The high vs. low tax debate is dumb. How to tax is the better question… including whether to include a consumption tax to improve (a) our trade balance and (b) our consumption vs. production balance.
Republican Bruce Bartlett was with the Reagan and Bush administrations.
He wrote last week documenting how current U.S. taxes are very low now… historically and in relation to other developed countries. Indeed taxes are lower than under Reagan or Bush I. He received incredulous responses from some commenters who had a cognitive dissonance experience when reading the article.
So Bartlett followed up with an article this week, with more data, concluding:
Nevertheless, it is clear that federal taxes have not been rising and are, at least in historical terms, lower for most taxpayers than they have been since the 1960s. Those who assert that taxes are rising or are at confiscatory levels simply do not know what they are talking about.
Our tax debate is so twisted and misleading, that its hard to get to any real issues. High vs. low tax is simplistic. HOW you tax is important. A government can tax income, wealth, real property (land) or consumption. Most developed countries spread tax burdens across all categories… not taxing one item to the exclusion of another.
The federal government does not tax consumption (or land), so a disproportionate amount of taxes falls upon income. Payroll taxes or income tax. (Whether income tax is too high or too low is not my point, but it is disproportionate in relation to consumption tax).
The U.S. consumes too much and does not invest and save. Thus we import more than we export which is overconsumption. To truly recover, we need to underconsume and overinvest for quite a few years. How can that happen?
Certainly our overconsumption in relation to production/investment/savings is policy based… not some individualistic choice. Foreign trade cheating causes a cost scenario making it - often times - compelling to move offshore as a base for selling back into the U.S.
On trade grounds, other countries impose their consumption taxes upon our exports. (See this CPA fact sheet on border adjustable taxes). They are often called value added taxes or goods and services taxes. But they act like tariffs. Our companies pay all U.S. taxes plus the foreign consumption taxes before getting their product into that country. Our exports are taxed here to pay for our infrastructure, government costs, military, etc. and taxed over there to pay for their infrastructure, government costs, military, etc.
And foreign countries rebate their value added taxes to their domestic companies who ship abroad, because consumption taxes are imposed where the consumption occurs. Since we have no consumption tax, imports do not pay for our infrastructure, government costs, military, etc. They enter our border tax free even though we don’t enjoy the reciprocal right.
Because the average foreign VAT is 17%, the U.S. faces an un-acknowledged 17% tariff across the world (almost all countries) and a 17% subsidy by trade rivals selling here.
If you neutralize that two-way 17% cost disadvantage, you are basically cutting our export prices by 17%. Imagine the export boost. You are also taxing all container ships coming into the country. Imagine the revenue boost to apply to our public budget deficit.
At the domestic tax policy level, if you tax something that we have too much of… like consumption… you will depress it to a certain degree. You can then decide whether you can relieve the tax burden on income or wages, for example.
There are progressivity, revenue neutrality and transition issues to work out. But it is ultimately just math (yes… I know the rhetoric will obstruct the math solution… but let’s ignore the rhetoric for now). The “how to tax” debate is much better than the “high/low” tax debate for trade deficit reasons and for domestic production reasons.
Michael - while businesses are required to report VAT, they can reclaim import VAT in most countries. VAT is generally not a cost to businesses. If a US exporter ships goods to for example Europe, the importer will pay import VAT. But that VAT amount can be immediately reclaimed. In countries like the Netherlands and the UK there are even simplifications that minimize the cash flow burden.
Your article is based on the assumption that VAT is a cost to U.S. businesses (see “Because the average foreign VAT is 17%, the U.S. faces an un-acknowledged 17% tariff across the world (almost all countries) and a 17% subsidy by trade rivals selling here.), which is incorrect.
For the Netherlands and UK perhaps, but definitely not for China.
The Chinese government publishes statistics on its revenue collection, helpfully dividing domestically generated VAT revenues from VAT generated from imports. VAT levied on imports paid for 22% of the central government’s budget in 2009.
Interesting that you mention China. Even in China VAT is generally recoverable for businesses. China is one of the few countries that discourages export by blocking a certain amount of input tax credit for export supplies, although nowadays this only applies to a few categories of goods vs. all exported goods a couple of years ago.
Where did you find these stats? I’d be interested in having a look at them.
Mark,
My understanding is the VATs are reclaimed by exporter from counties with VATs, so the VAT counties’ exporter will remain competitive selling their products in other countries. Conversely, VAT countries assess VATs on imports; otherwise their domestic producers would be at a competitive disadvantage.
