Why Favor Manufacturing?

Pop Quiz: Did the Tea Act of 1773 raise or lower taxes on tea?

I suspect that many Americans believe that it must have raised taxes. We all know that it got the colonists quite upset. They must have been mad because they felt they were “taxed enough already,” right?

Wrong. The Tea Act actually lowered taxes. What got the colonists so upset was that it didn’t lower everyone’s taxes. It only lowered the taxes paid by one firm: the East India Tea Company. Historically, Americans don’t just oppose high taxation. They oppose inequitable taxation. That’s why I find it particularly puzzling that politicians in both parties are going out of their way to single out the manufacturing sector for favorable tax treatment.

"Boston Tea Party" by W.D. Cooper, Image in the Public Domain

The big government sponsored enterprise of the 18th Century was the British owned East India Tea Company. Like the GSEs of our time, the Company benefited from a number of government-granted perquisites, including a government charter and a monopoly on trade in the East. The Tea Act added one more privilege: inequitable taxation.

In 1767, in an effort to raise money, Parliament had passed the Townshend Acts which had imposed taxes on a number of colonial goods, including tea. But colonial resistance had led to partial repeal of these acts in 1770. After this, the only tax that remained was the tax on tea and it was paid by all companies that dealt in the trade. This wasn’t ideal for the Americans, but it was enough to make them stop protesting.

All of that changed in 1773 when Parliament passed the Tea Act. Unlike the Townshend Acts, the Tea Act was not designed to raise revenue. In fact, it didn’t raise a single tax. Yet it sparked the most concentrated and violent protests in the simmering dispute between the mother country and the colonies.

The Tea Act exempted the East India Tea Company from the tea tax, permitting the company to undercut its rivals and giving it a monopoly in the tea trade. To use an increasingly common phrase from today, the act “picked winners and losers.” Perceiving themselves the losers, Americans were outraged. In Charleston they left the tea to rot on the docks. In New York and Philadelphia they sent it back to Britain. And, of course, in Boston they threw it into the harbor.

All of this has been going through my mind as I have been reading President Obama’s corporate income tax proposal. I’d like to be reading that the president plans to lower the rate for all U.S. firms. After all, there is bipartisan consensus that our corporate tax rate is highly uncompetitive. Instead, I’m reading that the president’s plan calls for preferential treatment of manufacturers.

Why? Because it has become politically popular to favor the manufacturing sector. Just ask Rick Santorum. He would cut the corporate tax rate to 17.5 percent for all firms except manufacturers. They would pay zero.

Apparently politicians are convinced that because manufacturers “make things” that we can see and touch, they ought to be treated favorably. But does the consumer who buys a college education derive any less value than the consumer who buys a Ford? Are those who spend thousands of dollars a year on health care, hospitality, insurance, banking, travel, and hundreds of other activities just imagining that these services are worthwhile? Are the workers in these industries any less worthy than the workers on an assembly line?

We all want to know what will be the next big industry of tomorrow. But this is a question that must be left up to the American consumer. Whenever a politician awards special privileges to one industry or another, he attempts to substitute his judgment for that of the consumer. In the process, the politician artificially draws labor and capital into the favored industries. Think of housing during the 1990s and 2000s. Lured by favorable tax and regulatory treatment, millions of workers went into housing, finance, and related industries. When it turned out the public didn’t want as many houses as the politicians did, all of these workers were stranded with outdated skill sets.

How many factory workers will lose their jobs when it turns out that political interest in manufacturing doesn’t guarantee customer interest in manufacturing?

President Obama’s former economic advisor, Christina Romer, recently parted with her former boss and questioned the wisdom of favoring manufacturers. In doing so she joined a venerable American tradition in opposing inequitable taxation. It would be nice if more Americans joined her.


Update: Veronique de Rugy weighs in with a nice post here.