Simpson-Bowles and a Smarter Tax System to Spur Growth

Sen. Alan Simpson and Erskine Bowles have released their newly revised plan for curbing the deficit and reducing the debt.  Included in the plan is a call for $600 billion in increased tax revenues to be accomplished by reducing deductions for corporate and individuals while reducing tax rates.

In calling for this approach to tax reform, Simpson-Bowles takes aim at our bloated, inefficient tax system:

Reform the Tax Code in a Progressive and Pro-Growth Manner. The current tax code is complicated, confusing, costly, anti-growth, anti-competitive, unfair, and riddled with well over $1 trillion of tax expenditures – which really are just spending by another name. Tax reform must reduce the size and number of tax expenditures to reduce the budget deficit and lower marginal tax rates for individuals and corporations. At the same time, tax reforms must maintain or improve the progressivity in the tax code and promote economic growth. Tax reform will make the tax code more efficient, effective, and globally competitive.”

The last goal, to create a “globally competitive” tax system cannot be overemphasized.  In this era of globalization, the U.S. remains at a major competitive trade disadvantage by virtue of its tax system.  Eliminating this disadvantage is the prime key to growth that government policy could provide.

According to the new Census Bureau report, the 2012 U.S. trade deficit dropped nearly $20 billion to $540 billion, mostly due to a decrease in expenditures for foreign oil.  But, our manufacturing trade deficit reached a record deficit of $684.5 billion, an increase of 7%.

The goods deficit with China increased $20 billion, to $315 billion from $295 billion, accounting for 58% of the imbalance. U.S. exports to China increased $6.7 billion (primarily soybeans and civilian aircraft, engines, equipment, and parts) to $110.6 billion, but imports increased $26.3 billion (primarily cell phones and other household goods) to $425.6 billion.

The goods deficit with European Union increased from $99.9 billion in 2011 to $115.7 billion in 2012.  Exports decreased $3.3 billion (primarily non-monetary gold and petroleum products) to $265.1 billion, while imports increased $12.5 billion (primarily passenger cars, civilian aircraft engines, and petroleum products) to $380.8 billion.

Achieving Growth through Tax Policy.  The most positive reform to stimulate growth in exports, domestic production and jobs would be to replace the Corporate Income Tax with a Value Added Tax.  VAT is now utilized by all our trading partners and over 150 countries to exclude the cost of government from the price/value relationship of goods and services in international trade.  By definition under GATT rules, unlike corporate income taxes, the VAT is border-adjusted, i.e., subtracted from exports and added to imports. Without a VAT of our own, imports have a decided price advantage, and our exports carry a price disadvantage.

Replacing the CIT by a VAT would eliminate the double-taxation of dividends, encourage the return of multi-national profits now parked in countries with lower corporate tax rates, and stimulate foreign investment here.  Imports would carry an equal burden, so American goods would become more competitive at home and abroad.  An additional consideration to stimulate jobs would be to replace the corporate contribution to FICA by the VAT to reduce a direct disincentive cost to employment.

Governor Mitch Daniels, echoing Herman Kahn of Hudson Institute, once suggested that replacing our current tax system by a VAT coupled with an individual income tax with a high threshold would produce a tax system that is fair, competitive, and stimulative for growth.  And, with zero tax preferences (no exclusions and deductions), gone would be the corrupting lobbying for loopholes, once and for all.

Brooks, David, “Let’s Talk About X,” The New York Times, 11/30/12

“…Even the 1986 reform, which closed loopholes and lowered rates, didn’t do much to increase growth. Even after the reform was passed, people were paying the same amount in taxes, so they faced the same basic incentives.

If you closed loopholes and raised rates, as we’d have to do this time around, then you would make the incentives worse. Raising top tax rates may not be as cataclysmic for the economy as some have argued, but this is still one of the most growth-killing ways to raise revenue.

In other words, if we’re going to simultaneously address our two most pressing needs — raising revenue and boosting growth — we’re going to have to break free from the 1986 paradigm.

That means asking the basic question: What is the single biggest problem with the tax code? It’s not the complexity, bad as that is. The biggest problem is that it rewards consumption and punishes savings and investment.

