Hollings, Sen. Fritz, “Fighting in Trade War,” HuffingtonPost.com, 08/10/12

“Fundamental to an industrial policy is the Value Added Tax that’s rebated on exports. The Corporate Tax is not rebated. 150 countries compete in globalization with a VAT. Not having a VAT is killing manufacture in the United States. A U.S. manufacturer exporting to China pays the 35 percent Corporate Tax and is levied a 17 percent VAT when the exports reach Shanghai. But a manufacturer in China exports to the United States tax-free.

The economists caution against a VAT saying it’s complicated, a money machine. The VAT is not complicated — easily implemented with computers. The tax is on the difference of cost and materials and the sales price.

The VAT has no loopholes, giving us instant tax reform. The VAT is self-enforcing so we can cut the size of government (IRS). Running annual deficits in excess of a trillion dollars we need a money machine. Last year the Corporate Tax produced $181.1 billion in revenues. A 7 percent VAT for 2011 would have produced $872 billion in revenues. With spending cuts we can balance the budget in two years rather than ten years.

Canceling the 35 percent Corporate Tax and replacing it with a 7 percent VAT immediately releases a trillion dollars in offshore profits for Corporate America to create jobs in the United States and jumpstart the economy.

But the president and Congress refuse to consider this tax cut. They fight in every war but the one necessary.”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/fighting-in-trade-war

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.

Jobs: What Would Pres. Washington and Treas. Sec. Hamilton Do?

The path to jobs and renewed prosperity is to encourage more manufacturing in the U.S. by replacing the Corporate Income Tax with a VAT that would place a matching burden on imports and be subtracted from exports.  In addition a provision should be created for patent protection that requires 80% domestic content in exchange.

In 1791, Hamilton presented a major paper that made the case for federal leadership (industrial policy) to create jobs.  The principle met with opposition on the age-old diversion in opinion on the purpose and reach of the federal government, and was defeated by the Congress, but President Washington joined in pushing for American manufacture.

“At a time when the country was overwhelmingly agricultural, Hamilton devised a visionary blueprint of ways that the federal government, through selective bounties and import duties, could galvanize manufacturing.  He and Washington recalled how reliance on foreign manufactures had crippled America in wartime; the report was driven partly by the desire for strategic self-sufficiency…

..Far from being Hamilton’s willing dupe, Washington understood his programs thoroughly.  Though he knew America would remain agricultural, he wanted to augment its manufacturing capacity.  Starting with his inauguration, he had delighted in wearing clothes of American manufacture to stimulate the textile industry.  At Mount Vernon he refused to drink porter or eat cheese that was not produced in America.  In his discarded first inaugural address, he had endorsed government action to open canals, improve roads, and stimulate internal improvements.”

– “Washington, A Life,” Ron Chernow, The Penguin Group, New York 2010, p. 672


Needed for Job Growth: Industrial Policy, 01/03/11

We need to focus on developing a growth industry. The New York Times, 01/01/11: “President Obama’s recent tax-cut deal with the Republicans included measures to support growth, notably extended unemployment benefits, and the payroll tax cut.” It is a euphemism to characterize unemployment benefits as stimulative; they only postpone a drag on the economy, and they will not create new jobs.

We need to stimulate a new industry that promises domestic jobs. In bygone days we used to say “as Detroit goes, so goes the nation,” but too much of that industry has been outsourced to imports and imported parts, and transfer pricing affords foreign suppliers to retain earnings in their own countries.

The 1990’s saw an economy supported by the nascent internet industry, and the 2000’s saw home construction leading the way. Both, unfortunately ended in bubbles, but such “creative destruction” is the way of normal boom and bust cycles.

There is no more promising industry to create 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 incentivize the private creation of jobs, while reducing our dependence on imported oil.

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. China now produces half the world’s supply of solar panels and exports 96% of them to the U.S. and Germany. 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 ridiculously low Asian labor costs. 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.

Thomas L. Friedman, “Still Digging,” The New York Times, 12/08/10

Tom Friedman admonishes, “We don’t seem to realize: We’re in a hole and still digging. Our educational attainment levels are stagnating; our infrastructure is fraying. We don’t have enough smart incentives to foster both innovation and manufacturing…” Of course superior education is necessary to remain competitive, and we must fix it for the long-term. However, the focus in the short-term must be jobs and economic growth.

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. Infrastructure construction could certainly help today.

What then? An industrial policy for alternative energy with strong incentives for innovation and domestic manufacturing could put America back to work in the short-term while working to lessen our demand for imported oil.

Congress should create a matching Feed-In-Tariff for state utilities. FIT’s have been successful in driving demand in the countries using them; the German FIT has made them the number one installed base for solar panels, and the recent Ontario FIT is driving installation there. Congress can also ease the adoption of state and local PACE bonds (Property Assessed Clean Energy Bonds) by forcing Fanny and Freddy to accept these bonds as a first lien against properties, perhaps at some cap of installation cost to value. Most states have as their RPS targets (Renewable Portfolio Standards) about 25% of energy from renewables within three to four years time. However, these targets are moot without the incentives of FIT’s and PACE bonds.

The implementation of a VAT as part of tax reform and deficit reduction will make domestic production, including solar, more competitive, but a stronger incentive is needed to assure home-grown manufacturing jobs. My suggestion would be to restrict the protection of a U.S. Patent to solar equipment that is at least 80% domestic value-added in manufacturing.