This report examines the provisions in current federal tax law that benefit most or many manufacturing firms. Basically, it tracks the manufacturing sector's share of non-agricultural employment, gross domestic product (GDP), business investment in research and development (R&D), exports, and domestic investment in capital assets between 1960 and 2010. The tax relief is mainly intended to promote certain policy goals. Table 2 shows the tax preferences from which manufacturing companies derive the most benefit. The exception is the first preference in the table: the deferral of the active income of controlled foreign corporations (CFCs) under Section 11(b). Arguments For and Against Federal Support for Manufacturing

The current debate over whether to expand federal support for manufacturing is reminiscent of the lively (and at times acrimonious) debate over industrial policy that influenced the formulation and implementation of U.S. economic policy in the 1980s. The question of whether federal assistance for manufacturing is justified on economic grounds also has noteworthy implications for the debate in the 114 th Congress over reforming the federal tax code. Several proposals to expand federal support for manufacturing have been introduced, a few of which include new or expanded targeted tax incentives. More specifically, they focus on the importance of manufactured products to U.S. exports, the wages and benefits available in the manufacturing sector, the role of manufacturing in technological innovation, the links between manufacturing and other sectors, and actions taken by other countries to support manufacturing. Proponents maintain that product innovations in manufacturing have had a major impact on the growth prospects for firms that use those innovations in a variety of non-manufacturing industries. In their view, such a focus makes sense for two reasons. They can be summarized as follows: (1) the lack of any market failures linked to the performance of the manufacturing sector, (2) a sustained decease in the contributions of the manufacturing sector to job creation and GDP over the past 50 years, and (3) the untapped potential for growth in U.S. exports of services in which the United States may have a comparative advantage. Some critics say it would be misguided in light of recent history for the federal government to target assistance at manufacturing in the expectation that doing so would be likely to spark large employment gains over time. Promoting Service Exports Would Do More to Stimulate the Economy

Critics also say the U.S. economy would benefit more in the short run from government efforts to dismantle foreign barriers to U.S. exports of services than from new programs to bolster the competitiveness of U.S. manufacturers, especially SMFs. Such an increase would support or create nearly three million U.S. jobs, according to Jensen, and those jobs would be likely to pay higher wages than manufacturing jobs, on average. Implications of the Arguments for Federal Policy toward Manufacturing

The debate over whether manufacturing industries should receive federal assistance raises several issues that Congress may wish to take into consideration as it examines options for reforming the federal income tax or laying a foundation for future robust economic growth. In 1981, Congress added a temporary research tax credit to the tax code. In an economy marked by uneven and relatively weak job growth more than six years after the end of the 2007-09 recession, it can be argued that increased federal assistance for manufacturing would do less to spur faster job growth in the short run than policy measures that deliver a greater stimulus to aggregate demand, such as increased federal spending on the rebuilding and expansion of the U.S. transportation network. Proponents of a greater federal role in revitalizing the domestic manufacturing base say that the future growth potential of the U.S. economy hinges in part on finding ways to convince more manufacturing firms to perform a substantial share of their R&D and production in the United States. Rather than focusing on manufacturing as the primary pathway to growing the U.S. economy, Congress might consider policy options for providing more R&D support, improving worker training to reduce mismatches between employer skill needs and the skill sets of workers, expanding access to credit for small- and medium-sized companies, and encouraging the growth of industry-specific networks that could offer a range of collaborative services for the mutual benefit of individual firms that would apply to all industries. Permanent tax incentives require no annual appropriations or other congressional action to have their intended effect. Some options would seek to achieve revenue neutrality by lowering business income tax rates and expanding the business tax base by reducing or repealing certain business tax incentives.
Fueled in part by certain policy initiatives advocated by President Obama, a lively debate over whether additional federal assistance should be provided for manufacturing is taking place among some analysts and lawmakers. Several issues are central to the debate: (1) the contributions of manufacturing to the performance and growth of the U.S. economy, (2) whether the federal government should do more to promote the growth of the sector, and (3) if so, what measures would be likely to have the intended effect?
The federal government supports manufacturing in a variety of ways. This report focuses on the support provided through the federal tax code. Current federal tax law contains nine provisions with the potential to provide significant tax relief to firms primarily engaged in manufacturing. A few are targeted at manufacturing, while the others offer more benefits for manufacturers than for firms in most other sectors. The most important provisions, ranked on the basis of estimated foregone revenue, are the deferral of the active income of controlled foreign subsidiaries of U.S.-based corporations, the research tax credit, the expensing of outlays for research and experimentation, and accelerated depreciation for a variety of capital assets.
A number of proposals are being considered in the 114th Congress to expand federal tax benefits for the manufacturing sector. Some of the bills would create new tax incentives intended to increase domestic investment and job growth in manufacturing. Their prospects for passage have become intertwined with the growing debate in Congress over reforming the federal tax code. Most proponents of tax reform favor an approach that would combine a broadening of the income tax base (e.g., by eliminating certain business tax incentives) with a lowering of corporate and individual tax rates, in a revenue-neutral fashion. Such an approach could have a significant effect on the taxes paid by many manufacturing companies.
Proponents of boosting federal assistance for manufacturing say the added support would benefit the U.S. economy in several important ways. In their view, a revitalized manufacturing sector might enable the United States to derive more of its economic growth from exports and domestic production than it has in the past two decades or so. Proponents also contend that average domestic wages would be likely to rise in response to growing manufacturing output, as manufacturing jobs historically have paid higher wages and benefits, on average, than have non-manufacturing jobs. In addition, according to proponents, a growing manufacturing sector would help lay a foundation for future U.S. economic growth, since manufacturing industries perform the vast share of private-sector research and development (R&D), which fuels the innovation that serves as a primary engine of economic growth. Finally, proponents argue that the United States would lose its long-standing leadership in advanced manufacturing technologies in the absence of increased federal support for manufacturing R&D and worker training.
Critics of greater federal assistance for manufacturing maintain that there is no economic justification for additional support. In their view, in the absence of a market failure linked to goods production in general, government aid for manufacturing should be decreased or eliminated, not increased. Critics also say that promoting job growth in manufacturing would do little to create the millions of jobs needed to bring domestic full-time employment back to the levels that prevailed on the eve of the severe recession from 2007 to 2009. And, say critics, U.S. gross domestic product and employment would receive a greater boost from federal initiatives to dismantle foreign barriers to expanding exports of services than from targeted assistance aimed at boosting the competitiveness of U.S. manufacturing companies.