Funding Medicare For All with Tax Reform

An unprecedented lobbying effort led up to the failure to repeal and replace the Affordable Care Act. Insurance companies and Big Pharma spent heavily to protect their interests.

As reported in “Modern Healthcare,” 04/21/17, government lobbying disclosures revealed the five largest publicly traded insurance companies spent over $6 million total on lobbyists in first quarter 2017.  To be clear, this effort was not to find a way to protect the public interest. Among other provisions to the Affordable Care Act, insurers sought to eliminate the annual tax on health insurance companies that funds ACA subsidies for low-income enrollees.  

The insurance industry’s lobbying wave in the first quarter was dwarfed by the tsunami of the pharmaceutical industry.  According to “Kaiser Health News,” 04/21/17, 38 drug manufacturers and trade organizations spent $51 million in first quarter 2017, a 25% increase over first quarter 2016.  Big Pharma used 600 lobbyists in all. At stake are lower prices and increased competition.

America’s dependence on private insurance companies results in a large unproductive expense. While the administrative cost of Medicare is only 3%, private insurance companies have administrative expenses of 30%. Eliminating that unrewarding difference would go a long way towards covering more of the population at less cost. With fully 16% of the economy involved in healthcare, some regulation will be needed to curb abusive pricing practices and to put the breaks on runaway costs. Insurance companies and pharmaceutical manufacturers will spend heavily to sway Congress otherwise.

There are, of course, other crushing expenses of healthcare: preposterously high malpractice policy premiums that protect doctors and hospitals against unlimited “pain and suffering” judgments; the drag on hospitals created by ER’s which are open to the uninsured.

Citizens must pressure Congress to act for the common good. More funding will surely be needed, and the public needs to decide whether it is willing to pay for all the benefits wanted. Ultimately, it comes down to how — and how much — we would pay for healthcare. The public must make it possible for politicians to do the right thing.

As we have already experienced with the ACA, young people tend to postpone insurance expense, betting on their youthful vigor. And, many ultra-wealthy taxpayers would surely forego a contribution and tax deduction rather than support illegal aliens.

The secure approach would employ tax reform in a plan that would curtail lobbying for loopholes while it funded basic insurance for the nation — Medicare For All (MFA). Medicare works (3% administrative expense), and it is well liked. The Gallup Organization polled insured Americans for satisfaction with their health insurance, and the winner is Medicare (75%), well above employer paid insurance (66%).

The country could move to MFA and leave private insurers to compete for supplemental policies, much as they do now. According to Pew Research (01/13/17), 60% say the federal government should ensure healthcare for all Americans.

Paying for MFA could be accomplished with a dedicated sales tax replacing the Corporate Income Tax. The public would understand exactly what it is paying for healthcare, noting the percentage tax on all consumed goods and services. If this percent reaches a ceiling of acceptance, the public will come to understand the need to curtail covered expenses.

The ideal form of the sales tax would be a value added tax, since it would be applied equally to imported goods as to domestic production and would eliminate a competitive disadvantage for American companies and workers. (VAT would also be subtracted from exports making US goods more competitive abroad. VAT’s are already in use by every US trading partner, so this would be a reciprocal tax policy. VAT differs from a retail sales tax in that it is collected at each stage of production; the percentage and tax is the same.)

Implementing a VAT sales tax across the board without exceptions would assure the broadest base and the lowest needed percentage. Any one exception would produce a clamor from lobbyists for various clients’ desired tax loopholes, ergo no exceptions means no lobbying for loopholes and “draining the swamp”.

The VAT sales tax would collect from the illicit drug trade and from illegal aliens, too; those individuals would pay substantial taxes as they consume goods and services. Unlike the income tax, the VAT will affect them equally. The consumption tax would apply to hundreds of billions of dollars of transactions per year and would reduce the percentage tax for the rest of us.

The consumption tax burden for the lowest incomes would be relieved through the Earned Income Tax Credit, and funded by a more progressive tax code that affects the uppermost income segments. Note, it is consumers who (indirectly) pay the current corporate income tax when their purchases make corporations profitable. Also, when considering the burden of the corporate consumption tax, it is important to remember it would replace the cost of basic health insurance premiums.

The concept of a border-adjustable tax had been a keystone of the Republican tax reform plan (see the Trump campaign’s economic white paper written by Secretary of Commerce Wilbur Ross and economist Peter Navarro), but it was recently dropped from consideration due to lobbying pressure from the retail industry and importers. It would be smart for Democrats to seize the concept as their own (much as Gov. Jerry Brown did in 1992 when he ran for president). The idea of a VAT replacing other taxes has more recently been endorsed by President Clinton to level the playing field for American workers.

