helps out US manufacturing. And the exporters I referred to in this earlier post can breathe a sigh of relief now that Europe will be removing (instead of increasing) punitive tariffs on their products.

But a closer look reveals an uglier picture. The NY Times explains:
The original goal of the bill had been to replace a tax break for exporters that the World Trade Organization had declared illegal. But the measure that passed was a 900-page behemoth that offered something for almost every business interest...

The immediate corporate beneficiaries would include any company that still produces goods in the United States. The bill would also define "manufacturers" to include software companies like Microsoft, mining companies and Hollywood studios.
Taxpayers for Common Sense (a slightly oddball, pro-environment and fiscally conservative watchdog group) reports that the bill as passed by the Senate contains more deals for special interests than a small army of stick-shakers could shake sticks at. Some notable examples include exempting "educational" archery equipment from existing excise taxes and new tax breaks for dog racing tracks and Oldsmobile dealerships. Less amusingly (and more worryingly for environmentalists, anti-corporate-welfare progressives, and would-be budget balancers), the bill cuts taxes on large energy corporations to the tune of $14 billion.

But the strangest and most potentially-discomfiting thing about the bill is the tax break for "manufacturing" firms. In order to get in line with the WTO's "national treatment" and anti-export subsidy rules while still maintaining assistance to domestic firms, the Senate has chosen to throw a bone to all companies that make stuff here in the US. Shockingly, some very conservative Republicans have made good points on this matter. In their minority view in the bill's committee report, Senators Nickles and Kyl note that:
[t]he manufacturing deduction is not neutral because it could cause companies with a variety of business operations to shift more resources to their manufacturing operations to take advantage of the lower rates, even if that is not the most productive use of their resources. We believe that the reported bill will lead us down the slippery slope of industries pressuring Congress to expand the definition of 'manufacturing' in the future to allow them to qualify for the deduction, regardless of whether the industry can properly be defined as a manufacturing industry. We see this already in the reported bill, which allows films to qualify for the manufacturing deduction. We know that special-interest tax provisions for favored industries lead to unproductive, tax-driven economic activity; we should not add yet another such provision to our tax code.
And that was before the orgy of amendments was added (and before the inevitable addition of even more junk in the House-Senate conference on the bill).

Kyl and Nickles point out very good reasons to oppose this bill regardless of one's political leanings.

Populists/Liberals: Even if you cling to the idea (against the consensus among economists) that an American manufacturing base is a really important thing to maintain, this bill isn't going to get you there. Instead, the bill creates an incentive structure whereby any firm or group of firms who will gain more from a 3% tax break than they expect to lose in lobbying costs (discounted over time, of course) will find a way to get defined as "manufacturers." I can promise you right now that in the long run US manufacturing jobs will still be lost, even with the 3% tax cut, and that plenty of ununionized, poorly-paying industries will somehow successfully package themselves as manufacturers. The best one can hope for is that the bill will slow down inevitable plant closings, giving employees more time to equip themselves to meet new economic realities; there are far better, politically feasible ways to help displaced workers though, as I've argued before.

Technocrats/Free-Traders: This is not what the WTO is supposed to accomplish. Ask your typical technocrat why he supports the WTO, and he'll tell you all about reciprocity norms, reaching higher equilibria, overcoming collective action problems and the like. But underlying all this jargon is the idea that the WTO helps countries lower their trade barriers in order to achieve more efficient allocation of resources within their economies and across national borders. The bill being considered does a lot of shifting redistributionary policy around without clearly reducing distortions in the economy. And the idea of new special treatment for manufacturing, however defined, should bring back unpleasant memories of the bad old days, even if national treatment laws are being technically adhered to.

Unless you're a Member of Congress looking to pick up a little electoral or campaign-finance support, or a lobbyist, it's tough to see why you'd be happy about this bill. There's some chance the House won't get its act together and pass similar legislation, and an even smaller chance that the bill will get hung up some other way between now and the end of the legislative session. But don't count on it.

UPDATE: Click here for an over-the-top rant about manufacturing jobs as a very bad thing. [Link via Drezner]

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