CPA has long been concerned about foreign value added taxes which act as tariffs on our exports and subsidies to foreign sales to us.  Because they are WTO legal tariffs, our options to neutralize these unfair competitive advantages are to negotiate their elimination or to enact our own VAT.

Several proposals, including that of Congressman Paul Ryan (R-WI) include a type of consumption tax that is border adjustable in the tax mix.  Another proposal by Alice Rivlin and Pete Domenici was released yesterday as a comprehensive tax reform proposal that includes a VAT.

The latest plan would reduce projected deficits by nearly $5.9 trillion from 2012 through 2020. It was approved unanimously by a panel led by former Senator Pete V. Domenici of New Mexico, who was the senior Republican on the Senate Budget Committee for more than a quarter-century, and Alice M. Rivlin, who served both Congress and President Bill Clinton as budget director.

The Rivlin/Domenici proposal would include a 6.5% “Deficit Reduction Sales Tax.”  This is a type of consumption tax which is potentially, but not definitively, border adjustable.  The proposal also would eliminate the payroll tax for one year, and reduce income tax rates and deductions.

From CPA’s perspective, any consumption tax must be border adjustable under WTO rules.  A plain national sales tax would not necessarily be charged on foreign goods at the border, though I don’t know the details of the Rivlin/Domenici proposal.

We need to neutralize foreign VATs to balance trade.  We need balanced trade to fix our economy through growing jobs and wealth.

Below is a letter from Rivlin and Domenici published in today’s Washington Post, explaining their plan.

*****

Payroll tax holiday and other measures to reduce the debt

Washington Post op-ed

By Pete V. Domenici and Alice M. Rivlin
Wednesday, November 17, 2010

This morning, a bipartisan task force that we co-chair unveils a bold, comprehensive plan to dramatically reduce America’s deficits and debt and strengthen our economy, enabling the nation to reclaim its future. We urge the nation’s leaders to seriously consider it.

The strong economy that has made the United States the world’s leading power is gravely threatened. Federal debt will soar in the coming years under current policies, endangering our prosperity and our leadership. The national debt will overtake the economy itself, increasing our dependence on China and other foreign lenders, draining our resources and reducing our living standards. This risks economic crisis and threatens to turn America into a second-rate power.

But this dire scenario is not inevitable. We can restrain the debt, rebuild our economy, restore our independence and ensure that America remains a world leader. Restraining the debt can give us a leaner, more-effective government, a more efficient health system and a far simpler tax system more favorable to economic growth. Moreover, we can put the budget on a sustainable path without threatening the fragile recovery.

Our plan shows that a group of Democrats and Republicans (including 19 former White House and Cabinet officials; former Senate and House members; former governors and mayors; and business, labor and other leaders) can craft a viable blueprint to tackle the nation’s most serious long-term economic challenges.

Here are the highlights:

To ensure a more robust recovery, we propose a one-year “payroll tax holiday” for 2011, suspending Social Security payroll taxes for employers and employees. We also would phase in the steps to reduce deficits and debt gradually beginning in 2012, so the economy will be strong enough to absorb them.

We would stabilize the debt held by the public at less than 60 percent of gross domestic product, an internationally recognized standard; reduce annual deficits to manageable levels; and balance the “primary” budget (everything other than interest payments) by 2014.

We would dramatically simplify the tax system, establishing individual tax rates of 15 and 27 percent (from the current high of 35), cutting the corporate tax rate to 27 percent (from 35 today), ending most deductions and credits while simplifying the rest, and ensuring that nearly 90 million households no longer have to file returns. To reduce the debt, we would supplement our spending cuts with a 6.5 percent “debt-reduction sales tax.”

We would strengthen Social Security so it can pay benefits for the next 75 years by gradually raising the amount of wages subject to payroll taxes; slightly reducing the growth in benefits for the top 25 percent of beneficiaries; raising the minimum benefit for long-term, low-wage workers; indexing benefits to life expectancy; and changing the calculation of cost-of-living adjustments to better reflect inflation. We would not raise the age at which senior citizens can begin receiving benefits.

We would control health-care costs - the biggest driver of long-term deficits - by reforming Medicare and Medicaid while, starting in 2018, capping and then phasing out the tax exclusion for employer-provided health care. We would reform medical malpractice laws and help address the health costs tied to rising obesity by imposing a tax on high-calorie sodas.

We would freeze domestic discretionary spending for four years and defense spending for five, both at 2011 levels, and then limit their future growth to the rate of growth in the economy.

Finally, we would cap domestic and defense discretionary spending (with tight exceptions for true emergencies) and trigger across-the-board cuts if the caps are breached; enact a strict pay-as-you-go statutory rule for tax cuts or expansions of entitlements; and enact long-term budgets for major entitlements while creating a Fiscal Accountability Commission that would recommend policy changes every five years if entitlements are exceeding their budgets.

Many on the left and right will attack pieces of our plan, just as they attacked the recent proposal from the co-chairs of President Obama’s fiscal commission. Indeed, some members of our group question elements of our proposal while supporting the comprehensive package as a whole.

But the status quo is not an option, and everyone must sacrifice a little in the common interest. Our economic security and our future prosperity depend on living within our means.

Bipartisan cooperation can provide a path to a stronger, more prosperous America.

Pete V. Domenici, a Republican from New Mexico, was chairman of the Senate Budget Committee. Alice Rivlin was the founding director of the Congressional Budget Office and a director of the Office of Management and Budget in the Clinton administration. They co-chair the Bipartisan Policy Center’s Debt Reduction Task Force.