You can’t fundamentally address that problem within the 1986 paradigm. You can address it only through a consumption tax. This idea is off the table right now, but reality will inevitably drive us toward it. We have to have a consumption tax if we want to both grow the economy and reduce debt.

But isn’t a consumption tax regressive since poor people spend a bigger share of their incomes than rich people? The late David F. Bradford of Princeton University effectively solved that problem with his so-called X Tax, which has recently been championed by Alan D. Viard of the American Enterprise Institute and others. Under the X Tax, you wouldn’t pay the consumption tax at the cash register. Businesses would be taxed on their cash flow, taking an immediate deduction for investments rather than depreciating them over time. Households would pay tax at progressive rates on their wages but would not pay tax on income from savings.

The X Tax effectively taxes the money you spend right now and rewards savings and investment. The government could raise a chunk of revenue this way and significantly boost growth with little or no change in how tax burdens are distributed between rich and poor. Most economists vastly prefer consumption taxes to income taxes.

The other complaint is that a consumption tax is politically impossible to get passed. There are, indeed, political difficulties. But there would be huge political difficulties if we try to do another 1986-style act next year. Every special interest will fight every loophole closing. And after all that, the country would get very little benefit in return. The political barriers to an X Tax are no greater, and we would actually address our problems…”

http://www.nytimes.com/2012/11/30/opinion/Brooks-lets-talk-about-x.html

 

Bartlett, Bruce, “Tax Reform That Works; Building a Solid Fiscal Foundation with a VAT,” New America Foundation, 11/30/12

In advocating a Value Added Tax, this concise paper by Bruce Bartlett takes on the myths about VAT and the mistaken political resistance to it.  It is highly recommended in the context of the realities of the “fiscal cliff.”  The link to the article is repeated at the bottom of this entry.

“…In my opinion, the greatest potential to break the tax reform gridlock is to get away from the model of cutting popular tax preferences in order to pay for rate reductions. That is the political equivalent of World War I-style trench warfare. I think it makes more sense to adopt a different approach, one more akin to Douglas MacArthur’s strategy of leapfrogging Japanese strongholds in the Pacific during World War II, leaving them impotent.

The tax equivalent of MacArthur’s strategy would be to leave in place all the existing deductions and credits, but make them irrelevant for most people. Prof. Michael Graetz of Columbia University has devised exactly such a plan.  He would institute an exemption of $100,000 for married couples ($50,000 for singles, $75,000 for heads of households).  All the existing deductions and credits would remain in place and could still be used by those with incomes above $100,000, but for the vast bulk of taxpayers they would become irrelevant because they would have no taxable income against which to take them. About 100 million of the 140 million people now required to file federal income tax returns would no longer have to do so.

Graetz would replace the lost revenue with a value-added tax (more below) combined with a rebate mechanism to relieve the regressivity on those with low incomes and also replace refundable tax credits for the poor. A recent analysis of the Graetz plan by the Tax Policy Center concluded that it could be done in a deficit-neutral manner with a VAT rate of 12.4 percent – well below the rates that prevail in Europe…”

“…For many years, official Republican Party platforms have opposed a VAT for the United States. The 1992 platform said such a tax in Europe “has resulted in higher prices, fewer jobs and higher levels of government spending.”  The 2008 platform said, ‘In any fundamental restructuring of federal taxation, to guard against the possibility of hypertaxation of the American people, any value added tax or national sales tax must be tied to simultaneous repeal of the Sixteenth Amendment, which established the federal income tax.’  The 2012 platform repeats the same language.

Fear that a VAT might come on top of the income tax and hence constitute some sort of double taxation is only one of many conservative objections to a VAT.  (No country imposing a VAT has ever abolished its corporate or individual income taxes, although excise and other taxes were often replaced.)

