POTUS Campaign | “Free” Trade & VAT Tax Reform

It is little wonder that middle-class workers are flocking to the speeches of Sen. Bernie Sanders and Donald Trump.  Twenty-five years of “free” trade agreements have eroded the hope of millions of Americans for higher-wage manufacturing jobs, which have fallen by nearly one-third since 1990 accompanied by stagnant wages.

What policies might help to stop the bleeding?  Mr. Trump sees tariffs, which could threaten world trade and cause economies to implode.  Secretary Hillary Clinton and Sen. Sanders envision higher education as a ladder to higher paying employment, but that is a longer-term solution based upon speculation that those jobs can and will be created in sufficient numbers.

Most effective in the short-term would be a shift in the way we tax corporations to match our global competition.  Changing to a Value Added Tax as a replacement for the Corporate Income Tax would go a long way towards making American workers more competitive.  How?  Because VATs are border-adjustable, i.e., subtracted from exports and added to imports to eliminate the cost of government from the price/value relationship of goods crossing borders.  For example, China has a 17% VAT that is added to their imports, and 17% is subtracted from the price of their exports.  That is a big difference, coming and going.  Likewise, Germany has a 19% VAT that has enabled their higher-wage country to still be very competitive with higher wages.

Among the presidential candidates, the only remaining contender proposing this shift in how we tax ourselves is Sen. Cruz.  Whether you like his other positions or not, this tax reform deserves your support.  Sen. Paul has proposed a similar plan.  This should not be a partisan issue.  Gov. Jerry Brown ran for president in 1992 based upon the same tax reform.  President Bill Clinton has endorsed the concept, and so have many labor leaders.  Will Hillary Clinton…or Donald Trump?

It’s time we got smart about how we tax ourselves, if we want to compete in the world economy.  It’s time for VAT.

“Free” Trade & Tax Reform | Carrier’s Move to Mexico

Here’s the good news for employees at the Carrier plant in Indianapolis — the next Carrier air conditioner they buy will be cheaper.  The bad news is Carrier’s jobs are moving to Mexico, and the employees’ next jobs will likely pay them less.  (See: “Carrier Workers See Costs, Not Benefits, of Global Trade,” The New York Times, March 20, 2016)

“This is strictly a business decision!,” CEO Robert McDonough told an assemblage of Carrier’s workers about the outsourcing plans that will cost them their jobs. This explanation was met with boos and curses. To help discarded employees, the company promised to pay for four years of additional education, but many older workers feel it is too late for them.  Carrier wages averaged $20 or more per hour, and jobs at the adjacent Amazon warehouse average just over $15 per hour.

We can presume that Mr. McDonough, as most public company CEO’s, is under pressure from parent United Technologies management and stockholders to increase profits any way they can.  And, with global competition, “You can blink and see your market position erode,” he said.  In a subsequent address to a gathering of financial analysts Mr. McDonough went further: “We’ve shifted an abundant part of our manufacturing footprint to relatively lower cost countries, about two-thirds.  Still, there’s some opportunity there.”

We can’t blame UT management for the outsourcing decision, which is a consequence of government policies and free trade agreements.  But it is also important to note that corporations have pushed Congress for these trade agreements, which enable outsourcing in the search for higher profits.  Then, too, there is no faster way for top management to increase the value of their stock options than to dramatically lower the cost of labor through outsourcing.  The result is a deck stacked against the American worker, now in competition with cheaper wages in other countries.

It is little wonder that middle-class workers are flocking to the speeches of Sen. Bernie Sanders and Donald Trump.  Twenty-five years of “free” trade agreements have eroded the hope of millions of Americans for higher-wage manufacturing jobs, which have fallen by nearly one-third since 1990 accompanied by stagnant wages.

What policies might help to stop the bleeding?  Mr. Trump sees tariffs, which could threaten world trade and cause economies to implode.  Secretary Hillary Clinton and Sen. Sanders envision higher education as a ladder to higher paying employment, but that is a longer-term solution based upon speculation that those jobs can and will be created in sufficient numbers.