This healthcare solution is what we could have…if we could only break the stranglehold of corporate lobbyists on the Congress.

 

“Taxing Imports, Not Exports,” Steve Lohr, NYTimes, 12/13/16

“President-elect Donald J. Trump has vowed to protect and create American manufacturing jobs, even threatening high tariffs on imports to help achieve that goal. So far, though, his plan seems to lean heavily on one-at-a-time deals, like the one struck late last month to save jobs at the Carrier plant in Indianapolis.

But proponents of a more far-reaching approach say it could achieve many of Mr. Trump’s goals without tariff walls or presidential jawboning: a sweeping overhaul of the corporate tax system that embraces a concept endorsed by House Republican leaders in their blueprint for tax reform, announced in late June.

“It would be the biggest change in business tax law ever in the United States,” said Martin A. Sullivan, the chief economist at Tax Analysts, a nonprofit tax research organization and publisher. “It might actually work, and I don’t think it’s a partisan issue.”

A central idea is that goods would be taxed based on where they were consumed rather than where they were produced, meaning that imports would be taxed by Washington while exports would not. Tax experts call this a destination-based consumption tax.

This would be a sharp departure for the United States in a number of ways, but taxing imports but not exports is in step with nearly all of America’s trading partners, which have so-called value-added taxes. The import-and-export tax treatment is known as border adjustment.”

Getting to “Majority Wins”

Do you believe that “the majority wins”?  Most of us do.  But so often in our elections the winner is decided by a plurality, not a majority.  Why?  Third party candidates can siphon off enough votes in tight elections so that winners are deprived of clear (majority) victories.

In the 2016 presidential race, the results in four decisive battleground states were potentially affected by the votes for minor party candidates:

  • In Florida, Donald Trump defeated Hillary Clinton 49% to 48%; Gary Johnson received 2%; Jill Stein had 0.7%; two other candidates totaled 0.3%.
  • In Pennsylvania, Trump won 49% to Clinton’s 48%; Johnson had 2%; Stein had 0.9%; one other had 0.4%.
  • In Michigan, Trump received 48% to Clinton’s 47%; Johnson garnered 4%; Jill Stein had 1%; two others captured 0.5%.
  • In Wisconsin, Trump won 48% to Clinton’s 47%; Johnson had 4%; Stein had 1.0%; three others received 0.7%.

We can only speculate as to which candidate would have won if, in a runoff election, the minor party voters had a chance to vote for their second choice candidate.  But, Maine voters in this election passed a referendum that going forward the state will employ Ranked Choice Voting (RCV) to result in an instant runoff and a winner always decided by majority preference (Instant Runoff Voting, or IRV).  In the event no candidate wins an outright majority, the second choice of the third place (and lower) finishers are added to the remaining candidates.  This process can be done sequentially, eliminating the lowest vote-getter first, and continuing, to arrive at a majority winner.

In the above four battleground states, if all Jill Stein’s votes and half of Gary Johnson’s votes had gone to Hillary Clinton, she would have won those four states.  (Clinton did win the plurality national vote:  47.7% to Trump’s 47.5%; Johnson received 3.2%; Stein received 1.0%; other candidates received 0.6%.)

This is not a partisan issue!  In the election of 1992, Bill Clinton won the presidency with 43.0% of the national vote to President George Bush’s 37.5%.  In that year, the major third party candidate, Ross Perot, received 18.9% of the popular vote.  In every state the winner had received less than 50% of the vote, and were there a runoff election (instant or traditional) in each state, the second choice of Perot’s voters in each state would have decided each state’s majority winner.

Arriving at a majority winner by RCV/IRV would have additional significance. There is a psychological mandate for the winner who captures a majority.  Also, during the campaign..especially in primaries with several candidates..there is a greater likelihood that candidates will not insult each other because winning may ultimately depend upon the runoff votes of the other candidates’ supporters.

RCV/IRV is openly supported by Sen. John McCain, Sen. Bernie Sanders, and President Barack Obama, and is already used in Minneapolis, San Francisco, Burlington (VT) and five other cities.  It has been used for years to decide national elections in Australia and Ireland and in London for Mayor.  It is used in electing student leaders at over 50 American colleges and also is used to select Oscar nominees for best picture.  New York City’s Comptroller Scott Stringer has called for RCV/IRV to be used to avoid costly runoff elections; in NYC, a runoff election can cost the city upwards of $13 million to administrate.

Maine having passed the RCV/IRV referendum will accelerate the movement towards majority wins.  About time.

