I wonder if the average voter really knows what a jump back to a tax rate of 39.6 percent from the current level of 35 percent might mean. The underinformed might view it as a slight financial inconvenience for the Wall Street button-down types and the owners and management of large corporations. Unfortunately, many of the folks that are going to get hit with the higher tax rate at the end of the year—if Congress doesn’t complete a Hail Mary pass to renew the Bush-era tax cuts—will be owners of manufacturing firms.
Many small to midsized manufacturers are organized as S Corporations under the U.S. tax code, which means these firms pay taxes at the owner’s individual tax rate. When that rate jumps, a company’s ability to reinvest in much-needed machine tools and upgrades to remain competitive decreases.
“There is a lot of noise in Washington right now about only raising taxes on the ‘wealthy’ to pay for social programs and hopefully balance our federal budget. However, as a small business, we may report $250,000 or more in profit, but few manufacturers take those profits home – they are overwhelmingly reinvested in the business and our employees manufacturing in America,” said Ralph Hardt, president of family-owned Jagemann Stamping Co. in Manitowoc, Wis., at a congressional hearing in July. “The less resources we have due to paying more taxes ties our hands and does not allow us to buy new million-dollar machines that need new employees to run.”
Hardt further illustrated his point by mentioning that he had to offer a personal guarantee of collateral to follow through on the purchase of a $270,000 grinder. That’s his money that’s going back into his company, not his wallet.
Manufacturing has remained a bright spot in a very sluggish economic recovery. The last thing the manufacturing community needs is a major kick in the shins just because Congress can’t get its act together to ensure we don’t fall over the fiscal cliff at the end of 2012, when tax rates automatically jump to 39 percent and huge federal budget cuts go into effect.