Most effective in the short-term would be a shift in the way we tax corporations to match our global competition.  Changing to a Value Added Tax as a replacement for the Corporate Income Tax would go a long way towards making American workers more competitive.  How?  Because VATs are border-adjustable, i.e., subtracted from exports and added to imports to eliminate the cost of government from the price/value relationship of goods crossing borders.  For example, China has a 17% VAT that is added to their imports, and 17% is subtracted from the price of their exports.  That is a big difference, coming and going.  Likewise, Germany has a 19% VAT that has enabled their higher-wage country to still be very competitive with higher wages.

Among the presidential candidates, the only remaining contender proposing this shift in how we tax ourselves is Sen. Cruz.  Whether you like his other positions or not, this tax reform deserves your support.  Sen. Paul has proposed a similar plan.  This should not be a partisan issue.  Gov. Jerry Brown ran for president in 1992 based upon the same tax reform.  President Bill Clinton has endorsed the concept, and so have many labor leaders.  Will Hillary?  Will Donald?

It’s time we got smart about how we tax ourselves, if we want to compete in the world economy.  It’s time for VAT.

Marco Rubio Attacks Ted Cruz on Tax Reform

Sen. Rubio’s attack on Sen. Cruz has taken an unfortunate turn. Sen. Rubio has called Sen. Cruz’s tax reform plan “sneaky” and a “liberal scheme” supported by President Obama and Nancy Pelosi. That’s laughable on the face, but may sadly prove effective.

Opponents of VAT fear that its simplicity would encourage more taxation and spending, but they focus on the VAT being an “add-on” tax and not a replacement for other taxes. As Larry Summers said, “Liberals think VAT is regressive and conservatives think it’s a money machine. We’ll get a VAT when they reverse their positions.” With proposals from Sen. Cruz and Sen. Paul replacing the Corporate Income Tax by a VAT, perhaps this is a sign that the time has come.

The VAT itself is not a tool to deliver more expensive social programs.  VAT should be seen for what it is…an efficient mechanism for raising revenue and partially leveling the playing field in trade.  How we use the funds raised and how much revenue we should raise are separate issues, and should be debated separately.

The U.S. is at a major competitive disadvantage without a VAT of its own. All our trading partners utilize a VAT, as do over 160 countries today.  Far from a “European-style” tax, VAT is the world class tax system for international trade.

Our trading partners tack on significant VAT percentages to our goods and services as they cross their borders, a de facto tariff. For example, China adds 17% VAT to their imports from the U.S. and Germany adds 19%, just below the European average. Were the U.S. to replace the CIT by a VAT, it would remove this competitive disadvantage; U.S. exports would be cheaper and our imports..which arrive with the exporting country’s VAT subtracted..would face the same taxes as domestically produced goods and services.

Eliminating the CIT would end the incentive for multi-national corporations to park profits in lower-taxed countries. Forget inversion mergers. With zero CIT, the U.S. would become the lowest income tax country and capital would flow back to our shores. Foreign multi-national companies, too, would seek to move profits retained elsewhere to the U.S. Gone would be the double-taxation of dividends; stock market values should soar.

VAT remains a hot potato. To date, no Democrat for the presidency since Jerry Brown in 1992 has dared to raise the issue of a consumption tax.  Hillary Clinton will probably not mention VAT, even though President Clinton has previously endorsed the concept of VAT replacing other taxes.

TPP – Competitive Disadvantage(s)

You might think Congress would look back at our prior “free” trade deals – pitting U.S. workers against lower wage countries – and have a more jaundiced view of the Trans-Pacific Partnership.  The most outspoken MOC critic of our trade deals is retired Sen. Fritz Hollings of South Carolina.  Hollings saw the industries in his state decimated and warned about the threat to higher paid manufacturing jobs by the trend to globalization.  Free Trade policy, he said, was just American corporations seeking a lower-cost labor supply.  (See, for example, Hollings on “Economists and Free Trade.”)  Sen. Hollings’ Op/Ed’s repeatedly cited the additional competitive disadvantage for the U.S. without a Value Added Tax, a handicap which compounds our labor cost disadvantage.  Let’s look at what the VAT tax disadvantage means for TPP.

