By Karen Mills
Nov. 28, 2017
The GOP tax plan that has passed the House, along with the one being debated in the Senate, focus on lowering the tax rates for corporations to spur job creation, while also attempting to deliver on the President’s promise of bringing manufacturing back. But what these plans get wrong is that they are based on economic assumptions from decades ago, offering a 20th century tax plan instead of one that will position the United States to be competitive in the 21st century.
Fundamentally, both the House and Senate plans ignore two critical realities when it comes to creating good jobs and higher wages in today’s economy: 1) the importance of small businesses and 2) the role of service sector companies.
While there is nothing wrong with trying to stimulate the manufacturing sector, as it does create jobs and have a multiplier effect, it only comprises 10 percent of all jobs in the United States. This means that a focus on manufacturing alone will not support good jobs across the entire economy.
On the other hand, the services sector makes up 90 percent of the jobs in our country. While many assume these are low-paying jobs with little upward mobility, that is not true. Recent research by MIT economist Mercedes Delgado and me shows both the growth of the supply chain services sector and the wages associated with those jobs. In fact, supply chain services industries have experienced the highest job growth of any sector in the U.S. economy since 1998, and average wages in this sector are $80,000 compared to the national average of $47,700. This is in contrast to supply chain manufacturing jobs, which have been in steep decline over the past two decades.
In addition, many of these supply chain services companies are part of the small business segment of our economy, which generates more than 60 percent of all net new jobs in our country.
However, GOP tax plans ignore these smaller supply chain services companies. Instead, they provide greater tax breaks to capital-intensive (i.e., manufacturing) small businesses, by allowing a higher percentage of income for those companies to qualify for the lower “pass-through” rate. The legislation also explicitly excludes a list of businesses, forcing them to face higher tax rates: “health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.”
The stated intent of this exclusion is to prevent high-paid workers such as lawyers and consultants from incorporating themselves as small businesses and taking advantage of the system. But in protecting against this possibility, the GOP plans disadvantage supply chain services companies who provide well-paying jobs for millions of Americans.
For example, hundreds of thousands of middle-class Americans find employment in industries such as payroll services, equipment rental, landscaping architecture, and crude oil extraction, all of which have higher average wages than the economy as a whole – in short, these are the good, middle-class jobs. Yet, small businesses in these sectors are largely excluded from the tax relief in the GOP plans.
Quite simply, the GOP plans appear to be one based on assumptions from 50 years ago when producers of manufactured goods, not services, drove our economy. By not extending tax relief to small services sector businesses, these tax plans will fall short in creating the economic growth to make the United States competitive in a 21st century global economy, and they fail to live up to the promise of supporting well-paying jobs for the average American.
Karen Mills is a Senior Fellow as the Harvard Business School and served in President Barack Obama’s Cabinet as Administrator of the U.S. Small Business Administration from 2009 to 2013.