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.

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.

VAT to Replace CorpIncTax = Fair Trade, Jobs & Growth

VAT to Replace CorpIncTax = Fair Trade, Jobs, Growth (Bill Clinton explains)

Alm, James and Asmaa El-Ganainy, “Value-added Taxation and Consumption,” Tulane University Economics Working Paper 1203, July 2012

Does the value-added tax affect consumption?  Using a sample of fifteen EU countries over the period 1961-2005…we find that the effective VAT tax rate is negatively correlated with the level of aggregate consumption.  More precisely, a one percentage point increase in the VAT rate leads to about a one percent reduction in the level of per capita aggregate consumption.  This result is consistent across various estimators, alternative time periods, and additional explanatory variables.  To our knowledge, these estimation results are the first attempt to include explicitly and to estimate directly the effects of the VAT on consumption behavior.

Our results have the clear implication that policymakers should consider the potential impact of the VAT on households’ consumption decision when designing a VAT.  Our results are also consistent with the often-stated view of proponents of consumption taxes that taxing consumption rather than income generates more savings, and so leads to higher growth.

Of course, there are many considerations that influence any decision to tax consumption versus income.  The effects on consumption choices are clearly important, but other dimensions also matter: how are other aspects of behavior (e.g., labor supply, portfolio choice, tax evasion)affected, what are the distributional effects of different forms of taxation, how does a country make the transition from one major tax base to another, what are the administrative dimensions of taxing different tax bases, how are different levels of government affected by income versus consumption taxes, how does consumption versus income taxation affect the international decisions of firms and individuals, to name just a few.  Even so, our results demonstrate that greater use of the VAT has led, at least in EU countries to less consumption and more savings, a finding that has broader implications for the choice of a consumption tax versus an income tax.

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.

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.”

http://budget.senate.gov/democratic/index.cfm/committeehearings?ContentRecord_id=553aa480-29a4-44b4-8b3f-9fc8004f4e81&ContentType_id=14f995b9-dfa5-407a-9d35-56cc7152a7ed&Group_id=d68d31c2-2e75-49fb-a03a-be915cb4550b

Burman, Leonard E., “Tax Reform to Encourage Growth, Reduce the Deficit, Promote Fairness,” Senate Budget Committee Hearing, 03/01/12

Dr. Leonard E. Burman, Daniel Patrick Moynihan Professor of Public Affairs, Maxwell School of Syracuse University

“As noted, the BPC proposed to introduce a small VAT in the U.S. The advantage of a VAT is that it does not tax saving and is thus thought to be more conducive to economic growth than the income tax.  The tax has never gained traction in the U.S. because conservatives are concerned that it would fuel more growth in government and liberals worry that it is regressive. To address the first concern, I have suggested that a VAT be earmarked to pay for government’s health care costs. I believe this would actually help to constrain spending since, for the first time, consumers would see a connection between their health benefits and their tax bill.  If health care costs continue to grow faster than the economy, the VAT rate will rise, which taxpayers would dislike.  This could build support for sensible measures to constrain government health care spending.

The regressivity of a VAT may be offset by refundable tax credits designed to match the typical VAT levied on a family at the poverty line. This is similar to, although much smaller than, the “prebate” proposed as part of the national retail sales tax (or “FairTax”).”

http://budget.senate.gov/democratic/index.cfm/committeehearings?ContentRecord_id=553aa480-29a4-44b4-8b3f-9fc8004f4e81&ContentType_id=14f995b9-dfa5-407a-9d35-56cc7152a7ed&Group_id=d68d31c2-2e75-49fb-a03a-be915cb4550b

 

WSJ Interview, Mitt Romney, “On Taxes, ‘Modeling,’ and the Vision Thing,” 12/24/11

Merry Christmas!  Mitt Romney, in an interview, today, with The Wall Street Journal expresses his open-mindedness toward a VAT, if the “modeling” proves to be pro-growth, and implemented with a vision of fairness and not class-warfare.