The irony is that the VAT is probably the best tax ever conceived from a conservative point of view. As a broad-based tax on consumption, it creates less economic distortion per dollar of revenue than any other tax – certainly much less than the income tax…”

“…A VAT would address a common conservative concern about the growing percentage of the population that pays no federal income taxes. In 2011, 46 percent of all returns had no federal income tax liability according to the Tax Policy Center.  It’s unrealistic to think that income taxes will be imposed on such people once they have become exempt. A VAT would be a way of getting all Americans to pay for the federal government’s general operations…”

“…Perhaps the strongest evidence that the VAT was considered the conservative tax reform is that it is the foundation of the flat tax, which is still supported by practically every conservative tax reformer. The flat tax, originally devised by Hoover Institution scholars Robert Hall and Alvin Rabushka, is a subtraction-method VAT with one twist; businesses are permitted to deduct cash wages paid from the base on which they calculate the VAT. Workers pay the same rate on their wages less only a personal exemption. The purpose of this adjustment is to create transparency so that everyone sees the tax they are paying, and to redress its regressivity.

This is not the only case of conservatives supporting a VAT when it suited them to do so. When former California Gov. Jerry Brown, a Democrat, proposed a VAT plus a flat rate income tax in 1992, this was widely hailed by supply-side economists such as Arthur Laffer and Gary Robbins. Similarly, conservatives have recently embraced a proposal that would have replaced California’s state income tax with a VAT.

In Congress, Rep. Paul Ryan, Republican of Wisconsin, chairman of the House Budget Committee and the Republican Party’s nominee for vice president in 2012, received high praise from conservatives for his “Fiscal Roadmap” plan that would eliminate the national debt by slashing spending. But its first version would also have replaced the corporate income tax with what he called a Business Consumption Tax that is, again, a type of VAT. Sen. Jim DeMint, Republican of South Carolina, generally considered to be the most conservative member of the Senate, cosponsored this legislation.

Nevertheless, whenever a VAT for the U.S. is suggested, conservatives are the first to denounce the idea. It is an article of faith among them that the VAT is a money-machine that must be fought to the death…”

http://growth.newamerica.net/sites/newamerica.net/files/policydocs/Bartlett_Bruce_VAT_NAF_November_2012.pdf

Porter, Eduardo, “Broader Tax For Fighting Inequality,” New York Times, 11/28/12

“…Progressive taxes make it hard to raise money because they distort people’s behavior. They encourage taxpayers to reduce their tax liability rather than to increase their pretax income. High corporate taxes encourage companies to avoid them. High taxes on capital income also encourage avoidance and capital flight. High income tax rates on top earners can discourage work and investment, too. So trying to raise a lot of money with our progressive tax code would probably not achieve the goal and could damage economic growth.

Big-government social democracies, by contrast, rely on flatter taxes to finance their public spending, like gas taxes and value-added taxes on consumption. The Nordic countries, for instance, have very low tax rates on capital income relative to income from work. And they have relatively high taxes on consumption. In Denmark, consumption tax revenue amounts to about 11 percent of the nation’s economy. In the United States, sales taxes and excise taxes on cigarettes and other items amount to roughly 4 percent.

Liberal Democrats have long opposed them because they fall much more heavily on the poor, who spend a larger share of their incomes than the rich. But these taxes have one big positive feature: they are difficult to avoid and produce fewer disincentives to work or invest. That means they can be used to raise much more revenue.

Public finances are under strain today on both sides of the Atlantic, as governments struggle to cope with our long global recession and the aging of the baby boom generation. In Southern Europe, the pressure to pare back universal welfare systems is intense. In the United States, political leaders on both sides of the partisan divide have realized that even our relatively meager package of social goods cannot be sustained with our slim tax take.

But the United States has one option that most of Europe’s flailing economies do not. Its tax revenue is so low, comparatively, that it has more space to raise it. A more efficient, flatter tax schedule would allow us to do so without hindering economic activity.

Bruce Bartlett, a tax expert who served in the administrations of Ronald Reagan and George H. W. Bush, told me last week that he thought federal tax revenue could increase to 22 percent of the nation’s economic output, well above its historical average of 18.5 percent, without causing economic harm. If President Obama tries to go down this road, however, he may have to build a flatter tax code.

