Two decades ago, when I bought Bison Gear & Engineering, a manufacturer of small motors used in everything from soft-drink dispensers to meat slicers, railway gates and hospital equipment, we had 50 employees, a small customer list and a small suburban Chicago facility. Today, Bison has hundreds of loyal customers in North America, Europe and Asia, about 240 employees, a large and modern production facility in St. Charles, Ill., and plans for expansion. But now all of that is threatened.
The 21st century has been one of negative wealth creation in America with the World Trade Center attacks and subsequent military activity, the financial crisis of 2008-09 and continually growing trade deficits. In the past decade, General Motors, where my father worked, has had its share of problems, and the Dayton, Ohio, area, where I grew up, lost 42,000 manufacturing jobs, roughly half of all jobs in that sector. Stimulus spending has provided some temporary relief in the economic cycle, but its effect is waning, and we face trillion-dollar government budget deficits if we do not take action to create real economic growth by engaging in serious tax reforms to spur investment. Expanding manufacturing in the United States is the best path for this investment.
The United States has been the leader in manufacturing output globally for the past 110 years, with about two-thirds of all business research and development in the United States being performed by manufacturers and nearly 60 percent of exports coming from manufactured goods. American manufacturers hold the lion’s share of patents granted in the United States and have doubled productivity since 1987, which is twice the rate of the entire business sector. However, more effective foreign competition has led to increasing manufactured-goods trade deficits and the loss of 7 million U.S. manufacturing jobs since 1980. Our position as the world’s leading manufacturing economy is about to be lost to China because of a lack of effective measures in tax and trade policies. With Japan lowering its corporate tax rate to 25 percent, the U.S. will have the highest and most uncompetitive corporate tax rate (at 35 percent, not including state taxes) in the industrialized world, 40 percent higher than the average of our foreign competitors.
The timing of my acquisition of Bison Gear & Engineering Corp. in 1987 was fortuitous. It was at that critical juncture that a bipartisan effort, led by President Reagan, resulted in the Tax Reform Act of 1986, with the personal income tax rate being lower than the corporate rate for the first time in history. By changing to a Subchapter S corporation taxed at the personal rate, I had 7 cents more from every profit dollar to reinvest into the company, which was key to growing the business. This led to growth rates that doubled our sales every five years ongoing and the hiring of an additional 200 employees, who enjoyed 14 percent higher wages than for other private-sector jobs. (Over time, the personal rate has found parity with the corporate rate, so the investment differential does not exist today.)
I was not alone in this type of thinking. Today, there are 4 million Subchapter S corporations and 3 million partnerships/LLCs with income passing directly through to their shareholders, who pay taxes at personal income tax rates. These are predominantly smaller, closely held American firms, averaging $12 million to $15 million in annual sales versus C corporations at an average size of $100 million. These businesses represent a full 80 percent of all corporations in the United States, accounting for one-third of gross domestic product. If Congress does nothing to change the tax provisions of the 2011 budget, those businesses face a 10 percent tax increase in 2011 at the top rate. These millions of American companies are the bedrock of our interconnected economy and, like my company, Bison Gear, are proven job creators, given the right investment incentives.
I serve on the Board of the Manufacturers Alliance/MAPI and felt we should take a detailed look at the economic effect of the current tax situation. Jeremy Leonard, a staff economist, worked with Ernst & Young to develop a report we just published. Our economic models indicate that under President Obama’s 2011 budget proposal, S corporations in the manufacturing sector will see their tax bills go up 14 percent, our country’s economic output through 2015 will drop $200 billion on an annual basis, with 500,000 jobs lost - especially in the manufacturing sector - and the deficit will increase another $100 billion. This appears to be a recipe for a continued downward spiral.
We also took a look at the Wyden-Gregg tax proposal, which would simplify personal tax rates and lower the corporate rate to the world average of 24 percent, close to what it was in the 1986 reform. Our model indicates creation of nearly 2 million jobs and the addition of an extra $500 billion annually to GDP by 2015. This bill is a good start on the type of tax reform needed to get America back on track. That said, the bill would eliminate most business tax deductions and incentives as revenue “broadeners.” I would strongly recommend that we not throw the baby out with the bath water, but continue effective tax incentives to encourage export and manufacturing-sector investment. One important thing to consider would be to maintain rate parity between C and S corporation manufacturing businesses. If we can make this a truly bipartisan effort, there will be some horse trading and we will find a way to get U.S. manufacturing growing again.
We are at a critical juncture in America, and we need to take action now to focus on building our economy by encouraging investment in domestic manufacturing. As we say on the ranch in Montana, “Are you just going to lie there and bleed, or are you going to cowboy up?” In the best American tradition, it’s time to cowboy up.
Ron Bullock is chairman of Bison Gear & Engineering Corp. in St. Charles, Ill. Find the study at MAPI.net.