Why Would You Tax the Rich To Invest in Manufacturing?

President Obama speaks after touring TPI Composites, a wind blade manufacturer, in Newton, Iowa, on May 24, 2012

Photograph by Jewel Samad/AFP/GettyImages.

The latest Obama campaign ad mostly features on familiar themes—the need for progressive taxation, the need for bank regulation, and the absurdity of turning back the clock to the Bush years. But for me it does hit a sour note when the president says that one reason we need to tax high income earners is in order to “invest” in manufacturing:

I think this actually lays bare what’s long been troubling me about the administration’s weird manufacturing fetishism. Let’s say there are four kinds of people—doctors, waitresses, factory workers, and factory owners. The factory workers and the factory owners are both in the manufacturing sector, the doctors and the waitresses aren’t. The doctors and the factory owners are both rich, and the waitresses and the factory workers aren’t. But the factory owners are richer than the doctors, and the factory workers are richer than the waitresses. What we want to do is to help the waitresses. Taxing doctors in order to subsidize factory owners (“invest in manufacturing”) so that they’ll hire some waitresses to go become factory workers seems like an exceptionally roundabout way of accomplishing the goal. Why not just tax those who have a lot (regardless of sector) and give money to those in need?

Now the president’s other idea of taxing the rich in order to invest in education makes much more sense. Obviously one can raise doubts about the efficacy of education spending. But the idea is that doing this in a smart way—and I think the administration’s education ideas have mostly been smart ones—raises the long-term growth potential of the economy across the board. Not only will some people earn more because they’re better educated than they otherwise would have been, but everyone shares to an extent in their gains thanks to skill complementarities and spillovers.

The administration’s main policy argument that similar externalities exist in manufacturing is that manufacturing firms account for a disproportionate share of R&D. But that’s an argument that subsidizing R&D would be good policy (and incidentally good for many manufacturing firms) not for an across-the-board manufacturing subsidy.