The Associated Press is looking at the positions that President Barack Obama and Republican presidential candidate Mitt Romney have taken on small business issues. Here's where they stand on ways to help U.S. manufacturers:
BACKGROUND: U.S. manufacturers, including hundreds of thousands of small businesses, have been suffering for decades due to competition from factories overseas and from technology that has increasingly made some manufactured goods obsolete. The Brookings Institution estimates that the U.S. lost 41 percent of its manufacturing jobs between June 1979, when employment at U.S. factories peaked, and December 2009, the recent low point for the industry. The biggest concern for many manufacturers, their employees and lawmakers is China, where a huge array of goods, or the components that go into goods, are manufactured more cheaply than in the U.S. China's entry into the World Trade Organization in 2001 cost the U.S. 1.8 million manufacturing jobs between that year and 2007, according to economist Robert Scott with the Economic Policy Institute in Washington.
THE QUESTION: List three specific things you would do to help U.S. manufacturers compete with companies overseas.
Gov. Romney is committed to cutting the corporate tax rate from 35 percent to 25 percent. This lower tax burden will enable manufacturing companies to reinvest more of their profits back into the company and offer higher wages to skilled workers.
Protecting the competitive edge of U.S. manufacturers will also require assertive trade policies that open new markets for American businesses and workers while stopping countries like China from cheating on their trade commitments. Gov. Romney will confront China over its intellectual property theft, its closed market and its currency manipulation and make clear to all countries that the United States embraces free trade but only with countries willing to play by the rules.
Acknowledging the importance of research and development to the manufacturing industry, Gov. Romney will also make permanent the R&D (research and development) credit. This credit promotes innovation in both manufacturing and non-manufacturing industries, and helps businesses plan their innovation spending. With a strong, permanent credit, companies will be able to invest for the future with confidence.
FACT CHECK: The vast majority of manufacturers are small businesses that wouldn't benefit from a cut in the corporate tax rate. According to 2008 Census figures, the most recent numbers available, nearly 99 percent of manufacturers had fewer than 500 employees. More than 80 percent of small businesses are either not corporations, or they're what are known as S corporations, according to the National Small Business Association. In all these cases, owners pay taxes on the business, at an individual rate that may be higher than the corporate rate.
The U.S. had a trade deficit with China of $295.5 billion in 2011. The deficit for the first three months of 2012 was at $67.1 billion, ahead of the $60.2 billion for the same period of last year. Some of the imbalance is due to the fact that goods are manufactured more cheaply in China, but the country also has been criticized by lawmakers and business groups in the U.S. because of its limits on imports of foreign goods. The country also has much looser laws about copyright and trademark infringement. In December, Assistant U.S. Trade Rep. Claire Reade told Congress, that "counterfeiting and piracy in particular remain at unacceptably high levels in China and continue to cause serious harm to U.S. businesses."
China has been accused of keeping its currency, artificially low. That helps make it easier to export its goods and, critics say, undercut the prices of U.S. manufacturers.
The president has put in place a strong agenda for manufacturing. Building on that, the president has proposed:
Tax reform to create incentives for domestic manufacturing: The president has put forward a framework for corporate tax reform that would strengthen incentives for manufacturers to create jobs in the United States. That effort includes:
—Lowering marginal rates: The corporate rate would be dropped to 28 percent. On top of that, the domestic production deduction - which only applies to production taking place in the US - would result in a 25 percent rate for manufacturers. The president's plan would also double the credit for advanced manufacturing technologies from 9 percent to 18 percent.
—Putting in place a minimum tax on foreign earnings: Under the minimum tax, U.S.-based companies would have to immediately pay a minimum rate of tax on foreign income. This would end tax incentives that make it cheaper to invest overseas - and which put domestic manufacturers at a disadvantage.
—Ending tax incentives to outsource: Under current law, costs incurred to outsource US jobs are tax deductible. The president proposes ending this deduction, and creating a new 20 percent income tax credit for expenses incurred to move jobs from abroad to the U.S.