According to the Congressional Research Service, in 2012 total U.S. exports to TPP countries amounted to $650 billion.  Total imports from TPP countries amounted to $800 billion.  Of that import total, 40% was from Canada, which operates with an average 13% GST (value added tax).  The VAT – being border adjustable – is subtracted from exports, which means the $316.5 billion in goods imported from Canada would cost $41 billion dollars more within Canada.

This is not a Canadian subsidy.  Rather, GATT rules (General Agreement on Tariffs and Trade of the World Trade Commission) respect the subtraction of VAT from exports to eliminate the burden of the cost of government from the price/value relationship of goods shipping to another country.  The importing country would add its own VAT (cost of government).  Therefore, the imported goods would be on an equal footing with goods produced in the importing country since the VAT is charged on domestic production.

All even, except in the case of the U.S., which does not employ its own VAT.  Imports to the U.S. from TPP countries arrive with a competitive price advantage to the exporting country…13% in the case of Canada.

The second largest TPP exporter to the U.S. is Mexico, which accounts for one-third of U.S. imports from TPP countries.  Mexico’s VAT is 16%, so these goods arrive 16% cheaper than they would be in Mexico itself.  The third largest TPP exporter to the U.S. is Japan, accounting for 16% of U.S. TPP imports; Japan’s VAT is 8%.  The VAT in the other TPP countries: Australia, 10%; Chile, 19%; Malaysia, 6%; New Zealand, 15%; Peru, 18%; Singapore, 7%; Vietnam, 10%.  Only Brunei and the U.S. do not use a VAT.

Because the U.S. does not employ a VAT, government costs are not subtracted from exports.  (GATT rules do not permit the subtraction of corporate income taxes.)  When U.S. exports arrive at a TPP country, that country’s VAT is levied on the total price of U.S. goods..including the implicit CIT.  That is a competitive disadvantage for U.S. exports.  All our trading partners utilize a VAT, as do over 150 countries today.  China’s VAT is 17% and Germany’s is 19%, just under the European average.  Were the U.S. to turn to a revenue-neutral VAT to replace the Corporate Income Tax and Social Security Insurance, the VAT would be in the range of 10%.

The U.S. Congress – in deference to our multi-national corporations – has expressed knee-jerk opposition to VAT.  There has been no outspoken support for VAT even with our presumed goal to retain and increase high-paying domestic manufacturing jobs.  The VAT itself is not a tool to deliver more expensive social programs, an expressed fear of many in Congress.  VAT should be seen for what it is…an efficient mechanism for raising revenue and partially leveling the playing field in trade.  How we use the funds raised and how much revenue we should raise are separate issues, and should be debated separately.

The debate over TPP should beg the question whether the U.S. should employ a VAT to replace other taxes and remove a competitive disadvantage in trade.

Would a VAT replacement of the CIT add a greater burden to consumers?  Taking the view that the consumer pays the CIT, a revenue neutral replacement of the CIT by a VAT should make no difference on balance.  However, there would be a shift of burden from smaller companies to multi-national corporations that are more dependent upon imports.

It is notable that economists are split on where the burden of the CIT falls.  Some argue that it is workers who suffer the burden because the amount of taxes paid could otherwise be used for increased wages.  Likewise some argue that the burden falls on the shareholders.  Others posit that..when a company prices its goods..a margin is added and an implicit tax obligation will inure; since the margin exists within the price of goods, it is the consumer that absorbs the burden of the CIT.

As to the argument that a VAT consumption tax would be regressive..this could readily be nullified via adjustments to the threshold and progressivity of the income tax and via the Earned Income Tax Credit for those at the bottom.

We are entering into the height of the presidential primary season, ripe for conceptual debates about tax policy.  But, so far, among the Republican candidates we see only talk of lowering taxes, and little to none on the impact of tax policy on trade.  Only one presidential candidate has offered a VAT (Rand Paul), and, while he perhaps wisely named it a BAT (business activity tax), no debate question covered Paul’s concept of replacing the CIT with his BAT consumption tax.  To date, no Democrat has raised the issue of a consumption tax.  Hillary Clinton will probably not mention VAT, even though President Clinton has previously endorsed the concept of VAT replacing other taxes.

