Fundamental Tax Reform: The Key to American Competitiveness

1
Fundamental Tax Reform The Key to American
Competitiveness

• Charles H. Blum
• Ruth L. Kemmish
• IAS Group, Ltd.
• iasg_at_erols.com
• 202 393 8600

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The Problem

• The US tax system has become increasing out of
  step with the rest of the world.
• Problem is not the overall tax burden.

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Types of Consumption Tax

• Value-Added Taxes
• e.g. European Union, Mexico, China
• National Retail Sales Tax
• e.g. Canada, Australia
• Business Transfer Tax
• These can be used alone or be combined to form a
  hybrid system.

4
Low Tax, Bad Tax

• The U.S. is a low-tax country but we are a
  badly-taxed country.

5
Direct vs. Indirect Income vs. Consumption

• Fundamental problem is an over-reliance on direct
  taxes and non-use of border adjustable
  consumption taxes.
• Indirect taxes may be adjusted at the border.
• Exporters receive rebate for taxes paid
• Importers must pay taxes at port of entry
• This creates a 2-way trade advantage for
  countries with consumption taxes when trading
  with countries without one.

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The Effect on Relative Prices
U.S. Price PLUS 17 VAT 117.00
U.S. Local Price100
China Local Price 100 VAT Rate 17
Chinese Price MINUS 17 VAT 85.89
U.S. Price PLUS 16 VAT 116.00
U.S. Price Local Price 100
Germany Local Price 100 VAT Rate 16
German Price MINUS 16 VAT 86.56
German Price MINUS 16 VAT PLUS 17 VAT 101.27
Germany Local Price 100 VAT Rate 16
China Local Price 100 VAT Rate 17
Chinese Price MINUS 17 VAT PLUS 16 VAT 99.63
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Link Between Tax System and Trade Competitiveness
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Options for Eliminating US Disadvantage

• Three ways to go forward.
• Attempt to change the international rule.
• First in the Omnibus Trade and Competitiveness
  Act of 1988,
• The principal negotiating objective of the
  United States regarding border taxes is to obtain
  a revision of the WTO rules with respect to the
  treatment of border adjustments for internal
  taxes to redress the disadvantage to countries
  relying primarily on direct taxes for revenue
  rather than indirect taxes. -Bipartisan Trade
  Promotion Authority Act of 2002
• Result No progress in Uruguay Round, Doha Round
  90 new users of consumption taxes

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Options for Eliminating US Disadvantage

• H.R. 2600, Border Tax Equity Act of 2007,
  approach.
• If no international agreement is made by 2009
• Apply a Countervailing Duty on imports equal to
  value of tax subsidy, effective 4/1/2009.
• Use revenue to reimburse exporters, effective
  7/1/2009.
• Result U.S. violation of WTO rules likely trade
  war

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Options for Eliminating US Disadvantage

• Join the rest of the world.
• Adopt a consumption tax based system.
• Only feasible option.

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Current Proposals
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Competing Tax Reform Objectives

• Trade Competitiveness
• Incentive to Save
• Incentive to Invest
• Simplification
• Fairness
• Revenue
• Transition Costs

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Bottom Line

• Only a Border Adjustable Consumption Tax will
• Incentivize savings
• Ensure that U.S. imports pay their fair share
• Remove burden of double-taxation from U.S.
  exports
• Perfectly legal under WTO rules
• Perfectly reciprocal

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Why Reform Now?

• The tax system is under stress
• Fiscal gap
• AMT explosion
• Bush Tax Cuts
• Complexity
• Evasion and avoidance
• Cost of compliance
• Low savings rate ? relying on foreign capital
• Unsustainably high trade deficit

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Common-Sense Approach to Fundamental Tax Reform
Potential Consensus Principles for U.S. Producers

• Shift tax burden substantially away from income
  and onto consumption
• Institute border-adjustable consumption tax at
  rate high enough to impact trade flows
• Eliminate, reduce, and simplify all other federal
  taxes
• Ensure internationally competitive treatment of
  capital investments
• Ensure fair transition rules (e.g. loss, carry
  forward, and asset depreciation balances)

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What we need to move forward

• Clear political objective
• United lobby of domestic producers
• Create a consensus