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  • Obama, Tax Policy, and Manufacturing

    Posted by David Foster on June 30th, 2011 (All posts by )

    Fact #1: Obama has been giving many speeches about how much he values American manufacturing and also introducing various initiatives which he claims will be help manufacturing businesses

    Face #2: In his recent budget proposal, Obama proposed the elimination of LIFO inventory accounting for tax purposes. This would generate additional business income tax revenues for the government of an estimated $72B by 2016.

    In what universe do the above two things go together?


    LIFO = last-in-first-out. It means that when a product is sold, the costs allocated against the sale are those of the most recent item of the same kind which was purchased or manufactured, rather that the least recent or the average of the lot. Since it deals with inventory accounting, the elimination of LIFO for tax purposes hits only those companies dealing in tangible goods. It has no adverse impact on, say, a consulting firm or a law firm, but as this 2009 post notes, “sectors which could be severely impacted by any repeal include: industrial equipment, metal fabrication and transportation equipment..” (LIFO accounting is also often used by oil companies, and of course Obama, in line with his ongoing demonization of that industry, will tend to talk about that particular LIFO application.)

    If you are a manufacturer using LIFO for tax purposes, then you are almost certainly using it because it makes your tax bill smaller than the alternative methods. With Obama’s proposed change, taxes for thousands of manufacturers would go up–government revenue is business cost.

    Manufacturers do not only compete with other US and international manufacturers; they also compete in the capital markets with businesses of all types. An investor is going to put his money where he thinks he can get the best risk-adjusted return. Additional unavoidable costs for a particular type of business will drive its product prices up and/or its wages down. So if American manufacturers’ costs are increased by the proposed LIFO change (as well as by many other Obama policies), they become less competitive, less able to expand and to take advantage of some of the global changes which have (could have had) the effect of creating an American manufacturing renaissance.

    See comments from Orrin Hatch, who says that “If there is a tax-policy case to be made for repealing LIFO, then that case should be made in the context of tax reform..” Indeed, changing LIFO at this moment in time, without addressing other issues in the corporate tax system, is discriminatory specifically against tangible-goods businesses at a time when many of them are already struggling with economic and governmental assaults on multiple fronts.

    Is Obama so economically clueless that he is truly unable to see the disconnect between his LIFO proposal and his increasingly vocal advocacy of manufacturing?…or is he consciously speaking with a forked tongue?

    Personally, I don’t think Obama likes doing the tough intellectual work of thinking seriously about proposed policies and how they would play out in the real world if enacted. His policy positions seem to be be based on two factors: the ideas and catch-phrases he absorbed during his formative years–apparently unexamined since–and the things that he believes will get him re-elected. The logic of what actually works, especially in the long term, doesn’t really enter seem to enter the equation to any significant degree.

     

    12 Responses to “Obama, Tax Policy, and Manufacturing”

    1. John Wolfsberger, Jr. Says:

      “Is Obama so economically clueless that he is truly unable to see the disconnect between his LIFO proposal and his increasingly vocal advocacy of manufacturing?”

      Yes. And dumb as box of rocks to go along with being intellectually lazy. Don’t forget, this clown referred to tax cuts as “spending in the tax code,” because the distinction between “revenue” and “expense” is a bit too … nuanced … for a committed Leftist to grasp.

    2. Michael Kennedy Says:

      What is so startling to me is the poor staff work in the Obama administration. This should be the pinnacle of life for these young Democrats. What higher calling is there for a Democrat than government work ? What would be more in demand than a job in the Obama White House that impacted policy ? It has been a mystery why the various gaffes have occurred in the protocol office. Maybe Obama really does hate the British and chose to insult the Queen and the PM deliberately. That still goes far beyond the level one might expect from a sophisticated intellectual.

      I know that Obama belittles Americans because we don’t speak a second language although many of us do and he certainly does not.

      Why would Hillary Clinton’s famous “reset” button for the Russians be misspelled? Surely there are Russian scholars in the State Department, still ?

      There is more excuse in economics as Democrats have been unfamiliar with the details of that dismal science for decades. Larry Summers seems to have made a bet on interest rates for the Harvard endowment, then forgot about it.

      Harvard, it seems, had no choice. Unwilling to sell its assets at fire-sale prices, it needed immediate cash to cover, among other things, what my sources say was approximately a $1 billion unrealized loss from interest-rate swaps. That’s a staggering figure: $1 billion, roughly a third of the university’s entire operating budget for last year.

      Those swaps, put in place under Harvard’s then president, Lawrence “Larry” Summers, in the early 2000s, were intended to protect, or hedge, the university against rising interest rates on all the money it had borrowed. The idea was simple: if interest rates went up, the swaps would bring in enough money to cover Harvard’s higher debt payments.