VAT remains a hot potato.  Even though its clear advantage for trade should mean economic growth and domestic jobs.  There is tacit support among union leaders (Richard Trumka, AFL-CIO; Andy Stern, SEIU).  The elimination of double-taxation of dividends would be good for stock valuations (and Wall Street).  But, until there is a national political leader who champions this sweeping tax reform and rallies the public behind it, VAT is destined to remain unmentionable.

Sen. Rand Paul’s Plan…A Good Start for Tax Reform

Tax policy is a hot potato and controversial.  It can propel a presidential candidate into the headlines, but it can also make the candidate an easy target for opponents and pundits alike. Sen. Paul’s bold proposal is a fine beginning and merits productive discussion.  Hopefully it will not be dismissed by knee-jerk opposition.

The way we tax ourselves should be separated from the purposes to which we apply the revenue we need.  Ideally, on the personal income tax side this plan would have eliminated – purely – all deductions.  Sen. Paul, in sensible practicality..to head off congressional opposition..has incorporated deductions for mortgages and charitable contributions.  The mortgage deduction will placate the real estate lobby, but it will also create the precedent for other industries to lobby for their gain.  The proverbial camel’s nose under the tent.

Critics are circling over the potential shortfall in total revenues.  Once revenue needs are clearly defined, if more revenue is needed the plan can be fixed by increasing the 14.5% rate in the Business Activity Tax, a value-added tax, and by adding one or two tax brackets on the personal income tax side.  The addition of another personal tax bracket or two will change the definition from a “flat” tax with a single percentage for both business and personal taxes, but would provide the necessary flexibility to ensure progressive distribution of the tax burden.  The tax base will be clean.

Importantly, Paul’s Business Activity Tax will finally harmonize the U.S. tax system with all of our trading partners; over 165 countries now use the border-adjustable VAT to our current competitive disadvantage in world trade.  With Paul’s BAT, the cost of government paid by the BAT will be subtracted from U.S. exports and added to imports, neutralizing that government burden in the price/value comparison of goods and services crossing borders. 

Bottom Line: Sen. Paul’s plan is an excellent beginning.  Let’s not let the pundits and political opponents kill it this time.  Let’s fix it.

VAT – (OECD) Latest Worldwide Stats

An update on Value Added Tax usage is provided by the Organization of Economic and Community Development in “OECD Consumption Tax Trends, 2014; VAT/GST and Excise Rates, Trends and Policy Issues.”

VAT is the world-class tax designed for international trade.  Over 160 countries have implemented VAT to neutralize the cost of government for goods and services that cross borders.  Under GATT rules (General Agreement on Tariffs and Trade), Value Added Taxes are added to imports to equalize the burden of government for imports and domestic production.  Likewise, VAT’s are subtracted from exports…to remove the cost of the exporting country’s government from the price/value comparison of goods and services.

The unweighted average VAT rate of the OECD countries (excluding the U.S.) is 18.7 and for the major U.S. trading partners varies from 5% for Canada and Japan, to 19% in Germany, 19.6% in France, and 20% in the United Kingdom.  China, which is not an OECD member, has a 17% VAT.  In the OECD countries in Europe, Value Added Taxes raise 20.2% of total tax revenue on average, equivalent to around 6.6% of GDP.

For the full OECD report see: http://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2014_ctt-2014-en

As the above statistics amplify, the U.S. is the outlier in not employing a VAT.  This could change, as the new Congress promises to reconsider tax reform.  Readers of this website know that VATinfo advocates 100% replacement of the Corporate Income Tax by a VAT.

This sweeping reform would make U.S. goods more competitive abroad and at home.  The CIT has been corrupted with loopholes, a veritable Swiss cheese tax code that now barely collects 8% of federal revenues, down from 32% in 1952.  VAT replacing the CIT would cleanly end the double-taxation of dividends.  Multi-national corporations stashing profits abroad to avoid the CIT would return overseas capital to domestic banks.  All these benefits would stimulate the economy and grow domestic jobs.  The regressive impact could easily be addressed via the Personal Income Tax with credits.

