Fiat Chrysler will make Ram trucks in Michigan instead of Mexico beginning in 2020, and the company says this will mean 2,500 extra jobs at the plant in Warren, Detroit’s largest suburb.
While this isn’t the first bit of good economic news in the wake of big corporate tax cuts Republicans just passed, it’s the one that cheers us the most, because it best reflects the way lower corporate taxes work.
The key is not bigger profits but increased competitiveness.
Lower corporate taxes will lead to higher pay, but the barrage of year-end bonuses major employers announced led to an oversimplified understanding of the economics here. The simplistic story — that with lower tax rates, corporations will have more money, and they’ll pass along some of that money to workers — is a tale of "trickle-down" economics, which is a term of abuse used by the Left against free enterprise.
Unfortunately, many Republicans tell this simplistic story, too, because it’s easy to tell and understand. “The whole purpose of the tax cut act was to put more money in companies,” Treasury Secretary Steven Mnuchin oddly said in a White House briefing last week.
“Put more money in companies,” is the way central planners talk about their industrial policy. It’s the way the Left talks about tax cuts. It implies that tax cuts involve Mnuchin and Trump taking a pile of money and handing it to Wal-Mart, and then hoping Wal-Mart spreads the wealth.
But this isn’t what tax cuts do, and conservatives and supporters of market economics shouldn't take this rhetorical shortcut, because it leads into a thicket. Nobody gets money from a tax cut. Profitable businesses keep more of the money they already earned, thanks to tax cuts. We don’t know whether the parade of corporate bonuses after the tax cuts were more economic or political responses to the cuts. But we do know that the Fiat Chrysler move is more representative of what we can expect now with a much lower corporate rate.
More companies will set up more business in the U.S., because it’s now easier to compete by doing so.
Mexico has a 30 percent corporate rate. When the U.S. had a 35 percent rate, it made sense for Chrysler to make its profits in Mexico. Now the U.S. rate is 21 percent. Labor is still much cheaper in Mexico, but Chrysler weighs the pros and cons of where to manufacture, and the U.S. is suddenly much more appealing than it had been before the bill passed.
Lower tax rates aren't the only reason to move a plant to Michigan. Better energy infrastructure, a more educated workforce, and a better legal system all weigh on that side of the scale. But reducing the tax rate from 35 percent to 21 percent weighs heavily, and in many cases, it will tip the balance in favor of America.
So cheers to Fiat Chrysler. May it be the first of many.