“We should reform the tax system, no question,” William Gale, a tax policy expert at the Brookings Institution and co-director of the nonpartisan Tax Policy Center, wrote in an e-mail. “We are going to need to move beyond the current set of tax instruments to raise the needed revenues — a VAT and or a carbon tax seem like the obvious ways to go.” And Mr. Bartlett, who writes a column for The New York Times’s Economix blog, also pointed out: “We can’t get all the revenue we need from the rich. Eventually, everyone will have to pay more.” “

http://www.nytimes.com/2012/11/28/business/combatting-inequality-may-require-broader-tax.html?pagewanted=all&_r=0

 

Hollings, Sen. Fritz, “Critical Needs Ignored,” HuffingtonPost.com, 11/07/12

“The presidential campaign ignored the real needs of the country. Four problems — four solutions.…

Second, we must pay for government — not plan to pay. In 2001 we gave President Bush a balanced budget but he and President Obama have refused to pay, adding $10 trillion to the debt in twelve years. Now everyone is running around with plans for later Congresses to pay. Congress can pay for government now by replacing the 35 percent corporate income tax with a 7 percent value added tax (VAT). One-hundred-fifty countries compete in globalization with a VAT that’s rebated on exports. The corporate tax is not rebated. A U.S. manufacturer exporting to China pays the 35 percent Corporate Tax and is levied a 17 percent VAT when exports reach Shanghai. But a China manufacturer exports to the U.S. tax free. This 52 percent difference is killing manufacture in the United States. The Corporate VAT is not regressive, needs no exemptions and eliminates all loopholes — instant tax reform. Last year’s corporate tax produced $181.1 billion in revenues. A 7 percent VAT for 2011 would have produced $872 billion. This tax cut, with spending cuts, will balance the budget in two years. Eliminating the Corporate Tax releases $1 trillion in offshore profits for Corporate America to create jobs in the United States…

Third, we make wars in Iraq, Afghanistan, Pakistan, Somalia and Yemen; threaten wars in Syria and Iran, but refuse to fight in the trade war in which the world is engaged. Globalization is nothing more than a trade war with production looking for a country cheaper to produce. Tax cuts and federal aid for policemen, firemen and teachers don’t build a strong economy. It takes private investment. The president and congress must make it profitable to invest in the United States and protect the investment. The VAT tax cut is a good start.

The United States was founded in a trade war — the Boston Tea Party. Instead of calling for “free trade,” the Founding Fathers rejected David Ricardo’s comparative advantage in agriculture and opted for manufacture by enacting the Tariff Act of 1787 — two years before the Constitution. This protectionism worked so well that Edmund Morris in Theodore Rex wrote that, after a hundred years, the Colony was “$25 billion richer” than the Mother Country. But Wall Street, the big banks, and the U.S. Chamber of Commerce want to keep the China profits flowing. So they shout “Free trade! Protectionism!” and contribute to the president and congress doing nothing.

In 2006, the Princeton economist Alan Blinder estimated that in ten years the U.S. would offshore 30-40 million jobs, or an average of 3-4 million jobs a year. David Wessel reports in the Wall Street Journal “between 2007 and 2010 (U.S. Firms) added 200,000 U.S. jobs and 600,000 outside the U.S…” BusinessWeek headlined (10/14/12) “Despite profits near record highs many executives are planning to trim their payrolls.” We lose 4 million jobs a year due to our deficit in the balance of trade. Great Recession? The recession has been over for three years. We are having a weak recovery because we are offshoring more jobs than we are creating.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/critical-needs-ignored_b_2088479.html

Domenici-Rivlin Ditch DRST (VAT), testimony before Senate Finance Committee, 06/19/12

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.

Hollings, Sen. Fritz, “Making Romney Electable,” HuffingtonPost.com, 04/25/12

“The voters are frustrated. The country is fighting in all the wars but globalization. Globalization is nothing more than a trade war with production looking for a cheaper country to produce. Every country develops an industrial policy to protect its economy. Our industrial policy is to call for “free trade” and have Corporate America develop China’s closed market. The United States needs to develop an industrial policy to make Corporate America want to invest and create jobs in our country.

