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

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

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

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

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

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

TPP – Competitive Disadvantage(s)

You might think Congress would look back at our prior “free” trade deals – pitting U.S. workers against lower wage countries – and have a more jaundiced view of the Trans-Pacific Partnership.  The most outspoken MOC critic of our trade deals is retired Sen. Fritz Hollings of South Carolina.  Hollings saw the industries in his state decimated and warned about the threat to higher paid manufacturing jobs by the trend to globalization.  Free Trade policy, he said, was just American corporations seeking a lower-cost labor supply.  (See, for example, Hollings on “Economists and Free Trade.”)  Sen. Hollings’ Op/Ed’s repeatedly cited the additional competitive disadvantage for the U.S. without a Value Added Tax, a handicap which compounds our labor cost disadvantage.  Let’s look at what the VAT tax disadvantage means for TPP.

According to the Congressional Research Service, in 2012 total U.S. exports to TPP countries amounted to $650 billion.  Total imports from TPP countries amounted to $800 billion.  Of that import total, 40% was from Canada, which operates with an average 13% GST (value added tax).  The VAT – being border adjustable – is subtracted from exports, which means the $316.5 billion in goods imported from Canada would cost $41 billion dollars more within Canada.

This is not a Canadian subsidy.  Rather, GATT rules (General Agreement on Tariffs and Trade of the World Trade Commission) respect the subtraction of VAT from exports to eliminate the burden of the cost of government from the price/value relationship of goods shipping to another country.  The importing country would add its own VAT (cost of government).  Therefore, the imported goods would be on an equal footing with goods produced in the importing country since the VAT is charged on domestic production.

All even, except in the case of the U.S., which does not employ its own VAT.  Imports to the U.S. from TPP countries arrive with a competitive price advantage to the exporting country…13% in the case of Canada.

The second largest TPP exporter to the U.S. is Mexico, which accounts for one-third of U.S. imports from TPP countries.  Mexico’s VAT is 16%, so these goods arrive 16% cheaper than they would be in Mexico itself.  The third largest TPP exporter to the U.S. is Japan, accounting for 16% of U.S. TPP imports; Japan’s VAT is 8%.  The VAT in the other TPP countries: Australia, 10%; Chile, 19%; Malaysia, 6%; New Zealand, 15%; Peru, 18%; Singapore, 7%; Vietnam, 10%.  Only Brunei and the U.S. do not use a VAT.

Because the U.S. does not employ a VAT, government costs are not subtracted from exports.  (GATT rules do not permit the subtraction of corporate income taxes.)  When U.S. exports arrive at a TPP country, that country’s VAT is levied on the total price of U.S. goods..including the implicit CIT.  That is a competitive disadvantage for U.S. exports.  All our trading partners utilize a VAT, as do over 150 countries today.  China’s VAT is 17% and Germany’s is 19%, just under the European average.  Were the U.S. to turn to a revenue-neutral VAT to replace the Corporate Income Tax and Social Security Insurance, the VAT would be in the range of 10%.

The U.S. Congress – in deference to our multi-national corporations – has expressed knee-jerk opposition to VAT.  There has been no outspoken support for VAT even with our presumed goal to retain and increase high-paying domestic manufacturing jobs.  The VAT itself is not a tool to deliver more expensive social programs, an expressed fear of many in Congress.  VAT should be seen for what it is…an efficient mechanism for raising revenue and partially leveling the playing field in trade.  How we use the funds raised and how much revenue we should raise are separate issues, and should be debated separately.

The debate over TPP should beg the question whether the U.S. should employ a VAT to replace other taxes and remove a competitive disadvantage in trade.

Would a VAT replacement of the CIT add a greater burden to consumers?  Taking the view that the consumer pays the CIT, a revenue neutral replacement of the CIT by a VAT should make no difference on balance.  However, there would be a shift of burden from smaller companies to multi-national corporations that are more dependent upon imports.

It is notable that economists are split on where the burden of the CIT falls.  Some argue that it is workers who suffer the burden because the amount of taxes paid could otherwise be used for increased wages.  Likewise some argue that the burden falls on the shareholders.  Others posit that..when a company prices its goods..a margin is added and an implicit tax obligation will inure; since the margin exists within the price of goods, it is the consumer that absorbs the burden of the CIT.

As to the argument that a VAT consumption tax would be regressive..this could readily be nullified via adjustments to the threshold and progressivity of the income tax and via the Earned Income Tax Credit for those at the bottom.

We are entering into the height of the presidential primary season, ripe for conceptual debates about tax policy.  But, so far, among the Republican candidates we see only talk of lowering taxes, and little to none on the impact of tax policy on trade.  Only one presidential candidate has offered a VAT (Rand Paul), and, while he perhaps wisely named it a BAT (business activity tax), no debate question covered Paul’s concept of replacing the CIT with his BAT consumption tax.  To date, no Democrat has raised the issue of a consumption tax.  Hillary Clinton will probably not mention VAT, even though President Clinton has previously endorsed the concept of VAT replacing other taxes.