Forbes: Tax Reform to End Inversions & Grow Economy/Jobs

 

There is a bold but promising solution to end corporate tax avoidance schemes including inversions: sweeping tax reform, replacing the corporate income tax with a clean consumption tax with zero exceptions.

Forbes Op/Ed by Steve Abramson, VATinfo.org

 

 

Tax Reform: End the Corporate Income Tax to Grow Economy & Wages

The Corporate Income Tax, today, collects just 1.8% of GDP, and accounts for only 8% of total federal revenues.  By comparison, at its peak in 1952 the CIT amounted to one-third of federal revenues.  Corporations have employed every legal resource to reduce their tax liability, and while some multi-national corporations park profits in lower-taxed countries, others with less ethical boundaries claim overseas subsidiaries in tax havens and transfer their profits to a mailbox.

With the CIT having been perversely minimized, the VATinfo website has endorsed the concept of sweeping tax reform, at once eliminating the Corporate Income Tax and replacing it with a Value Added Tax, and combining it with a progressive Personal Income Tax employing a large standard deduction and no other deductions.  VATinfo’s rough “Smart Tax” calculation…based upon IRS tables with insight provided by IRS and the Tax Policy Center at Brookings Institute…projected that a VAT tax rate of 9% would be required to replace the CIT and offset a Personal Income Taxes cut for incomes under $100,000.  (The plan envisioned eliminating the PIT for filers with Adjusted Gross Income under $50,000…two-thirds of all filers; reducing the PIT by 56% for those with AGI between $50,000 and $75,000; reducing the PIT by 17% for those with AGI between $75,000 and $100,000.)

In December 2013, the National Bureau of Economic Research released a working paper, “Simulating the Elimination of the U.S. Corporate Income Tax,” with very reinforcing conclusions.  Foremost is the understanding that when U.S. capital moves to a lower-taxed country, U.S. workers suffer a loss in labor demand and real wages.  And, the reverse would be true were the U.S. to end the CIT.  The study projects that capital would flow to the U.S. resulting in “a rapid and sustained 23 to 37 percent higher capital stock.”  “Higher capital per worker means higher labor productivity and, thus, higher real wages.  Indeed, in the wage-tax simulation, real wages of unskilled workers end up 12 percent higher and those of skilled workers end up 13 percent higher.”

The NBER study concludes that while the economic gains from eliminating the CIT would fall short of replacing the revenue loss entirely (requiring an increase in taxes on wages, or a consumption tax), there would be relative distributional gains accruing to both skilled and unskilled workers, i.e., addressing income inequality.

Solar Panel Maker Seeks Duties v. China (Trade Problem VAT Would Fix)

What a shame!  At one time it looked like the manufacture of solar panels would be an arena in which the U.S. could work towards energy independence, grow manufacturing jobs and compete successfully.  However, China, following a trade model of government subsidies and dumping has managed to put most American solar panel manufacturers out of business.  Those manufacturers that remain in the U.S for the most part import Chinese solar modules and only assemble the finished panels here.  One of the holdouts, SolarWorld Industries America, the German subsidiary, has petitioned the Commerce Department to impose new duties on solar modules that with loopholes currently escape duties.  (See NYTimes, 01/01/2014.)

Think about this:  China imposes a 17% VAT on imports, and, by virtue of the Value Added Tax mechanism, also subtracts the 17% tax burden from exports.  This creates a very large price wedge in itself against solar panels manufactured in the U.S. for domestic consumption.  Were the U.S. to similarly employ a VAT (in sweeping tax reform as a revenue-neutral replacement for the Corporate Income Tax and other taxes), domestic manufacturers like SolarWorld would be far less disadvantaged vs. Chinese and other foreign imports.  SolarWorld’s need for duties might even be entirely mitigated.

Improve Obamacare: Single-Payer (VAT) & Multiple Providers

In 2005, The New England Journal of Medicine published an article titled “Healthcare Vouchers, A Proposal for Universal Coverage” by Ezekiel Emanuel, MD, PhD and Victor Fuchs, PhD.  At the time, Dr. Emanuel was Chief of the Department of Bioethics at National Institutes of Health, and Dr. Fuchs was Professor of Economics and of Health Research and Policy at Stanford University.

