Sen. Orrin Hatch (Again) Miscasts VAT

On August 2, Sen. Hatch, in a speech on the Senate Floor, used the opportunity to again warn against a “European-style” Value Added Tax.

Notably, in the last Domenici-Rivlin testimony before the SFC, Sen. Hatch – for emphasis – rhetorically asked Sen. Domenici and Alice Rivlin if their revised proposal dropped the Deficit Reduction Sales Tax (VAT).  Alice Rivlin responded affirmatively, but made the point that both she and Sen. Domenici “still like” the DRST, but there was “no appetite” in Congress for a VAT.

Sen. Hatch and others who oppose a VAT smear it as a “European-style” tax, and only characterize it as an “add-on” tax, which it need not be!

Opponents in Congress ignore the potential opportunity for a revenue-neutral replacement of the Corporate Income Tax by a VAT to stimulate domestic growth and improve our trade balance.

The U.S. is at a competitive disadvantage in global trade for not employing a Value Added Tax.  All our trading partners use a VAT to eliminate the burden of taxation from the price/value comparison of goods crossing borders, since the VAT is subtracted from exports and added to imports.  Even China imposes a 17% VAT on everything we sell to them, and subtracts 17% from exports.  It’s not a socialist concept.  It’s just smart business.

In contrast, the U.S. clings to its high 35% CIT rate which is successfully avoided by parking profits abroad and through successful lobbying for loopholes.  The CIT is so unsuccessful that its share of government revenue has dropped from 32% in 1952 to 7.9% in 2011.  Today, that 24% drop in share would project to $674 billion in revenue.  In fact, government receipts have dropped to the point where corporations now spend $740 for avoidance (accountants, tax attorneys, lobbyists) for every $1,000 the government collects.

To replace the CIT, revenue-neutral, would take a VAT of 4.5%.  Imagine the effect on domestic job creation, if imports cost 4.5% more and exports cost 4.5% less. Imagine the effect of zero CIT on the billions of U.S. profits retained in lower CIT countries to avoid U.S. taxes?  Imagine the investment by foreign businesses, which would want to avoid their own country’s CIT?

Nothing government could do would have the significant positive effect on growth as replacing the CIT by a revenue-neutral VAT.

Prejudicial rhetoric without discussion of the merits of a revenue-neutral VAT to replace the CIT is against the country’s best interest.