VAT remains a hot potato.  Even though its clear advantage for trade should mean economic growth and domestic jobs.  There is tacit support among union leaders (Richard Trumka, AFL-CIO; Andy Stern, SEIU).  The elimination of double-taxation of dividends would be good for stock valuations (and Wall Street).  But, until there is a national political leader who champions this sweeping tax reform and rallies the public behind it, VAT is destined to remain unmentionable.

Sen. Rand Paul’s Plan…A Good Start for Tax Reform

Tax policy is a hot potato and controversial.  It can propel a presidential candidate into the headlines, but it can also make the candidate an easy target for opponents and pundits alike. Sen. Paul’s bold proposal is a fine beginning and merits productive discussion.  Hopefully it will not be dismissed by knee-jerk opposition.

The way we tax ourselves should be separated from the purposes to which we apply the revenue we need.  Ideally, on the personal income tax side this plan would have eliminated – purely – all deductions.  Sen. Paul, in sensible practicality..to head off congressional opposition..has incorporated deductions for mortgages and charitable contributions.  The mortgage deduction will placate the real estate lobby, but it will also create the precedent for other industries to lobby for their gain.  The proverbial camel’s nose under the tent.

Critics are circling over the potential shortfall in total revenues.  Once revenue needs are clearly defined, if more revenue is needed the plan can be fixed by increasing the 14.5% rate in the Business Activity Tax, a value-added tax, and by adding one or two tax brackets on the personal income tax side.  The addition of another personal tax bracket or two will change the definition from a “flat” tax with a single percentage for both business and personal taxes, but would provide the necessary flexibility to ensure progressive distribution of the tax burden.  The tax base will be clean.

Importantly, Paul’s Business Activity Tax will finally harmonize the U.S. tax system with all of our trading partners; over 165 countries now use the border-adjustable VAT to our current competitive disadvantage in world trade.  With Paul’s BAT, the cost of government paid by the BAT will be subtracted from U.S. exports and added to imports, neutralizing that government burden in the price/value comparison of goods and services crossing borders. 

Bottom Line: Sen. Paul’s plan is an excellent beginning.  Let’s not let the pundits and political opponents kill it this time.  Let’s fix it.

Solar Panel Maker Seeks Duties v. China (Trade Problem VAT Would Fix)

What a shame!  At one time it looked like the manufacture of solar panels would be an arena in which the U.S. could work towards energy independence, grow manufacturing jobs and compete successfully.  However, China, following a trade model of government subsidies and dumping has managed to put most American solar panel manufacturers out of business.  Those manufacturers that remain in the U.S for the most part import Chinese solar modules and only assemble the finished panels here.  One of the holdouts, SolarWorld Industries America, the German subsidiary, has petitioned the Commerce Department to impose new duties on solar modules that with loopholes currently escape duties.  (See NYTimes, 01/01/2014.)

Think about this:  China imposes a 17% VAT on imports, and, by virtue of the Value Added Tax mechanism, also subtracts the 17% tax burden from exports.  This creates a very large price wedge in itself against solar panels manufactured in the U.S. for domestic consumption.  Were the U.S. to similarly employ a VAT (in sweeping tax reform as a revenue-neutral replacement for the Corporate Income Tax and other taxes), domestic manufacturers like SolarWorld would be far less disadvantaged vs. Chinese and other foreign imports.  SolarWorld’s need for duties might even be entirely mitigated.

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

Bartlett, Bruce, “Support The VAT,” Forbes.com 10/23/09

“”(W)henever I suggest the idea of a VAT for the U.S., I am attacked by supply-siders and assorted right-wingers….(M)y friend Larry Kudlow criticized me for wanting to “Europeanize the American economy.” Their concern is that the VAT is a money machine that will lead to higher taxes and bigger government precisely because it is such a “good” tax.

I myself held this same view for many years. But eventually I decided that it was stupid to oppose something because of its virtues. Opposing a VAT because it’s too good is like breaking up with your girlfriend because she is too beautiful.

In my opinion, opposing a VAT means implicitly supporting our current tax system, which imposes a dead-weight cost equal to a third or more of revenue raised–at least 5% of GDP–according to various studies. This is insane. The idea that raising taxes in the most economically painful way possible will hold down the level of taxation and the size of government is obviously false. It just means that the total burden of taxation including the dead-weight cost is vastly higher than it needs to be. If we raised the same revenue more sensibly we could, in effect, give ourselves a tax cut by reducing the dead-weight cost.

Those who oppose big government would do better to concentrate their efforts on actually cutting spending. The idea that holding down taxes or insisting that we keep a ridiculously inefficient tax system because that will give us small government is juvenile. If people want small government, there are no shortcuts. Spending has to be cut. But if spending isn’t cut, then I believe that we must pay our bills. I think it’s better to do so as painlessly and efficiently as possible. That’s why I support a VAT.”

http://www.forbes.com/2009/10/22/republicans-value-added-tax-opinions-columnists-bruce-bartlett.html