(This proposal was updated and presented in detail in 2008 in a book: “Universal Healthcare, Guaranteed, A Simple Secure Solution for America,” Ezekiel J. Emanuel, Public Affairs, Jackson, TN.)

The Universal Healthcare, Guaranteed plan called for eliminating – for corporations – the direct burden of healthcare insurance, and providing healthcare vouchers to be used in a health insurance exchange that could also include Medicare.  The vouchers were to be funded by a dedicated Value Added Tax.  This method of funding the vouchers would have broad economic benefits.

The Value Added Tax is monetarily equivalent to a sales tax.  It differs in that VAT is added at each stage of production and distribution rather than only at the retail level.  Credits are taken for taxes paid at each stage, so the tax does not cascade (no taxes on taxes).  Unlike a retail sales tax, however, VAT is recognized under GATT rules (General Agreement on Tariffs and Trade) as a border-adjustable tax, i.e., subtracted from exports and added to imports.  This feature eliminates the burden of government expenditures from the price/value competition of goods and services crossing international borders.  Both domestically produced goods and imports are taxed the same.

The U.S. does not employ a VAT, which results in a competitive disadvantage in trade.  All our trading partners have a significant portion of taxes paid by VAT’s, so goods exported from those countries are coming in cheaper by the percentage VAT.  How much cheaper?  Cars from Germany, 17% cheaper.  Goods from China, 19% cheaper.  The Emanuel/Fuchs plan for healthcare vouchers would require a VAT of around 12% to cover everyone under 65 (with Medicare still covering those older). At 12%, the healthcare VAT percentage would be about the average percent of our trading partners’ VAT’s.  Imports would be equally burdened by the cost of U.S. healthcare, and our exports would no longer carry the cost of healthcare in their prices.  We could expect domestic production to be more competitive at home and abroad, fueling economic and job growth.  

The VAT would replace healthcare insurance provided by companies and individual insurance premiums.  Many corporations currently pay around 15% of wages for healthcare insurance premiums.  Ford Motor Company, for example, spends more for healthcare premiums than it does for the steel in its cars.  Again, companies would be freed of this direct insurance cost. 

But would the burden of the VAT be fairly distributed?  Some companies would increase wages to assist employees, and competition suggests those who did not would not attract the best workers.  Health insurance by companies became a method of competition in the marketplace for employees when wages were frozen during World War II, and companies added to this benefit to remain competitive.  Government, too, could assist with VAT payments through the EITC (subsidy to the poor and lower wage earners).

Emanuel and Fuchs addressed that question: “Some people reflexively reject a value-added tax as regressive. However, the distributional impact of the voucher proposal requires looking at the benefits as well as the tax burden. All things considered, the program is progressive, since it implicitly subsidizes the poor. It is not an accident that countries such as Norway and Sweden, which provide universal health coverage, make substantial use of value added taxes to fund social programs.” 

There is resentment in some quarters about the expensive cost of free services in hospital emergency rooms and obstetrics units.  But, with a VAT paying for healthcare benefits, everyone would be contributing towards these benefits.  And, since wealthier consumers purchase more goods and services, they would be paying for a greater proportion of the VAT receipts, adding to progressivity.  Furthermore, because the VAT would be dedicated to healthcare vouchers, the public would have a visual check on the cost of demanding more medical services, and, perhaps, be somewhat self-limiting.

So, why didn’t Congress embrace the Emanuel/Fuchs plan?  Republicans have been wary of introducing another tax base that would be used as a money machine for bigger government. Some Democrats fear VAT would be too regressive.  Larry Summers put it this way: “The reason the U.S. doesn’t have a VAT is because liberals think it’s regressive and conservatives think it’s a money machine. We’ll get a VAT when they reverse their positions.” 

The Affordable Care Act will educate the public on the use of healthcare exchanges.  A smart Congress would do well to explore a dedicated Value Added Tax to fund healthcare vouchers used in the insurance exchanges.

(See the 9-minute video to learn how VAT would grow the economy and jobs – including a clear explanation by Bill Clinton)