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NAM • COMMENT
INDUSTRY TODAY 11
STEP NOT TAKEN
Extension of the 2001 and 2003 “Bush tax
cuts” is the most important, immediate step
that Congress should have taken before
recessing for the campaign season. Full
extension remains the critical first respon-
sibility Congress faces when it returns in
mid-November for a lame-duck session.
President Obama and leading
Democrats in Congress want to extend
the lower tax rates only for the bottom
three tax brackets while allowing the top
two rates to revert to 2001 levels. They
characterize the strategy as preserving
“middle class tax cuts” while renouncing
“tax cuts for the wealthy.”
REALITY CHECK
Rhetoric ignores the reality of American
business, especially small business.
About 73 percent of all manufacturers are
organized as S-corporations or other
flow-through entities that pay income
taxes at the individual rate, and they will
be disproportionately affected by the tax
increases. Since 2007, these companies
have lost more than 850,000 jobs. If
Congress fails to act and lets the tax rates
return to the permanently higher rates, the
National Association of Manufacturers
estimates that manufacturers will lose an
additional 238,000 jobs by 2019.
Individual income tax rates are not just
the most prominent ones to increase at the
beginning of 2011. Capital gains taxes
will increase to 20 percent, and dividend
tax rates will revert back to the top indi-
vidual rate of 39.6 percent from the cur-
rent 15 percent. The lower tax rates on
capital gains and dividends help drive
economic growth. Indeed, they were
instrumental in pulling the economy out
of the 2001-2002 recession.
EXASPERATING THE CONSTITUENTS
Inaction is especially frustrating because
Congress saw the deadlines approaching.
The 111th Congress convened in January
2009, knowing that the higher tax rates
would return within two years. Thus, it
undermined all the efforts to encourage
hiring and economic growth.
In the past year – as the economy con-
tinued sputtering and unemployment
remained well above nine percent – public
pressure for the full extension of tax rates
has grown. Further, campaigns highlighted
the issue. Support is bipartisan. In mid-
September, 31 House Democrats wrote to
Speaker of the House Nancy Pelosi, calling
for a full extension of the 2001-2003 rates.
“We believe in times of economic recovery
it makes good sense to maintain things as
they are in the short term, to provide fam-
ilies and businesses the certainty required
to plan and make sound budget decisions.
Providing this certainty will give small
businesses, the backbone of our economic
recovery, confidence and stability,” the
lawmakers wrote.
NO FOLLOW-UP
Here’s another serious case of omission
by inaction: the congressional failure to
renew the federal R&D tax credit. The
United States pioneered the tax credit in
1981. This move proved such a success-
ful impetus for innovation that other
countries followed suit.
In 2009, 21 OECD countries offered
R&D tax incentives – 16 of which offered
stronger incentives than the United States
– compared to just 12 OECD in 1996.
This 75-percent increase over 15 years
reflects a targeted effort by countries to
jumpstart technological advancements
and innovations by the private sector.
Indeed, many of these companies actively
recruit U.S. companies to move their
research and development offshore.
Rather than respond by making the U.S.
credit permanent and more flexible,
Congress let this critical incentive lapse at
the end of 2009 and failed to restore it this
year. True, Congress has previously cho-
sen this path of expiration and (often
retroactive) renewal of the tax credit – but
talk about uncertainty!
REALITY CHECK – PART 2
R&D fuels the innovation that drives new
product development and increased pro-
ductivity (two necessary factors for
growth in manufacturing) but Congress
has abdicated its role.
Finally, another deadline looms – and
“deadline” is an apt term. In January, the
estate tax, which was temporarily
repealed for 2010, will rise to a job-killing
55 percent with a $1 million exemption.
Small and medium-sized manufacturers
spend an average of $94,000 a year to plan
for the estate tax, and these costs have
increased significantly since the legisla-
tion was passed in 2001. The tax affects
these companies by discouraging savings
and investments. The estate tax also
reduces wages, stifles job creation and
ranks as the leading cause of dissolution
of thousands of family-run businesses.
LOOKING AHEAD
As the recession eases, smaller manufac-
turers will lead our national recovery by
acting first to bring back laid-off workers
and recruit new employees. Legislation
enacted since 2001 to lower tax rates has
been extremely helpful to smaller compa-
nies, but permanent, lower individual
tax rates are needed to revitalize the
U.S. economy.
Already, the economy, jobs and taxes
dominate 2010 congressional campaigns.
Indeed, high-stakes politics added to the
drama of the House’s last day in
Washington. Thirty-nine Democrats joined
the Republicans to vote against a resolution
to adjourn without acting on the tax rates.
“Vote no on this adjournment resolu-
tion. Give Congress a chance to vote on
extending tax rates,” said House
Republican Leader John Boehner of Ohio.
The resolution passed by just a single vote.
But these issues are far more than just
political, partisan disputes. The strength
of the U.S. economy and the ability of
manufacturers to grow and hire new
employees are also at stake.
Congress still has a chance to extend the
tax rates and improve U.S. tax competi-
tiveness. It’s not just a chance; it’s a
responsibility. About this national priority,
manufacturers are very, very certain.
John Engler is president of the National Association
of Manufacturers (NAM), whose mission is to
enhance the competitiveness of U.S. manufacturers
while helping to foster a stronger economy. Learn
more about NAM, visit
“The new level of
uncertainty only adds
to the competitive
disadvantage posed
by the United States’
second highest
corporate tax rate
among developed
nations.”