Sen. Pete Domenici and Dr. Alice Rivlin appeared before the Senate Finance Committee in open session to discuss their plan for sweeping tax reform. They emphasized the overarching point that additional revenue is needed to reduce the deficit. After all prudent cuts are made to Medicare, and after means-testing Social Security, there will still be a need for additional revenue to meet the obligations of a growing retired population.
Senator Hatch asked for confirmation that the revised D-R plan as now presented would replace their original element of a Deficit Reduction Sales Tax, a VAT, with an increased Corporate Income Tax (CIT). Dr. Rivlin confirmed in response, but added that they “both still like” the idea of the DRST, however there was “no appetite” in Congress for a VAT.
The fact that no one in the Senate has the courage to back a Value Added Tax is at once understandable and regrettable. Introducing a VAT…even dedicated to deficit reduction…would create yet another new tax in addition to the CIT. Senators would have a hard time convincing their constituents that this medicine would be in their best interest. It just would not be politically viable.
The way to sell a VAT rests with outright replacement of the CIT, which is a broken cog in our tax system.
In the process of avoiding taxation, corporations employ accountants, tax attorneys, and lobbyists to find and create loopholes that will minimize their costs. These specialists are hugely successful, particularly for the large multi-national corporations. As a result, the CIT is riddled with many exceptions —for agricultural subsidies, off-shore profits, American cruise lines, literally hundreds upon hundreds.
The result is a complicated maze that only a team of specialists can navigate. And, who knows what’s right? Neither individuals nor corporations know for sure whether their taxes paid are more or less than they could or should be. As Will Rogers said, “The income tax has made more liars out of the American people than golf has.” Ultimately, this crazy quilt of code has undermined trust in government.
The CIT has long been criticized for being too high and uncompetitive. This is why our multi-nationals tend to park profits in countries with lower tax rates. Some multi-national corporations push the limits by incorporating overseas profit centers that are no more than a mailbox in a foreign land. Such legal non-compliance may be an ethical and moral question, but it makes for good after-tax profits.
The fundamental purpose of our tax system should be to efficiently collect revenue in a way that is equitable and minimally inhibits economic growth and domestic employment. William Simon, who served as Secretary of the Treasury in the Nixon and Ford administrations, said disparaging of our tax code: “The nation should have a tax system that looks like someone designed it on purpose.”
Look at how unsuccessful the CIT really is. Collections peaked as a percentage of federal tax receipts in 1952 at 32.1%. Receipts averaged 21.3% of total revenues in the 1960’s, 16.1% in the 1970’s, 9.6% in the 1980’s, 10.5% in the 1990’s, 10.4% in the 2000’s. In 2010, the CIT contributed 8.9% and in 2011 only 7.9%.
A 2011 study by Citizens for Tax Justice revealed that the 280 most profitable corporations sheltered nearly half their profits from federal income taxes in the prior three years; their average effective tax rate was 18.5% over the three years, about half the statutory 35% rate; 78 of these companies paid zero federal income tax in one or more of those years.
Corporations are so successful at gaming the CIT, that taxes paid have fallen to the point where their compliance expenses including accountants, lawyers and lobbyists cost these corporations $740 for every $1000 the government collects.
If federal receipts from corporations have declined from one-third of federal revenues and now amount to less than 10%, why continue a tax system that is so easily thwarted and inefficient?
Why not replace the CIT with a smarter tax, a VAT to better compete in world trade and to assure compliance?
VAT is already accepted and proven. This tax system was specifically created for world trade and is employed by all our trading partners and over 150 countries. It is a consumption tax levied at each stage of production and in total is equivalent to a retail sales tax.
What makes the VAT important for trade is its border adjustability, meaning it is subtracted from exports and added to imports. This feature removes the variable of the burden of government from the cost comparison of goods in international trade.
For example, when a car is shipped from Germany to China, the 19% German VAT is deducted from the price of the vehicle, and the 17% VAT in China is added to the price of the car when it is imported there. But, when a U.S. car ships overseas, there is no such deduction for the cost government (the CIT), and a VAT tax is added to the price by the importing country. Here in the U.S., there is no VAT added to imports. Without our own VAT, there is a large price wedge against U.S. products at home and abroad.
Our largest trading partners add the following VAT cost to goods they import from us. The range is from 5% VAT in Canada and Japan to over 17% on average from the others: Canada 5%, China 17%, France 19.6%, Germany 19%, Italy 20%, Japan 5%, Korea 10%, Mexico 16%, Spain 16%, United Kingdom 17.5%.
These countries have a CIT in addition to a VAT. But, that does not make sense for the U.S. Why just add another tax onto the CIT, which we already know is a broken system? How would replacing the CIT by a VAT affect us?
- We would very likely see a strong economic growth spurt and more jobs.
- U.S. goods would be more competitive with imports here, since imports would be equally taxed by the VAT.
- U.S. exports would be more competitive, as the VAT, unlike the CIT, would be subtracted from exports.
- There would be no double-taxation of dividends. Because corporate profits would not be taxed, only dividends would be taxed to individuals when they receive them.
- U.S. multi-nationals…which now park profits in lower-taxed countries…would bring their capital back to the U.S. for investment. The U.S. with NO corporate income tax would be the best country for recognizing your profits. Foreign corporations would likewise shift profits to the U.S. for investment.
If VAT is so good, why don’t we have it? Again, VAT would be a new tax, and politicians fear proposing taxes, even if it is good medicine. Tax is a four-letter word to politicians. But, we don’t have to follow other countries and make our VAT an “add-on” tax. Our VAT can be a dollar-for-dollar replacement for other taxes. We can replace all corporate tax revenues by an 8% VAT, including rebates to protect individual tax filers with low income. Companies would save substantially on their compliance expenses, and that savings could go to stockholders or consumers in the form of lower prices. Companies would no longer have the CIT to dodge, so they would no longer need a bevy of expensive lobbyists to push for loopholes (unless we made the mistake of permitting exceptions to the VAT, which would be like letting the camel’s nose under the tent).
Want to see the idea considered of replacing the CIT by a VAT? Contact your representatives in the House and Senate. Tell them you would like the U.S. to get a fair shake in international trade. Tell them replacing the Corporate Income Tax by a Value Added Tax will make the U.S. more competitive and create jobs. Tell them you will not vote against them for proposing a revenue-neutral VAT to replace the Corporate Income Tax.
Chances are, some of our representatives really get the concept and would support a VAT, but they need to know you will support them.