Continuing key tax incentives for manufacturers: Making the R&D credit, which has been temporarily extended 14 times since it was created in the mid-1990s, permanent would provide certainty to manufacturers making R&D investment decisions. Likewise, the president has proposed to extend a tax credit for advanced energy manufacturing, which would support over $15 billion in manufacturing investments.
The president is also taking steps outside of the tax code to help manufacturers compete. He has launched partnerships between government, private sector, and vocational schools to train 2 million Americans with skills that will lead directly to a job. He proposes supporting natural gas development by incentivizing greater use of natural gas in transportation. He is proposing a one-time, $1 billion investment to launch the National Network of Manufacturing Innovation, as well as an increase in funding for advanced manufacturing R&D by 50 percent over the fiscal year 2011 level.
FACT CHECK: Most small manufacturers would not benefit from a cut in the corporate tax rate. While Obama has proposed a cut in the corporate rate, his budget for the fiscal year that begins in October calls for a top individual tax rate of 39.6 percent. Many small business owners are likely to fall in the higher tax brackets.
U.S. companies are currently not taxed on money they earn overseas. They aren't taxed until they transfer those profits back to the U.S., so as long as the money stays overseas, companies don't pay taxes, and this makes it cheaper for them to operate overseas. The U.S. Chamber of Commerce has argued in favor of lowering taxes on overseas profits to 5.25 percent from 35 percent, which it say would encourage companies to bring their profits home. And it says that would help create 2.9 million jobs in the U.S.
As for the National Network of Manufacturing Innovation, it was announced in March. It is not yet known how well the program is doing.
ANALYSIS: "The vast majority of small businesses ... are sole proprietorships or family owned firms, and most of them are less concerned about their tax rates than they are about having a positive income that could be taxed," says Chester Chambers, an assistant professor of manufacturing strategy at the Johns Hopkins Carey Business School. Chambers says simplifying the overall tax code is likely to be a more significant for smaller manufacturers than adjusting rates. "To say that broad actions such as cutting a corporate tax rate serves manufacturing is a red herring." He says it affects larger manufacturers such as car makers "but is far less relevant to the average firm."
Of Obama's plan to tax foreign profits, Chambers says, "this is a very tricky issue because such a policy motivates the firm to avoid reporting foreign income."
Stephen Gold, president of the Manufacturers Alliance for Productivity and Innovation, a policy and research group, says Obama's plan to tax overseas earnings won't stop companies from opening factories overseas because those plants tend to make goods to sell in those markets. Instead, he says, "it will provide an incentive for U.S. manufacturers with large global operations to shift their (operations) overseas." Moreover, he says, to remove the tax deduction that manufacturers get for building plants overseas will make them less competitive in other countries.
Chambers says the issue of China trade is more complex than the Romney statement makes it appear. "Many firms in China are responsive, consistent, inventive, and work in full compliance with national and international law. Some other firms do not. There is no doubt about that." But, he says, small businesses "are more concerned about identifying reputable partners at home and abroad than they are in the headlines about treaties or high level negotiations."
Meanwhile, Gold says of Romney's concerns about Chinese intellectual property theft and currency manipulation, they "are the same expressed by many industries that want to do business in China. But as politicians before him - including Presidents Obama and Bush - have discovered, political considerations seem to put a damper on the best of intentions." Gold says, "the most effective thing any national leader could do is to rally other trading partners into pressuring China to accept a more responsible role in the world trading community."
Chambers says Obama's training programs are what manufacturing needs. They're "more in keeping with what small producers routinely complain about - the lack of skilled labor," he says. "It is hard to find the technicians ... to actually do the production. The lack of machinists, welders, pipe-fitters, electronics repairmen, and the like is what most growing manufacturing firms cite as the major impediment to growth."
Gold's take on the training programs: A national manufacturing skills certification system "demonstrates that he and his administration understand that this is one of the largest challenges our manufacturing sector faces today."