Taxes and the deficit: The perils of oversimplification

Chris Kuehl, economic analyst, Fabricators & Manufacturers Association

This has been a year of trumpeting doom, of postulating, of worry—at least that’s how anyone would feel if they watched, listened to, or read the news. Workers in the media have serious column-inches to fill, and if you work in Washington, the election is the only game in town, one that has lasted far too long. Hence, we have worrying and postulating.

Meanwhile, business leaders in metal fabrication press on. Consider the 2013 Capital Equipment Forecast from the Fabricators & Manufacturers Association (FMA). As detailed in this issue, capital spending projections inched up 4 percent from last year. That’s certainly a less dramatic jump than forecast last year, but it’s a significant increase all the same. Most important, projected spending levels are nearly where they were before the recession. All this is happening in the face of a pending fiscal cliff and slowing global growth. Business leaders know of the uncertainty ahead, but they also know it’s riskier to fall behind by standing still.

There are issues that matter in the stump speeches, and none hit home quite like taxes, especially for business owners. Another element makes the issue of taxes especially poignant during this election cycle: math. Most politicians believe the government deficit just isn’t sustainable over the long term. When it comes to taxes, something will need to change in the coming years. That much is obvious, no matter one’s political stripe. The question, of course, is what exactly should change?

“We have a tremendously oversimplified debate going on in this country.”

So said Chris Kuehl, economic analyst for FMA. Oversimplification, he said, pervades any election season, and the current one is no exception. One side of the political spectrum says that the government should tax the well-off; the other side scorns the idea of taxing wealthy job creators.

The Mayan calendar will not end but reset at the end of the year; so, too, will the election cycle and, unfortunately, the postulating. While the arguments continue unabated, The FABRICATOR talked with Kuehl about the following three points that offer ration-al perspective—too boring for any stumping politician trying to grab headlines, but good for business owners planning ahead while trying to tune out the cacophony of hyperbolic sound bites.

1. The wealthy may give billions more, but the country needs trillions.

“If you define wealthy as those who earn $250,000 a year or more, the biggest revenue boost from this kind of tax increase I’ve seen is $49 billion,” Kuehl said. “That’s not an insignificant amount of money, but we have a $15 trillion debt. It’s a bit like trying to pay off a $100,000 loan a little faster by paying an extra $5.”

And yes, we may be in a time with relatively low tax rates. Some may cite that certain times of high growth also happened to be accompanied by higher tax rates. The wealthiest bracket of the 1950s was taxed to the hilt, at a rate of more than 90 percent. The top bracket of the 1990s was taxed a little higher than today, at more than 39 percent. Some argue that growth during these times didn’t have anything to do with taxes.

As always, Kuehl pointed to the subtleties. First, people avoided taxes then just as they do now. The rich in the 1950s shuffled their income to investments, which were not taxed at such a high rate. Second, the correlation between tax rates and economic growth has been a continuing debate. During this tenuous economic climate, the nonpartisan Congressional Budget Office said a tax hike will cause an economic slowdown for several years, but after that growth would resume. On the other hand, a recent International Monetary Fund report about the lackadaisical global growth attributes it in part to drastic austerity measures in Europe and elsewhere.

The argument is moot anyway, Kuehl said, because a tax hike alone won’t solve the problem. A plethora of pundits spout ideas, from cost-sharing programs in Medicare to raising the retirement age to closing corporate tax loopholes. Solutions that make the most difference usually involve cuts to the Defense Department, Social Security, and Medicare, which (especially the last two) represent the third rail in politics.

2. When taxes help.

Germany remains a manufacturing power amid an economically haywire Europe. And unlike other euro-based countries, Germany’s economy has been relatively resilient. Like most countries in Europe, Germany also taxes individuals higher than the U.S. does (though Germany does have a low effective corporate tax rate). In 2010 the average individual tax rate in Germany was about 40 percent. There’s a catch here, though. The taxes pay for a lot, including (most significant for manufacturers) an education system that churns out technical talent.

Why do U.S. citizens scorn higher taxes? As Kuehl explained, they see money taken out of their paychecks and wonder where it’s being spent. Meanwhile, every year health care premiums rise and more money is taken out of the paycheck. Yes, taxes pay for roads, bridges, and public safety. But beyond these basics, government spending doesn’t seem to make anyone’s life dramatically easier.

“The worst possible way to tax is tax the way we’re doing it now,” Kuehl said. “The rates are sort of high, but not incredibly high, and it doesn’t seem to pay for anything. I’m paying a 30 percent tax rate, but I’m also paying for health care and I’m paying for education.”

The U.S. household also is seeing greater earning differentials, with one spouse (now often the woman) making significantly more than the other. And with so many expenses for necessities, there really isn’t that much left for discretionary spending.

“You go to Europe, and the health care is nationalized, housing is subsidized, food is subsidized, and education is free,” Kuehl said. “There isn’t anything left to spend money on except to go to a movie.”

Kuehl recalled one Swedish client. “In Sweden, there’s lots of welfare for the people, but there’s also welfare for the company. A Swedish client of mine made brake adjusters for heavy trucks, and they wanted to get into a new product line. The government paid for all of it, including a $30 million new plant. The company didn’t even have to get a banker involved.”

Stateside, such support would give new meaning to those “your taxes at work” signs.

3. Free choice, careers, college loans, and paying up.

In some countries—especially those with a strong technical workforce—students are tracked at a somewhat young age. Switzerland is a good example, where many youth go into apprenticeship programs before they graduate high school. Not everyone goes to a four-year college, either. Gaining strong communication skills as well as a mathematical and technical background in primary and secondary school is enough for a healthy career.

This kind of tracking, though, may not sit well in America. Many feel students shouldn’t be guided but instead be free to choose their life’s pursuit. It’s not about what you can do for your country; it’s about, well, what you can do for yourself. And for many, this has entailed getting a student loan backed by the government (that is, the taxpayer), and majoring in anything. The country’s colleges are full of students who are ill-prepared for collegiate-level work, so they drop out.

But Kuehl, ever rational, pointed to the larger problem: Too many students graduating from any school—be it high school, a two-year community college, for-profit college, or a four-year university—aren’t entering the workforce with skills employers need. This should be the focus of education policy, and it has been to some extent, with programs like the Right Skills Now initiative (www.rightskillsnow.org) and national technical certification programs.

But another message that public school teachers hear, Kuehl said, is that every kid needs to go to college because a college degree—any degree—is a ticket to a good job. As a former college professor, he admits that he would have agreed with this notion a decade ago. Students who went to college could get a job because a degree in nearly any major was a badge showing that they could be taught. “I told students that they could major in anything, because they undoubtedly would find a job that didn’t relate to their major anyway. I wouldn’t dream of telling students that today.”

Problems with education perhaps are why business leaders in metal fabrication and elsewhere look at taxes warily. In business, nothing is more important than finding talent. If a fabricator can’t find talent, he hires and trains people so that they become talented. The fabricator does it because he has to, but it’s understandably frustrating. He pays taxes. He knows society needs roads and bridges, public safety, and national defense. He also knows the country needs public education, and this is a sticking point. His tax dollars for schools do not make his life any easier; to the contrary, the poor educational system actually makes his life harder.

The frustration doesn’t automatically push the fabricator toward a certain political camp. He knows the system needs to change. One side wants to pour more money into government so it can provide more and better services; the other side wants to leave more to the private sector. As Kuehl explained, both approaches have their pros and cons. The subtleties and messiness of the real world usually don’t fall neatly onto one political platform. But few politicians cover these complex, messy realities. They oversimplify, which in the long run doesn’t help anyone.