I’ve been talking to R’s and D’s on the VAT, getting a lot more support in the past. I’ll be posting more later on exactly how other countries use the VAT for their trade advantage. But this article is interesting. The American Council for Capital Formation supports a type of VAT which is a reasonable start. For those GOP offices that incorrectly think the VAT is just a way of raising taxes, this shows that there is substantial right-of-center support for the idea.
To refresh your memory, the CPA concern with the VAT is that from the trade competitiveness side. We pay a 17% VAT tariff everywhere we export, and other countries subsidize their shipments to us with a 17% VAT rebate.
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Bloomfield: Tax Overhaul — Triple Bypass or Triage?
- By Mark Bloomfield
- April 26, 2013, 5 a.m.
For the first time in three decades, Congress is scrubbing up to perform surgery on our unfair, incomprehensible and anti-economic growth tax code.
Mark Bloomfield, ACCF
President Barack Obama has made his proposals. The chairmen of the two tax-writing committees in Congress, Rep. Dave Camp, R-Mich., and Sen.Max Baucus, D-Mont., titled a recent high-profile joint op-ed, “Tax Reform Is Very Much Alive and Doable.”
Whether Congress performs a triple bypass through fundamental tax reform or if it just performs triage on the worst tax provisions remains to be seen.
Fundamental tax reform would replace our U.S. income tax with a consumption tax. Examples of a consumption tax are the European value added tax or state retail sales taxes. A uniquely American consumption tax could be crafted suitable to our economy, politics and times. Implicit would be provisions to prevent too much “regressivity” or creation of a “money machine.” It would be fairer — reward Mr. Thrift rather than Mr. Spendthrift. It would be simpler than our current tax code, which the IRS cannot easily explain or administer. It would facilitate economic growth by exempting all saving and investment from taxation: Mr. and Mrs. Middle Class would not be penalized when saving for a home, their children’s education or a secure nest egg for retirement. American businesses would not be penalized for innovation, investment and job creation.
A U.S. consumption tax in place of our current income tax would be ideal. Recognizing current political reality that tax reform may be limited to the income tax, here are three simple “do’s” to maximize economic growth and job creation:
• Do: Lower individual and corporate income tax rates. The U.S. corporate tax rate, at 35 percent, is uncompetitive and the highest among OECD countries. Move toward a “territorial” tax system to avoid multiple taxation by different countries. Most economists believe lower tax rates for individuals and corporations would minimize chasing tax loopholes and stimulate economic growth.
• Do: Be careful about “fixing” the income tax. First, look at fair, fundamental spending cuts that don’t jeopardize economic growth to “pay for” tax reform. Second, a no-brainer — end loopholes for special interests. It’s about revenue but, equally important. about public confidence in the tax code. Third, be careful about curtailing longstanding tax provisions that ameliorate the bias against saving and investment: the tax treatment of capital gains, dividends, IRAs, 401(k)s and business innovation and investment in new machinery and equipment.
• Do: Be bold and tax consumption to “pay for” lower tax rates to maintain and also liberalize the tax treatment of saving and investment. Economists of all stripes concur that this predicate is good for economic growth, job creation and a good standard of living for all Americans. According to the most recent analysis conducted by Ernst and Young, the U.S. had the fourth highest integrated (corporate and individual combined) capital gains tax rate among OECD (Organisation for Economic Co-operation and Development) and BRIC (Brazil, Russia, India and China) countries before the recent U.S. individual tax hikes. Similarly, our integrated tax on dividends was also the fourth steepest. In the most recent international comparison available, the U.S. tax treatment of business investment is also above the OECD average.
To illustrate the impact of tax policy on economic growth, consider the impact of the capital gains tax. Highly regarded mainstream economist Allen Sinai concluded in a macroeconomic analysis that eliminating the U.S. capital gains tax would create jobs at a cost to the federal government of only $18,000 per job. In contrast, recent federal stimulus programs created jobs at a cost of $92,000 per employee.
To hear the two top tax writers in Congress say tax reform is “alive and doable” is a positive prognosis, but to go the distance they will need to be prepared to revive and stabilize tax reform to ensure a healthy patient in the end. Most importantly, they will need to heed the Hippocratic oath, “First, do no harm.”
Mark Bloomfield is president and CEO of the American Council for Capital Formation.
The author is working for the large corporations, not the people that make up the heart and soul of this country and it is only our citizens, not the corporations, that are given priority for life, liberty and the pursuit of happiness.
The EFFECTIVE tax rate for US corporations is 9%, the lowest in the developed world. Also, tax loopholes such as ghost movement of profits to other countries where little or no taxes are due, is utilized by the large multinationals to give them an unfair advantage over their smaller local competitors.
A consumption tax is a regressive tax that will further damage our economy by reducing the purchasing power of those that spend a larger portion of their income on goods and services while lowering the income tax on those who spend a smaller portion of their income on goods and services.
Since 1972, the wages of line workers has dropped 7% of GDP while since 2003, the profits of corporations have risen by 7% of GDP. This represents $1 trillion a year transferred from workers who would have spent it on goods and services to corporations who save it, use it to buy their own stock or issue it as dividends to mostly high income individuals who are also unlikely to spend it on goods and services.
So how do we keep an economy with a $1 trillion hole in it alive — with ever-rising personal and public debt. And, of course, this is how we have grown financial service behemoths that now own our Congress.
Follow the suggestions of Mr. Bloomfield at your own peril.
I agree with you, Bob Goldschmidt. Moving to consumption taxes would be the worst thing possible, especially as poverty and unemployment spread through the land, as wages stagnate or shrink, and as the distribution of wealth skews ever higher towards the super-rich who consume little of their income, compared with the majority of us who have no savings and spend every cent just trying to survive.