Here is the portion of the interview relating to tax reform:

” What about his reform principles? Mr. Romney talks only in general terms. “Moving to a consumption-based system is something which is very attractive to me philosophically, but I’ve not been able to sufficiently model it out to jump on board a consumption-based tax. A flat tax, a true flat tax is also attractive to me. What I like—I mean, I like the simplification of a flat tax. I also like removing the distortion in our tax code for certain classes of investment. And the advantage of a flat tax is getting rid of some of those distortions.”

Since Mr. Romney mentioned a consumption tax, would he rule out a value-added tax?

He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.

Amid such generalities, it’s hard not to conclude that the candidate is trying to avoid offering any details that might become a political target. And he all but admits as much. “I happen to also recognize,” he says, “that if you go out with a tax proposal which conforms to your philosophy but it hasn’t been thoroughly analyzed, vetted, put through models and calculated in detail, that you’re gonna get hit by the demagogues in the general election.”

That also seems to explain his refusal to propose cuts in individual tax rates, except for people who make less than $200,000, which not coincidentally is also Mr. Obama’s threshold for defining “the rich.”

“The president will characterize anyone running for office, and me in particular, as just in there to lower taxes for rich people, and that is not my intent,” Mr. Romney says. “My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today. I’m not looking to lower the share paid for by the top, the top earners like myself.”

But doesn’t that merely concede Mr. Obama’s philosophical argument? “No,” Mr. Romney responds, clipping his sentences. “I’m just saying that I’m not looking to change the deal. I’m not looking to go after high-income individuals like myself. I’m not looking to differentially favor. I’m looking to provide a system which continues to recognize that people of higher income pay a larger portion of the tax burden and I’m not looking, I’m not running for office trying to find a way to lower the tax burden paid for by the very high, very highest income individuals. What I’m solving for is growth.” ”

http://online.wsj.com/article/SB10001424052970204464404577114591784420950.html

Breaking the Spell on the Economy

Halloween has passed, but our economic witches’ brew remains in place.  In our major cities, an impatient and resentful citizenry has taken to the streets in anger to protest inequality in opportunity.  And, it is spreading.  In Oakland the demonstration turned violent.  People are trapped in a spell fueling our nation’s debt — between a stalled economy with negligible job creation and rising entitlement demands from retiring baby boomers.

Both political parties are shackled to their core principles, but neither has a real remedy.  Republicans are steadfast in believing that tax cuts will fuel growth that will overcome the increase in short-term debt that these cuts will produce; they would rather cut entitlements to pay for some of the cuts.  Democrats believe that if government spends more on infrastructure projects, the jobs created will relieve the malaise; they would rather increase taxes on the wealthy to cover the cost of investment spending.

Both visions are incomplete, as both lack an identifiable long-term solution.  Can the Republicans foresee an industry that would fuel private sector growth?   Can the Democrats see that infrastructure projects are only a short-term fix for an economy that is hemorrhaging through outsourcing?

At one time, it was said, “As Detroit goes, so goes the nation.”  We can no longer look to the auto sector for salvation growth, since much of the industry is comprised of imports and imported components.

The internet industry propelled the economy for a time, but that was a finite bubble.  The new generation of internet applications, e.g., Facebook, Google, are not as labor intensive as manufacturing and have a much lower ratio of employees to sales.   The computer industry no longer resembles its original promise for domestic jobs, as the finished products or components have largely been outsourced.  Apple Computer, for example, has created tens of thousands of jobs in the U.S., but more than a million jobs for Chinese assemblyline workers.

The construction industry filled the gap after the internet bubble deflated, but, as is inevitable in the course of our boom and bust cycles, the end came to the housing bubble.  What’s next?  Can we identify a nascent industry on which to place our bet?  And, if so, how can we best support that industry?

The obvious target is alternative energy, whether nuclear, solar, wind.   In addition to sparking growth and employment, we would save billions of dollars for imported oil, which money Thomas Friedman has repeatedly warned fuels the middle-eastern countries that hate us.  That is why placing a bet on Solyndra was a good idea.  Their product had unique competitive advantages, and it would have been produced here in California.