Fundamental to an industrial policy is a Value Added Tax, which is rebatable on export. The corporate tax is not. A U.S. manufacturer exporting to China is taxed twice: the 35 percent corporate tax and a 17 percent VAT when the product reaches China. But U.S. manufacturers in China import their product into the U.S. tax-free. We are not only building China’s economy, but Germany’s. The BMW plant in South Carolina doesn’t make the engine or technological parts in South Carolina. They are produced in Germany, shipped at 3 percent cost; assembled at 3 percent cost and BMW produces a motor vehicle in South Carolina 13 percent cheaper than Detroit. Using its 19 percent VAT, Germany probably has as many manufacturing jobs in the U.S. as it does in Germany — which we welcome.

The people are tired of the campaign. All they have heard for a year is that both candidates are for jobs, but the plants keep closing in their states. They have caught on to ten year plans to balance the budget; to do filibusters to fundraise; taxing the rich to balance the budget; appeals to their pride and charades to create jobs. Candidates and media worry about Medicare that goes broke in 2024 and Social Security that goes broke in 2033 but not the country that’s already broke. The people are frustrated because the country is fighting all the wars but globalization. They are looking for the candidate to do something real to create jobs and pay for government. Replacing the 35 percent Corporate Tax with a 6 percent VAT does something real. The VAT has no loopholes; gives instant tax reform; produces billions to eliminate deficits and creates millions of jobs.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/making-romney-electable_b_1453065.html?utm_source=Alert-blogger&utm_medium=email&utm_campaign=Email%2BNotifications

Porter, Eduardo, “A Tax Code of Politics, Not Practicality,” NYTimes.com, 04/10/2012

“Our byzantine tax code is built upon a longstanding political deal: Democrats wanted a tax scale with higher rates for richer Americans to finance social programs aimed at the poor and the middle class. Republicans countered by pushing for tax exceptions, exclusions and deductions that shielded the incomes of the rich from the taxman and reduced government revenue.

This compromise has left us with a loophole-riddled code that isn’t very good at raising money. The richest 1 percent of Americans, who make $1.5 million on average, pay 28 percent of their income in federal taxes, according to the nonpartisan Tax Policy Center. That’s way below the top rate of 35 percent. The rest of us also pay little. The bottom 85 percent of taxpayers have an average federal tax rate of 12 percent. The poorest 25 percent pay less than 1 percent of their income — $77 a family, on average.

Compared to other developed countries, the United States doesn’t collect much tax at all. Tax revenue at all levels of government adds up to less than 25 percent of the nation’s gross domestic product, putting us behind every other rich country and even some poor ones. Among the 34 nations in the Organization for Economic Cooperation and Development, only Mexico and Chile collect less in taxes. The average across the O.E.C.D. is 9 percentage points higher.”…

“…(F)ederal tax revenue has not surpassed 21 percent of the nation’s output. Last year it was under 15 percent. Not only is our tax code bad at raising money, it is also plagued with perverse incentives that, added up across the population, can push us to distort the economy and slow it down”….

“ …What would a better tax system look like? Most other rich countries have one. While each country has a different version, they share a core feature: they raise a lot of money taxing people’s consumption, at the point of sale.

Consumption taxes create fewer perverse incentives because taxing what people buy doesn’t affect their choices about work and investment. If anything, such a system might promote savings, generally good for growth. These taxes are also easy to collect and hard to evade. They don’t add complexity to your tax return. Because they produce few perverse incentives, they can be used to raise a lot of money.

Consumption taxes are supported by a vast majority of economists. They underpin Western Europe’s welfare systems, which are based on the proposition that all citizens are entitled to similar income support and services to guarantee a minimum standard of living, and that everybody should pay proportionately for them. Denmark and Sweden collect about 10 percent of their gross domestic product with a value-added tax, a modern tax on consumption.

In the United States, by contrast, states raise only 2.2 percent of G.D.P. through various sales taxes.  There is no federal consumption tax at all.

A federal consumption tax has been proposed more than once. A report last year by the Congressional Research Service found that for every 1 percent levied in a value-added tax, the federal government would raise up to $55 billion a year. This new source of money could help change the political deal underpinning our tax system and pave the way to cull loopholes and reduce our top tax rates.”

 http://www.nytimes.com/2012/04/11/business/economy/a-tax-code-of-politics-not-practicality.html

Hollings, Sen. Fritz, “Untying the Knot,” HuffingtonPost.com, 04/09/12

“There is an immediate solution to deficit spending and creating jobs — just replace the 35 percent Corporate Tax with a 6 percent VAT. The 2011 Corporate Tax produced revenues of $181.1 billion. A 2011 6 percent VAT would have produced $728 billion. This will cut taxes, eliminate loopholes, give instant tax reform, promote exports, free up $2 trillion in offshore profits for Corporate America to create jobs in the United States, provide billions to avoid deficits, and create millions of jobs.