A link to PWC’s September 2010 white paper, which title speaks volumes regarding VATs, The Growing Importance of VAT - The Biggest Private-Public Partnership, follows:
http://www.pwc.com/be/en/book/assets/A-guide-to-VAT_presentation-PwC-2010.pdf
Thanks Hugh - you are exactly right. VAT on export is rebated, and VAT is levied on imports - the domestic playing field is level for all players - resident or non-resident. And therefore US companies are not at a disadvantage when they import goods or services into VAT countries: they are taxed with VAT, just as the resident companies are.
你会读中文吗？
Actually — even if you can’t, you can just use google translate or have a friend help.
http://yss.mof.gov.cn/2010zhongyangyusuan/201003/t20100325_280110.html
“进口货物增值税、消费税”
The fourth line from the top reads: “imported products VAT, consumption taxes” — note all of the figures are in units of 100 million RMB.
The data are from the Ministry of Finance.
Revenue generated from the import VAT and import consumption taxes was 772.9 billion RMB, while personal income tax in China generated 236.6 billion RMB for the government. Wouldn’t mind living under that tax system! I could avoid paying much tax by simply not buying many imported products!
Thanks Fred. 致谢
Thanks Mark – I agree with you that the VAT, in and of itself, doesn’t disadvantage imported goods or services into VAT from US companies. However because the U.S. has not joined the post-1970’s globalization taxation model by adopting a VAT, exports of goods or services from the U.S. are fully-loaded with our domestic taxes, which in other countries have been reduced or eliminated by VATs, so our exporters are disadvantaged by a double tax load.
Conversely, imports goods or services into the U.S. from VAT counties, enter the U.S. without the tax-load that or domestic products and services must bear, therefore of domestic producers are disadvantaged by a single tax load versus a no tax load.
In summary, the problem is the uneven playing field for our businesses and workers, caused by our 30 years of political unresponsiveness
Hugh - True. In addition, all signs are hinting that - globally - indirect taxes are overtaking direct taxes in government revenue (also see Fred’s previous comment on China). What I find enormously interesting (as an European in the U.S.) is that the corporate tax burden in the U.S. falls on the medium-sized businesses in relative figures, not on the large corporates.
Thus, medium-sized businesses in the U.S. should weigh the filing burden of a VAT against the potential of a lower corporate tax burden. VAT compliance is not cheap, but I think that the experience in other countries indicates that VAT is preferable over direct tax.
It can still disadvantage the United States if foreign countries “have difficulty” collecting the VAT from domestic producers but are assiduous in supplying export rebates and imposing VAT on imports destined for domestic consumption.
If a national government collects a 20% VAT on imports but is only “able” to collect about half of the VAT it is owed from domestic producers, collecting the equivalent of a 10% VAT, the result is effectively a 10% national tariff on imports. VAT is a system of taxation that is **perfect** for de facto mercantilists to exploit to limit imported manufactured goods… In open political systems such as the US or EU it is hard to manipulate the VAT for these purposes but in some countries it is very easy for government officials to be instructed to “be lenient” on domestic producers.
One country where this seems to be the case is the People’s Republic of China.
In domestic consumption and VAT taxes, China in 2009 took in 1,867 billion RMB. Those same two types of taxes levied on imports generated 772.9 billion RMB in 2009. If they were assessed evenly across domestic and imported products, this would imply that roughly 30% of Chinese domestic consumption in 2009 was of imported products (or intermediate inputs), which seems implausibly high given that it is literally almost impossible to find imported products in China (at least in the coastal cities I’ve visited). China imports a few fresh fruits from S. East Asia and Taiwan, some soybeans from the US and Argentina but not a whole lot else, lots of imported intermediate goods but if they are destined to export processing zones, they are imported tax free. Cars, computers, clothing, furniture, household goods etc are all made in China…. Even wine and classic “Americana” are mostly “Made in PRC”
As rare as American made goods are in Wal Mart or Target may seem, imported goods in China are much, much, much rarer…
Fred - good point. I was unable to reconcile these two amounts.
I was thinking that perhaps the Chinese domestic figure is the VAT that was actually collected (i.e the VAT charged by retailers), and the import figure was the VAT collected on import, but then repaid or credited as input tax. There was no reference to that though in the government reports.
The actual government ‘revenue’ from VAT should only be at the retail level - the level where goods/services are sold to individuals. Although businesses have a reporting and filing requirement, they should not bear the burden of the tax itself.
Some countries, like Singapore, have a fairly high VAT registration threshold. This means that a significant number of smaller businesses do not charge VAT, but also are not entitled to VAT credits. These are basically treated as end-users. This may account for some of the discrepancies, but not all.