Categorized | Tax

Political Pundits


The following is an essay by Former U.S. Senator Ernest F. Hollings

To create jobs and pay down the debt all the President and Congress need to do is eliminate the 35% Corporate Tax and replace it with a 6% Value Added Tax.  The “value added” is measured by the difference in the cost of parts and materials and the sale of the finished product – be it wholesale or retail.  A 6% VAT would be 6% of the difference in the cost and sale price.  The VAT is not complicated, regressive or a money machine. 150 countries compete in globalization with a VAT and not having a VAT is killing manufacturing in the United States.  The VAT is rebated on exports.  The Corporate Tax is not.  One can start a business, be making a profit, paying the 35% Corporate Tax on exports and paying the 17% VAT when his exports reach China.  Soon he will be competing with tax free China imports that will put him out of business.  The VAT has no loopholes so we have instant tax reform.  The VAT is self-enforcing so we can cut the size of government (IRS).  Eliminating the Corporate Tax releases $2 trillion in offshore profits for Corporate America to invest tax free to create jobs in the United States.  The 2011 Corporate Tax produced $181.1 billion in revenues.  A 6% VAT for 2011 would have produced $728 billion in revenues.  This VAT tax cut produces billions to pay down the debt, creates millions of jobs and jumpstarts the economy.  But all we get from the pundits is “cut taxes”, “cut regulations” and “federal aid for policemen, firemen and teachers” that don’t build a strong economy.

I’ve sent the VAT tax cut to pundit friends Chris Matthewes, Ed Schultz, Rachael Maddow, Lawrence O’Donnell, Bill O’Reilly, John King, and Joe Scarborough – but nothing.  Perhaps the pundits keep the VAT tax cut “top secret” because their programs depend on continued controversy.


8 Responses to “Political Pundits”

  1. Bob Goldschmidt says:

    A VAT would do absolutely nothing to make us more competitive. It is regressive and a 6% VAT would reduce the purchasing power of the public by 6% while adding those funds to the US Treasury. If the US government spent all of the proceeds the net effect on our economy would be zero.

    If US goods cost A and International goods cost B, then, after imposing the tax, US goods would cost 1.06A and international goods 1.06B.

    If we want to get serious, then we need to phase in an increase in our import tariffs to 30% on all imports except food, clothing and non-strategic raw materials. This would protect us against low-wage countries like China who pay their workers $0.70/hr. Once such a tariff was phased in, most steel, aluminum, autos, electronics etc. would again be manufactured in the US.

    Under this scenario, if Canada wanted to keep our border open for trade, they would need to agree to matching our import tariffs. We would not agree to do this with Mexico because of their low wage rates.

    • Tom T. says:

      Bob, I agree with you on this. Restructuring our tax system to stop the gaming under our current policies may get at fixing a symptom but not the whole banana. Essentially we have a government that is funded off of income here in the U.S. along with taxes on wages and a few other minor things thrown in. To be ideologically with the free trade crowd, the VAT is proposed. To restructure our whole system because we have some countries that are gaming the system seems extreme and poses additional risks.

      Any VAT should be levied at the border only. A VAT on imports would be a tariff under any other name, but who cares? To allow a country like China to game our economy because we want to protect the free trade ideology that has helped put us in this hole is like fixing holes in a dam with your finger when the dam needs to be replaced (no this isn’t an argument for imposing a VAT on our system).

      For guidance, we should probably look closer to Germany than some ideological morass that has been proven to be a disaster policy.

      The only way we will get out of the huge debt we have is for wages to rise in the U.S. so that taxes can be collected and pay for the government instead of selling jobs to China and then borrowing from them. Our best way out is this strategy, not reworking our corporate tax structure. Of course those getting paid off by the oligarchs want to convince us to be radical in their favor instead of fixing the loopholes and gaming that free flows of capital is creating in the world economy. China knows that it can reduce the power of the United States by buying its economy. Our politicians are not quite as bright or would rather play political games that benefit themselves than the nation. We have the highest concentration of wealth since before the Great Depression. That concentration of wealth has largely come because the wealthy are able to buy politicians that advantage them whether it be unlimited reduction of taxes on capital gains or other benefits that increase the concentration of capital. Our country became the strongest in the world in part because the benefits of the economy were shared and this sharing created wealth and demand from the middle class. Our politicians are selling us and the economy out for their self interests and some failed ideology.