Everyone in Congress is for these initiatives, but not one of the 535 members will introduce the VAT solution, nor will President Obama. Why not? Because Corporate America doesn’t want to increase the cost of their China exports to the United States. U.S. exports to China are taxed twice: the 35 percent corporate tax and a 17 percent VAT when exports reach China. China’s exports to the United States are tax free. 141 countries compete in globalization with a VAT that is rebated on exports. Wall Street, the big banks, and Corporate America are the biggest contributors to the President and Congress. Contributions for reelection in Washington come before the nation’s economy. Talk shows and the political pundits don’t mention the VAT solution because the press and media are owned or in bed with Corporate America.

In 2006, the Princeton economist, Alan Blinder, estimated that for the next decade off-shoring would cost the U.S. Economy an average of 3 to 4 million jobs per year. We are off-shoring jobs faster than we can create them. The recession ended over 2 ½ years ago and we wonder why the recovery is anemic. The economy would come alive by replacing the 35 percent corporate tax with a 6 percent VAT.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/untying-the-knot_b_1412370.html

Mitchell, Daniel J., “Tax Reform to Encourage Growth, Reduce the Deficit, Promote Fairness,” Senate Budget Committee Hearing, 03/01/12

Dr. Daniel J. Mitchell, Senior Fellow, Cato Institute

“The internal revenue code is needlessly punitive and complex. Some of its major flaws are:

1. High tax rates – Marginal tax rates on additional increments of productive activity are too high, discouraging people from productive behavior.

2. Biased treatment of income that is saved and invested – Because of the capital gains tax, the corporate income tax, the double tax on dividends, and the death tax, there is pervasive double taxation on capital, causing very high effective marginal tax rates.

3. Distorting loopholes – Many provisions of the internal revenue code are explicitly designed to encourage economically irrational choices.

4. Worldwide application – The United States have the world’s most onerous tax system for international activity.

5. Corruption – While in most cases technically legal, the common practice of swapping favorable tax policies for political support is corrosive.

6. Complexity – Nearly 100 years of tax changes have produced 72,000 pages of law and accompanying regulation.

Tax reform has the potential to reduce, or perhaps even eliminate, these problems. But it also could make them worse. To ensure the best possible outcome, lawmakers should be guided by these principles.

A. Tax rates should be as low as possible – Taxes are a price, and it doesn’t make sense to impose a high price of work and entrepreneurship. . The tax system should not discriminate against capital formation – Since every economic theory, even Marxism and socialism, holds that saving and investment is a key to long-run growth and higher living standards, it doesn’t make sense to impose extra-high tax rates on capital.

C. Government should not tilt the playing field with preferences or penalties – Luring people into making economically inefficient choices makes the economy less productive.

D. Territorial taxation – This is the good-fences-makes-good-neighbors approach to tax policy. Disputes with other nations become trivial if each nation is in charge of taxing economic activity inside its borders.

The ideal system, based on the above principles, is a low-rate, consumption-base, loophole-free tax.

The best-known tax meeting these criteria is the flat tax, as developed by Professors Hall and Rabushka at Stanford University’s Hoover Institution.

But the value-added tax is also satisfies these principles – assuming it is replacement rather than add-on tax. And a national sales tax also shares these theoretical qualities.

All of these tax regimes have different collection points, but the tax base is identical. All economic activity is taxed, but only one time and at a low rate.

If lawmakers want to improve growth, particularly in a competitive global economy, where labor and capital can cross borders in search of pro-growth fiscal policy, they should seek to reform the tax system so it fulfills these principles. Economists will not agree on how much additional growth such a system will generate, but they generally will agree that a low-rate, consumption-base, loophole-free tax is the way to minimize the damage caused by taxation.”

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