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.

Dadash, Uri & William Shaw, “Competitiveness: The Great American Distraction,” VoxEU.org, 06/28/11

“Insofar as the US structural current-account deficit reflects inadequate savings – as it clearly does – reducing it is desirable. Doing so efficiently requires that policymakers focus on fiscal reforms that not only reduce the budget deficit directly but also make public spending more effective and nudge the private sector toward producing more exports and reducing imports.

Three types of tax reforms clearly meet these criteria: increased gasoline taxes, a value-added tax, and a phased-in elimination of the mortgage interest deduction.

The US has held its federal gasoline tax at 18.4 cents per gallon since 1994, while other OECD countries have instituted much higher rates. Raising the US gas tax would directly improve the fiscal deficit – raising the tax to only half the OECD average could generate approximately 1% of GDP – and it would help reduce the current-account balance, as oil imports fall. Because the disposable income of consumers would decline, other imports and consumption could decrease as well. Over time, renewable energy sources, alternative means of commuting (including telecommuting), changes in residence or work location, and more efficient cars will mitigate the effect of the initial rise in gasoline prices. The gain in tax revenues will also be smaller as Americans adapt by consuming less gasoline.

A value-added tax (VAT) could also reduce the fiscal and current-account deficits. The CBO estimates that applying a 5% VAT to most goods and services in 2013 would raise $180 billion (1.2% of GDP) that year and $2.5 trillion through 2021 (1.4% of GDP over the period) (CBO 2011). Meanwhile, charging VAT on imports while rebating VAT payments to exporters, a universal practice, would strongly tilt incentives in favor of exporters. At the same time, introducing the VAT could increase the efficiency of the tax system (Hufbauer 2011) and would require limited administrative resources for enforcement, as firms purchasing inputs have an incentive to ensure that sellers fully state their VAT payments. Finally, a VAT could increase household savings by taxing all consumption goods and allowing households to earn interest on savings free of VAT.

The mortgage interest tax deduction, on the other hand, must be gradually eliminated to reduce the deficit. It will cost an estimated $100 billion in 2011 and artificially encourages spending on and investment in real estate, a highly volatile sector. Eliminating the subsidy would help direct savings to more stable assets, reduce individuals’ reliance on household equity to finance consumption during booms, and improve income distribution (subsidizing home purchases disproportionally benefits the rich, who typically buy houses, over the poor, who typically rent). It would also free resources for investment in internationally-competing sectors.”

http://temporaryaddress.voxeu.org/index.php?q=node/6697