      Instead, interest rates went down. And for reasons no one can explain to me, even as interest rates were plunging in 2007 and 2008, the university simply forgot, or neglected, or chose not to cancel its swaps—with the result that Harvard wound up facing that $1 billion loss! Whose responsibility was that? Where were Harvard’s chief financial officer and treasurer while all this was going on?

      He was advising candidate Barack Obama.

      The answers to these questions will generate books for the next 25 years after Obama leaves office.

    3. Jonathan Says:

      I think Obama’s priorities lie elsewhere than in maximizing economic growth and engaging our allies to foster US national interests. I assume that these priorities drive the Obama administration’s staff-management practices. Employers usually get the employee behavior they incentivize.

    4. Brian Dunbar Says:

      This would generate additional business income tax revenues for the government of an estimated $72B by 2016.

      As if business will simply roll on in the same old way that generated that number, once it’s being taxed.

      Business is a lot like a dairy cow, that way. Just standing around, waiting to be tapped by Farmer Dan.

    5. Shannon Love Says:

      Michael Kennedy,

      What is so startling to me is the poor staff work in the Obama administration. This should be the pinnacle of life for these young Democrats. What higher calling is there for a Democrat than government work ? What would be more in demand than a job in the Obama White House that impacted policy ? It has been a mystery why the various gaffes have occurred in the protocol office.

      These are people who have been told since the time they were children that they were so much smarter and better educated than everyone else. Rather than undermining their hubris as a good education should, their elite Ivy League educations just reinforced it. These people make huge numbers of unforced errors for the simple reason that they have virtually no realistic grasp of their own limitations. They never double check themselves because the idea that they could be in serious error is nothing more than abstract intellectual concept for them.

      It’s made all the worse because they operate in the political realm wherein concrete/empirical evidence of personal and group failure is solely lacking. It’s easy for them rationalize that something went wrong only because they couldn’t persuade others to perfectly follow their flawless plan. They don’t mistakes in matters of fact, they just don’t push their political marketing hard enough.

      They don’t bother to check minor issues of fact because they assume that if it was important, then they would know about. Conversely, if they don’t know about it, then it isn’t important.

      It’s a recipe for a greek tragedy on a planetary scale.

    6. David Foster Says:

      Shannon,

      I think there is much truth in what you say.

      Regarding hubris and education, see Fear and Loathing in Georgetown on “The Big Assumption.”

    7. David Foster Says:

      Also, see this post about the endless string of second chances that the writer believes that students at “elite” colleges, and graduates thereof, receive.

      It is unlikely that a recipient of multiple second chances would develop the kind of caution and mental toughness that an individual raised in a harder school would.

    8. J. Scott Shipman Says:

      Shannon, You nailed it; hubris, arrogance, dogma and not a shred of curiosity.

    9. Robert Schwartz Says:

      After the Wednesday June 29 press conference, which featured a BO performance so bad that Democrat pundit Mark Halperin called BO a jerk using a four letter word for the male organ, I think it is perfectly clear that BO’s only activity right now is the 2012 campaign. He seems to have staked his re-election on a very base oriented strategy of “populist” demagoguery.

      Some people are really excited about it:

      Let me finish, by the way, with the president of the United States finally telling the Republicans, in his own way, he‘s mad as hell and he‘s not going to take it anymore. We start with President Obama‘s press conference today, including those hot words.

      * * *

      Chuck, I heard the earth move today. The president—he is out there. Here he is on sharing the pain. Let‘s listen. This is a new Barack Obama, politically speaking.

      http://today.msnbc.msn.com/id/43595033/ns/msnbc_tv-hardball_with_chris_matthews/

      I don’t think it will work. If it does, we are truly doomed. But I don’t think that the Democrat base represents more than 40% of the votes, and the ideologically motivated part of that base is probably more like 20%.

    10. Roy Lofquist Says:

      These problems are the direct result of Obama’s lack of executive experience. Appointments and hires were based upon ideological agreement and buddies – not competence.

    11. tomw Says:

      Roy Lofquist:
      Appointments and hires were based upon ideological agreement and buddies – not competence.

      Roy,
      Depends on “Who sent you?”. This is the Chicago Way, doncha know?

      I have this picture in my mind of West Wing Wannabees finding truffles in the news they then bring to the days staff meetings and proudly present… Which are then used in the days speeches without further investigation of any other context. Or any relation to what was said the previous day…
      tom

    12. Roy Lofquist Says:

      Tom,

      My late wife ran the office of a labor union in NYC for 30 years. They do it the same way there.

      Roy