We can no longer accept that our future “Apples” will be grown in China.  In nurturing promising players in the alternative energy field, we must think ahead to their success, and how to assure that entrepreneurs will scale-up their inventions here and not turn to outsourcing. This means government must not only provide the tax incentives and investment funds (loan guarantees) for start-ups, but must also alter the rules of the game.

First, and foremost, the U.S. should sweep away its cumbersome and corrupting corporate tax code with all its loopholes in favor of a value added tax, so that the burden of government taxation is not shouldered by exports and is added to imports equally as to domestic production.  The U.S. would become the lowest taxed country (zero), making the U.S. a magnet for foreign capital and encouraging the return of multi-national corporation profits currently parked in lower-taxed countries.  Gone, too, would be the double-taxation of dividends.  In a nutshell, our Corporate Income Tax is a drag on our economy and all our trading partners now use VAT to our competitive disadvantage.

Second, the protection of a U.S. Patent should be restricted to products that are 80% value-added in manufacturing facilities here.  Too many products are outsourced in their entirety and too many are merely assembled here using imported high-value-added components.  Patents would still be licensed to foreign manufacturers for producing goods for their own populations, and foreign manufacturers would need to open plants here for U.S. Patents and to tap our market.

Third, where necessary, we should not hesitate to add tariffs to the mix to protect promising new industries, especially where we can identify dumping practices of foreign countries.

Turning our economic ship of state will take time.  Congress will deliberate on tax reform, patent law, industrial policy and tariffs.  In the short-term, the parties will fight over tax cuts vs. infrastructure spending.  But without visionary leadership with a longer horizon, we will not break the spell.

Energy Tax Policy & Tax Reform, statement of Steve Abramson, VATinfo, submitted to Joint Hearing of House Ways and Means Committee, 09/22/11

Dear Chairman Tiberi, Chairman Boustany and Members of the Committee,

Thank you for the opportunity to provide you with this submission for your hearing on Energy Tax Policy and Tax Reform.

Historically, with the notable exception of the internet bubble, to climb out of recession we have needed growth in one of two core industries, automobiles or housing. Today, automobiles are a smaller portion of our economy, with much of that industry comprised of imported cars and outsourced parts. The housing market is sitting on a huge inventory, and heightened foreclosures threaten further price decline.

There is no more promising industry to create economic growth and jobs than in renewable energy, particularly solar and nuclear, but that will require a robust industrial policy to support private investment. This is the role that government should play ⎯ to encourage the private sector creation of jobs, while reducing our dependence on imported oil. China now produces over half the world’s supply of solar panels and exports 96% of them to the U.S. and Germany. This is an industry in which we must successfully compete. Our industrial policy will have to include domestic content provisions that skirt WTO restrictions, just as China has managed to do in building its industries. Domestic content provisions will assure that we capture solar manufacturing jobs, here, for our middle class.

Overall, we must find the way to create and hold these domestic manufacturing jobs in the face of low Asian labor costs and subsidies. In the absence of such policies, CEO’s can be expected to outsource all the new ideas for production to Asia for the benefit of their shareholders and their own stock options. In January 2011, Evergreen Solar, the third largest domestic solar panel producer announced that it was closing its main U.S. factory, eliminating 800 jobs, and shifting its proprietary technology to China. In August 2011, Evergreen filed for bankruptcy, as did Solyndra and SpectraWatt. In May 2011, BP closed its U.S. solar manufacturing plant in Maryland and shifted its production to India, China and other low-cost countries. Then CEO, BP’s Tony Hayward said: “We remain absolutely committed to solar, (but BP was) moving to where we can manufacture cheaply.”

The Evergreen example, particularly, should be another wake-up call for the need of a protective renewable energy industrial policy. Even though Evergreen received $43 million in tax credits and grants from Massachusetts, Evergreen is not to blame for making the decision to sell their technology and outsourcing their labor. The business motive is rightfully the bottom line, and not to protect domestic jobs. Incentivizing job creation is the policy role of government.

