2011 Federal Budget Tax Proposals Harmful to Competitiveness of American Businesses Says Industry Group

June 23, 2010
MAPI report shows that under the Administration's plan measures to broaden the base would increase the aggregate business tax bill by more than $350 billion over the next 10 years

Tax increases in President Obama's 2011 budget proposals will have unintended adverse consequences on American businesses, and on manufacturers in particular, while the Wyden-Gregg proposal has more positive effects, according to a new report by the Manufacturers Alliance/MAPI.

A new MAPI report shows that under the Administration's plan, while the corporate rate remains unchanged, measures to broaden the base would increase the aggregate business tax bill by more than $350 billion over the next 10 years, amounting to a 6% tax increase relative to the pre-budget baseline.

Conversely, the report shows that the competing proposal of Senator Ron Wyden (D-OR) and Senator Judd Gregg (R-NH) has a more favorable impact on economic growth. "We found that the Administration's proposal results in an increase in the federal deficit of $100 billion relative to the baseline, said Jeremy Leonard, the report's author, "while the Wyden-Gregg bill adds to GDP growth and employment, and reduces the deficit by $300 billion relative to the baseline."

The paper also examines the effects of the 2011 federal budget's tax provisions on pass-through businesses, which include almost four million S corporations and more than three million partnerships, which together account for 80% of U.S. businesses and one-third of total U.S. business activity. According to the report, pass-through businesses in the manufacturing sector will see their tax bills increase by an average of 14%.

The report received the support of both Senators.

"I appreciate the Manufacturers Alliance's findings, as they support what Senator Gregg and I have been saying," said Senator Wyden. "Comprehensive tax reform can not only make the federal tax code simpler and fairer for all Americans, it can help American businesses grow by making them more competitive in the global marketplace. There are few win-win opportunities but this is one that shouldn't be missed."

Senator Gregg also cited the report.

"This new report by the Manufacturer's Alliance highlights the counterproductive nature of the President's business tax proposals," he said. "Those proposals threaten to destroy jobs, undermine the economy, and do little if anything to address our serious and unsustainable debt and deficit problems. However, the report also highlights the positive effects that the Wyden-Gregg tax reform would have on combating our nations debt and deficit epidemic by boosting economic growth, creating jobs and reducing the debt by $1.2 trillion over the next decade. In this time of economic recovery, I am hopeful that our colleagues will carefully consider the findings of this report and sign onto our common sense plan for bipartisan tax reform."

Thomas J. Duesterberg, Manufacturers Alliance/MAPI CEO, argues that policy makers should reform the tax code to assistnot punishthe manufacturing sector which is a key to U.S. innovation, productivity, and well paying jobs."It is important to understand that tax increases intended to help contain deficits will exact a high price in terms of the competitive posture of U.S. manufacturing and the growth of the economy as a whole," he cautioned.

The report finds that a more effective option to reduce the deficit can be found in the Bipartisan Tax Fairness and Simplification Act of 2010 (S. 3018) co-sponsored by Senators Wyden and Gregg, which would simplify the personal income tax system and reduce the corporate rate from 35% to 24%. It also holds personal income tax rates near current levels instead of raising them, which will aid S corporations. Simulations in the report indicate that it would create nearly two million jobs on a net basis and add an extra $500 billion to the GDP by 2015.

"The resulting dramatic increase in business profits would reduce the deficit relative to both the 2011 budget and the pre-budget baseline," Leonard said. "Smart tax policy can advance the twin goals of sustaining the competitive edge of American businesses and help keep the governments fiscal house in some state of order."

Ronald D. Bullock, Chairman of Bison Gear and Engineering Corporation in St. Charles, IL, and report sponsor, concurred. "S corporations and partnerships have become a central pillar of U.S. economic strength," he said, "and it would be ill-advised to inadvertently shoulder them with a disproportionate share of the tax burden."

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