It seems CPA will discuss any “reform” except for the one that would most directly bring about balanced trade. By this I mean Import Certificates issued in the same value as our exports. The system would guarantee balanced trade, diverting our $600 billion annual trade deficits instead towards American industry. That would create millions of new manufacturing jobs directly, millions more multiplier-effect jobs, and revive our manufacturing and other high value-added industries. Never discussed by CPA, not even to criticize it, just stony silence as if the idea had never been proposed….
Instead we get proposals for overhauling the entire tax system, a proposal guaranteed to bring every possible interest and opinion into the fray, to very quickly overwhelm the debate with a million distractions having nothing to do with balancing our trade or reviving manufacturing and creating the millions of jobs we need. This proposal for a switch to consumption taxes is about as bizarre as the recent CPA proposal that Congress could buy our support for a TPP if only a “currency fix” were “hardwired in.”
I just don’t understand the scattershot approach here.
Will,
I know that ICs have been discussed within the CPA. The idea is held back by numerous issues both political and economic. First, it is easy for Warren Buffet to write an article about a great game-changing policy, but it is another thing entirely to get that project through Congress. In 2006, the Dorgan-Feingold bill on ICs got almost no support from either party in Congress.
Second, the parties are not interested in instituting an enormous bureaucracy of unknowable quality/quantity. Even if it is efficient, you are talking about a certification program for a $2 trillion export economy and a $2.7 trillion import economy. Furthermore, Buffet’s proposal has not been scored on the economics so we cannot actually say what effects it might have.
Fighting against VAT with IC is an example of the perfect being the enemy of the good. Congress is willing to talk about tax reform. A value-added tax could be put in place modeled on best practices from the other 160 countries with VATs, and could be done so in a way that address both the regressive/distributional questions and the revenue questions. It could be done in a way that simplifies the tax code and - and this is the biggest selling point to Congress - sends home half of the Internal Revenue Service.
Are their better plans? Perhaps, but this is one that has traction, support, and a long economic history. Adopting a VAT simply has to happen. More than 90 percent of the global population has a VAT. Nearly 100 percent of our export markets have VAT mark ups. More than three-quarters of the global economy has a VAT (and that number is skewed by us, and our enormous non-VAT economy). Step one is figuring out the best way to implement a VAT that can get through Congress.
Very well stated Craig
Or perhaps a national VAT harmonized with each state VAT (once converted from the arhaic retail sales tax models that exist today) would prevent what you describe as “Moving to consumption taxes would be the worst thing possible, especially as poverty and unemployment spread through the land, as wages stagnate or shrink, and as the distribution of wealth skews ever higher towards the super-rich who consume little of their income, compared with the majority of us who have no savings and spend every cent just trying to survive.” How can this be so? Imagine more of the low wage earners not facing any income tax burden by a shifting of the tax bands and an overall lowering of the income tax rates. Think also of a lowering of the Corporate tax rate - matching Canada’s 15% federal rate is a good goal to set - which can result in one of many actions (i) higher wages (ii) increased employment (iii) R+D investments (iv) increase shareholder value. All of these can bring about substantial benefits for the population in general. They can also bring about a lowering of the cost of doing business. This most immediately would benefit current business owners, including small businesses. It can also benefit those entrepeneurs looking to establish a business and encourage them to do so and to hire more American workers.
These numbers are astounding, if right:\
http://www.huffingtonpost.com/2013/04/29/wealthy-stashing-offshore_n_3179139.html
Our problem is that we have sold Main Street to Wall Street and Wall Street takes the money and hides it in the global mattress and avoids taxes.
We have perhaps the worst governance I have seen in my lifetime.
Commenters here would likely benefit from a lesson in VAT 101.
Bob G states “A consumption tax is a regressive tax that will further damage our economy by reducing the purchasing power of those that spend a larger portion of their income on goods and services while lowering the income tax on those who spend a smaller portion of their income on goods and services.”
Indeed the VAT can be regressive but most countries in the developed world address this imbalance by (i) reducing personal income taxes, including raising the threshold on incomes subject to PIT, (ii) carving out a basket of basic necessities from the VAT net (food, public transport, healthcare, education etc) that lower incomes families spend a larger proportion of their incomes on (iii) offer individual subsidies / credits to lower income earners to off-set the burden from the VAT on non-essentials.
Each of the above in (i)- (iii) are practiced in numerous VAT jurisdictions globally, with Canada applying all 3 of these measures.
In addition, it should be noted that Canada’s corporate income tax rate has also significantly reduced over the 20 years since the national VAT (GST/HST) was introduced, with the Canadian CIT rate now at 15%, one of the lowest in the OECD. This is the kind of tax policy that attracts foreign entrepeurs to Canada to establish companies and create jobs for Canadians. Also worth noting is that the federal VAT rate in Canada has never increased from it’s original 7% rate, in fact, it has been reduced to 5%. While individual tax rates may be higher in Canada generally speaking, Canadians also don’t need to worry about the rising cost of health insurance premiums / healthcare costs which is one of the largest components of American spending. Marginally higher PIT rates in Canada come with universal healthcare which while far from perfect, is certainly much better than what the fear mongers would have you believe.
Why does Mr Bloomfield insist that any tax reform must be uniquely American. He gives only 2 alternatives which he says are the Euro VAT systems and retail sales taxes, and by doing so does a great dis-service to readers who would surely benefit from an understanding of how “modern” VAT systems work beyond the European model. New Zealand, Singapore, Canada, South Africa, China, all operate VAT models that are far more progressive than the EU systems. Canada for one presents almost a perfect example of what Bloomfield suggests the US needs “Implicit would be provisions to prevent too much “regressivity” or creation of a “money machine.” “.