About Solyndra.  The failure of this manufacturer has much to do with the hyper-competitiveness of the industry, including the plummeting cost of silicon (which Solyndra does not use) and lower costs in Chinese manufacturing (labor and overhead plus subsidies). Solyndra’s technology is unique (http://www.youtube.com/watch?v=2DlCUmBw7AU), and their robotic manufacturing plant with one-of-a-kind systems represents hugely expensive start-up costs. However, the Solyndra solar panels have features and benefits not available with other systems, and are superior for commercial flat roofs and apartment buildings: lower installation costs, wind resistance, omni-directional placement affording more wattage per square meter, zero-visibility on flat roofs, no need for roof-penetrating fasteners. Hopefully, by virtue of the public investment in this technology (plant and equipment), Solyndra will emerge from bankruptcy in the hands of an American company, rather than see this promising breakthrough technology exported to China as was Evergreen’s.

A U.S. Patent Restriction?  Recently, it was revealed that the Defense Department is requiring domestic content for solar panels. This is a step in the right direction to build and retain a home-grown industry and jobs. Government policy could also make it more difficult for companies like Evergreen to transfer their technology abroad. For example, U.S. Patent protection could be restricted to products with a minimum 80% domestic value-added in manufacturing.

On January 9, 2011, The New York Times reported that China is disturbed that the Pentagon, a rapidly growing consumer of renewable energy products — in insisting on buying solar panels made here is interfering with world trade. This despite China’s pervasive export subsidies and local content requirements. China has subsidized their solar panel manufacturing industry, something the U.S. is loath to do. Our policy has been to subsidize consumers and let them choose in the “free market.” But, the price advantage to Chinese panels gives them an almost insurmountable advantage. The result: today, China produces well over half the worlds solar panels and exports 96% of them to Germany and the U.S.

The intent of the Buy American provision in the defense appropriations section of the 2009 stimulus legislation is that Chinese manufacturers, and others, will be encouraged to establish manufacturing production in the U.S. This restriction can and probably will be challenged under WTO free trade rules. However, the U.S. would be wise to look at additional barriers to protect nascent industries for future U.S. jobs. Innovators will make their initial products in the U.S., but if successful in finding a market, will look to scale-up in lower-waged countries with fewer workplace and environmental restrictions.

Replacing the Corporate Income Tax with a VAT.  Under GATT rules, the value added tax is subtracted from exports and added to imports with the purpose of excluding the burden of a producing country’s government from the price/value relationship of competing goods and services. Currently, all U.S. trading partners and over 120 countries use a VAT to the competitive disadvantage of the U.S. The U.S. should consider replacing the Corporate Income Tax and other taxes including the payroll tax with a VAT balanced by a flat personal income tax with a high threshold as recommended by Gov. Mitch Daniels.

Federal FIT Match for States Paid-for with Gas Tax.  The uncertainty of the incentive price for clean energy production is a large impediment to domestic demand. In 2010, I had the opportunity to ask then energy czar Carol Browner about the potential for a national Feed-In Tariff (FIT), i.e. the incentive price at which green energy could is sold back to the grid. The FIT has propelled Germany into first place in the installed base of solar panels; this, even though Germany is at a latitude close to New York City’s, i.e., far from the maximum incidence of light. Ontario, too, which has recently implemented a VAT, is rapidly expanding solar installations. Ms. Browner responded that a FIT would not work here because the U.S. has diverse power companies regulated by individual states. However, that should not preclude the incentive of a federal matching FIT subsidy to the states. Electric utilities would be responsible for their average production cost per kilowatt hour and the FIT incentive overage would be shared by the states with a federal match. The FIT demand incentive expense should be paid-for by an increase in states’ gasoline taxes, adding an economic disincentive for imported fossil fuel.

Fully Deductible PACE Financing.  Demand would also be fueled by the state and local government adoption of fully deductible PACE bonds (Property Assessed Clean Energy Bonds) that would enable the deduction of principal as well as interest for residential installations of solar panels. Fannie Mae and Freddie Mac are known to oppose this incentive since the liens would come before their mortgage liens. Congress could and should legislate this hurdle away. Again, thank you for the opportunity to submit these ideas for your consideration.