Follow the Money

Part of the reason the United States isn’t more committed to manufacturing might be found in some of the basic facts of its tax system.


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America, why can’t you be more like Wichita?

A study recently released by the Brookings Institution revealed Wichita, Kansas to be a national leader in an important way. This is the home of Cessna, Hawker Beechcraft and Bombardier Learjet, among other manufacturers. Partly because of these companies, this city—which sells 28 percent of its gross metropolitan product outside the nation’s borders—is the U.S. municipality with the highest share of income from foreign sales.

Portland, Oregon and San Jose, California are also close. These cities manufacture, yes—but more significantly, they manufacture for export. They make products that foreigners want to buy. And it is worth considering just how much better our economic prospects would be if only a lot more U.S. cities could do the same.

For example, jobs would multiply. They would also be more stable. Right now, the problem is that U.S. employment is hostage to its own consumer spending—and this problem has long been with us. Even in the 1950s and 60s, we manufactured for ourselves. Later, U.S. consumers started looking elsewhere. A new way, a better way, would be for us to make products for consumers worldwide, wherever demand is flourishing.

So why don’t we do this? That is, why don’t we manufacture for export more than we do? Many see reasons in our contemporary culture, such as a bias against manufacturing and a mindset that disfavors this kind of work. Maybe. But a recent “Financial Times” article citing the Brookings study also cited an underappreciated reason why our economy is so driven by domestic spending. That reason is our tax system.

Home-grown manufacturing needs home-grown capital. We do not foster this. Rather, we tax income as opposed to consumption. We give little incentive to savings, but (through the mortgage interest deduction, for example) we do encourage debt. We have a system that not only erodes capital, but also sends it shopping.

A tax system seeing America as an export-driven manufacturer would look very different. It might feature a value-added tax instead of an income tax, for example. Here, though, hope falters. To many, such a proposal is incendiary—not because a value-added tax wouldn’t make sense in context, but because Congress would have to provide that context. What if lawmakers didn’t go all the way? Instead of a transformation, we might get a mess in which part of the new tax is added, but the old tax doesn’t go away.

Still, big changes—including changes for the better—have tended to come out of extreme times. That might be the silver lining of these times today. The different economy, the manufacturing export economy, might become more plausible as the alternatives increasingly fail. What is unquestionably plausible is America’s fitness for such an economy. We have the resources, population and knowledge to make what the world wants, not to mention the geographic access to shipping lanes. Producing high-value goods for foreign buyers should be the future for the United States, and perhaps it inevitably will be the future.