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A Barrons editorial presents the VAT issue as well as anyone. It gets right at the VAT tariff vs. trade issue.
I'm going to break the law by reprinting the full copyrighted piece here.
Memo
to Barrons' lawyers - If you don't like it, let me know and I'll take
the whole piece down. But I'll provide the link to send a few
more potential subscribers your way.
My only comment is that the
Barrons piece is written for Republicans, which is fine. But the
message needs to come through to Democrats, because this should not be
a partisan issue. Barrons decries corporate taxes, and many
Democrats like those taxes. There is a good reason to shift away
from corporate and other income taxes, but the language must appeal to
those who justifiably think Big Corporations have too much power.
I will feature the key Barrons point here, and then reprint the whole thing:
Self-Punishment
Taxes on world trade are levied according to a set of rules that
penalize the United States for its reliance on corporate income taxes.
Under the rules of the World Trade Organization, value-added taxes need
not be levied if the taxed goods or services are exported. No such
export rebate is allowed for corporate income taxes. If a German car
might be liable for $5,000 of value-added tax, its manufacturer would
receive the $5,000 back from the tax authorities after driving the car
onto a ship bound for the United States. A Honda exported from these
shores would carry its share of the manufacturer's corporate income tax
across the ocean, with no rebate allowed.
The U.S. Congress goes on year after year holding hearings about this
inequity, and the U.S. goes on and on running up trade deficits, but
nothing is ever done to secure better tax treatment for our exports by
substituting a value-added tax for the corporate income tax, or by
negotiating equal treatment for both kinds of taxation.
****
Monday, January 7, 2008
EDITORIAL COMMENTARY
Taxation Without Justification
Cut the corporate income tax or, better yet, abolish it
Taxes on world trade are levied according to a set of rules that
penalize the United States for its reliance on corporate income taxes.
Under the rules of the World Trade Organization, value-added taxes need
not be levied if the taxed goods or services are exported. No such
export rebate is allowed for corporate income taxes. If a German car
might be liable for $5,000 of value-added tax, its manufacturer would
receive the $5,000 back from the tax authorities after driving the car
onto a ship bound for the United States. A Honda exported from these
shores would carry its share of the manufacturer's corporate income tax
across the ocean, with no rebate allowed. (read more)
The U.S. Congress goes on year after year holding hearings about this
inequity, and the U.S. goes on and on running up trade deficits, but
nothing is ever done to secure better tax treatment for our exports by
substituting a value-added tax for the corporate income tax, or by
negotiating equal treatment for both kinds of taxation.
By THOMAS G. DONLAN
OUR STUBBORN HABIT AT EACH TURNING of the year is to denounce the
injustice and impracticality of the corporate income tax. It is a tax
on economic success and amounts to left-handed favoritism for
unprofitable companies. It is an invisible tax on customers, who pay
higher prices when the corporate income tax is passed down the line.
Paying taxes on profits -- the fuel for the economic engine -- is bad
enough when it happens only once, but the corporate income tax is the
first step in a two-step tax on capital. Corporate profits are taxed,
then taxed again when distributed to the owners of the business as
dividends and capital gains. The double-dipping doubly discourages
investors and investment.
Then there are the indirect costs of the corporate income tax, which
probably are worse than the direct burdens. It mandates complexity in
the calculation of revenues and expenses, which in turn requires a
corps of auditors and lawyers at the Internal Revenue Service, which in
turn requires a bigger corps of accountants and tax counsels at every
corporation. These people could have been employed in more productive
endeavors. The tax Foundation estimates that the total expense of
compliance sucked $147 billion out of businesses in 2005. (The direct
cost of business taxation was $278 billion.)
Foreign Entanglement
There is more to the corporate tax than just the domestic economic
impact. Whether Americans know it or not, the United States and its
businesses are in constant competition with businesses based in other
countries. It should not be a surprise that costs of doing business
vary around the world, and that taxes in most countries are a
significant business cost.
The U.S. has so many other positive attributes for business -- skilled
workers, deep capital resources, relatively low regulation and open
markets, for example -- that it has thought itself able to afford to
neglect its competitive position on taxes. The United States is far
behind most of the world in the effort to provide attractive tax rates.
The U.S. rate of 35% (it's 40% if the average impact of state corporate
income taxes is included) is the second-highest in the world, after
Japan's.
Competition is getting stiffer. The average corporate tax bite in the
17 most-developed countries was 31% in 2006, down from 38% in 1994 and
51% in 1982, according to the Organization for Economic Cooperation and
Development. The last significant reduction in the U.S. federal
corporate tax rate was the cut from 50% to 34% that came as part of the
1986 tax reform.
Even China, a nation of nominal communists, has a corporate tax rate of
25%. The leaders of Vietnam and France have announced their intentions
to take their corporate rates to the same 25% level.
Some of the most dramatic cuts in corporate income tax since 1982 have
been tallied in Germany (62% to 39%), Britain (52% to 30%), Sweden (61%
to 28%) and Austria (62% to 27%). At 12%, Ireland has the lowest
corporate income-tax rate of the 17 countries, and Ireland also has
been the best economic performer in Western Europe.
Rates are not the whole story; each country defines its taxable-income
base differently, and each country builds its own loopholes to favor
certain industries. The U.S. ranks only fifth of the OECD 17 in terms
of the average take from the corporate income tax. But it is rates more
than takes that declare intentions, and it is clear to every capitalist
in the world that the United States does not intend to allow businesses
to keep all the fruits of their efforts.
Self-Punishment
Taxes on world trade are levied according to a set of rules that
penalize the United States for its reliance on corporate income taxes.
Under the rules of the World Trade Organization, value-added taxes need
not be levied if the taxed goods or services are exported. No such
export rebate is allowed for corporate income taxes. If a German car
might be liable for $5,000 of value-added tax, its manufacturer would
receive the $5,000 back from the tax authorities after driving the car
onto a ship bound for the United States. A Honda exported from these
shores would carry its share of the manufacturer's corporate income tax
across the ocean, with no rebate allowed.
The U.S. Congress goes on year after year holding hearings about this
inequity, and the U.S. goes on and on running up trade deficits, but
nothing is ever done to secure better tax treatment for our exports by
substituting a value-added tax for the corporate income tax, or by
negotiating equal treatment for both kinds of taxation.
In Search of Progress
The abolition of the corporate income tax is our favorite cause, but
even with our rose-colored glasses on we don't see very many hints of
future success.
The last two secretaries of the U.S. Treasury have spoken out against
the tax. Unfortunately, the power of that office is much overrated, so
they haven't helped the cause as much as we might wish.
The holder of a much more powerful office, House Ways & Means
Committee Chairman Charles Rangel, has offered a small slice off the
tax, proposing last year to cut the rate from 35% to 30.5%. Any cut
would be better than nothing, except that Rangel actually was offering
something worse than nothing. All the lost tax revenue would be made up
by increasing other taxes. The top rate on the ordinary income tax,
which includes the tax on many small businesses, would rise from 35% to
44% in Rangel's plan.
At the very least, Chairman Rangel and his cohorts in Congress should
make the federal corporate income tax less complex and less burdensome.
They could turn down the heat on capital by permitting immediate
expensing of investments. That would also reduce the number of
accountants and lobbyists needed to play games with investment-tax
credits and depreciation and the number of IRS agents needed to referee
the games.
Perhaps more important, considering the recent American experience with
excessive debt, Congress should redress the tax imbalance that favors
corporate borrowing over corporate equity. Such differentials only
enrich the inventors of tax shelters. We could end the expensing of
interest payments, but the easiest and best way forward is to remove
the corporate income tax entirely.
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