 

Trump Wants to Exempt US from Mexico’s VAT? The Real Antidote Is a VAT of Our Own.

For the first time in seven presidential election cycles, Value Added Tax has entered the arena of a presidential campaign.  Not since Gov. Jerry Brown focused his 1992 presidential campaign on sweeping tax reform including a VAT had a would-be president boldly suggested a VAT.  In this cycle, both Sen. Ted Cruz and Sen. Rand Paul brought forward tax plans with value-added consumption taxes.

During the first debate with Hillary Clinton, Donald Trump pointed to the trade advantage of Mexico’s 16% VAT, which is subtracted from exports.  Mr. Trump suggested he would negotiate an exemption for the US from Mexico’s VAT.

A more realistic solution to the existing price wedge of the VAT between the US and Mexico — and over 160 countries using VAT’s — would be for the US to adopt a VAT of its own in replacement for other taxes, i.e., the Corporate Income Tax (CIT).

Why does every US trading partner employ a VAT?  Because it eliminates the cost of government represented by the tax from the price/value relationship of goods crossing borders.  VAT is added to imports (to match the domestic VAT percentage), and subtracted from exports to permit the importing country to add its own VAT without doubling up on the exporting country’s tax.  That is, VAT is a border-adjustable, destination based tax perfectly suited to this era of globalization.

The usual argument made against the US using a VAT is that it would be used to raise tax revenues to fuel social programs and put the country on a path to socialism.  Opponents allude to the high percentage of tax revenues raised by VAT’s in France and Scandinavian countries.  But, there is nothing that prevents a VAT from being used as a revenue-neutral replacement for other taxes, or for that matter, within an overall revenue cut.  Fear of VAT extends mostly from the notion of using VAT as an “add-on” tax base which it need not be.

Nor is there any justification to assume that the revenues raised by a US VAT would increase as a matter of course.  Among the major US trading partners within the 35 OECD members, the percentage VAT revenue to GDP did not explode over the fifteen years from 2000 to 2014 (the last year reported):

VAT Revenue  % GDP 2000 2111 2014   VAT % Total Tax Revenue 2000 2011 2014
France 7.4 7.0 6.9     16.7 19.7 15.4
Italy 6.5 6.2 6.0     15.4 14.4 13.8
Germany 6.9 7.3 7.0     18.4 19.4 19.3
Japan 2.4 2.7 3.7     14.4 14.4 13.8
Spain 6.1 5.3 6.0     16.6 12.6 16.6
United Kingdom 6.6 7.4 6.9     18.1 20.5 21.2
Canada 3.2 4.1 4.1     9.2 13.3 13.1
Mexico 3.1 3.7 3.9     18.7 19.0 n/a

Source: OECD Consumption Tax Trends, 2014

The meaningful trend among our trading partners is to increase revenues from the consumption tax while reducing CIT revenues.  Japan, for example, raised its VAT rate from 5% in 2013 to 8%, and has planned to raise it to 10% in 2017.  Concurrently, however, Japan reduced the CIT rate from 39.5% to 32.11% in 2013 and will drop its rate further to 29.74% in its 2016 fiscal year.

If the US were to replace the CIT by a VAT, it would put the US on a more competitive footing by eliminating a trade disadvantage.  This change would be positive for economic growth.  With zero corporate income tax, profits parked abroad by multi-national corporations would flow to the US.  The incentive for inversions would disappear along with the corrupting process of lobbying for loopholes.  Trump’s economic advisor, Peter Navarro, has a handle on the VAT concept.  For a full explanation of the impact on US trade, VATinfo has posted a 9-minute video with an explanation and support of VAT from Bill Clinton.

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.

Value-Added Taxation in Canada: GST, HST, and QST (5th edition), Ryan global tax services, publ. by Wolters Kluwer, 12/2015

Value-Added Taxation in Canada is an in-depth analysis of the Goods and Services Tax (GST), its harmonized counterpart (HST) currently applicable in Nova Scotia, New Brunswick, Newfoundland and Labrador, Ontario, and Prince Edward Island, and the Quebec Sales Tax (QST). The book combines discussion on the theoretical and practical questions posed by Canada’s value-added taxes, with an emphasis on the implications for private and public sector taxpayers. The authors have integrated commentary on the impact of all three taxes (GST, HST, and QST) in each topical area. These taxes are referenced extensively throughout the book, providing insight into the legislation and administrative policy at both the federal and provincial level.

This fifth edition of this essential reference has been updated to reflect applicable legislation, regulations, government policies, and proposed amendments as of September 2015.

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.