      A VAT should be imposed on imported goods so that countries like China can not gain our wealth without paying for our government and structure. How many companies in China are paying taxes to the U.S. government for our roads, teachers, government, military, social security and other benefits that have made our country better?

      A mere 6% VAT is not enough, although I would argue would really be closer to 12% in effect. It won’t stop the demand destruction nor increase wages enough to solve the problem no more than an increase in the sales tax an additional 6% (maybe a little but not much). Our structural problems can not be fixed in this manner. It is like putting your finger in a leaking dike but forcing blunt force trauma on the dike as a whole.

      We will not correct the problems in the United States until the average wage in the U.S. is considered as important as the Dow Jones Industrial Average gains. Capital (money) has been revered over labor far too long. It has helped create the circumstances of more leveraging and super low interest rates with no real growth. The growth that has come has been largely from the capitalization of assets, not real growth, as it is masked by deflation of wages of the middle and lower classes in relative terms. The “best” growth has come from those companies who have either had huge technological advances (productivity) or those that have been corporate predators in arbitraging our wages to world standards. It is wrecking our economy.

      Tom T.

      • Mo says:

        The VAT tax would not be the best solution. It would actually impose costs on many businesses. Also it works out almost to a sales tax because it gets rebated along the way except for the final consumer. Please read the following article linked below about the VAT tax.

        The VAT Subsidy That Does not Exist

        A decent solution to the current situation would be to lower corporate taxes, impose possible tariffs on currency manipulators, preventing currency manipulators and countries with industrial policies from buying up US companies they put out of business, encourage creation of state banks where states can deposit their own tax revenues and use them to recycle funds within the state to fund industrial activity and work towards sounder money which would involve educating people about money and banking and how money backed by a commodity really works.

        An example of working towards sounder money would be to have FDIC insurance only cover loans made for the real economy and not gambling and speculation. Of course none of these suggestions are perfect but would be a step in right direction.

        • Tom T. says:

          Mo, it seems that in the case of the VAT, the government issuing the VAT is getting paid what amounts to a sales tax. In the case of corporate income taxes, the U.S. does not get any corporate income tax on the items from other countries that are importing items. Thus, capital will flow to countries where there is less tax regardless of what government has it or what the name of the tax is. The corporate income tax might be a high tax compared to a VAT system, but the U.S. is supporting a world order burden that few other countries are supporting.

          In addition to the above capital flow incentive, the country that keeps its value added business in country is keeping jobs and capital that make that value added.

          I am not really for a VAT. I am really for a tariff to all countries who have perennial trade deficits (Warren Buffet’s plan would work just as well- better perhaps). I would worry about a VAT being hard to enforce and creating a whole lot of new accounting and other mess.

          Since we don’t have a VAT and do rely on corporate taxes, those taxes need to be levied at the border on imports using VAT accounting since we can not go and compel foreign corporations or importing corporations to give us the information to levy a corporate tax on them. The answer isn’t to always lower govt. revenues It is absolutely insane that U.S. corporations can take their capital to foreign countries, hire their workers and stimulate a foreign country’s economy while stealing jobs from the U.S. and then keep their money over seas to avoid the U.S. income tax.

          It is absolutely the wrong thing to do, while we can’t fund our own government with income revenues, to cut corporate taxes. I say equalize the taxes on imports to our tax rate, our labor protections, and all the other laws we have that have helped our country to be the best in the world. Defunding the government because we haven’t figured a way to make importers pay the same rate for goods for market access is nothing but silly. It doesn’t really solve our problems, it just allows them to be put on another paper promise for another day.

          Tom T.

          • Mo says:

            One thing the VAT tax does is allow the government to collect tax money earlier. It first collects and then rebates later.

            When it comes to corporate taxes in the US, on paper they are high because the top federal tax rate is 35% and the top state tax rate could be as high as 12% so it’s possible some corporations could pay a tax rate up to 47%. However, after various deductions, credits and exemptions the effective corporate tax rate is around 15-25%. So US corporate taxes are actually competitive with countries where companies outsource jobs to. Actually foreign corporate taxes are higher in a lot of cases then the US when dividends are taken into account.

            Bruce Bartlett wrote, for example Ireland has the lowest statutory corporate tax rate among O.E.C.D. countries, yet is still a relatively high-tax country because of the high tax rate it imposes on dividends. By contrast, Japan has the highest statutory corporate tax rate but only the 12th highest overall rate because it has one of the lowest tax rates on dividends(1).

            So if US companies are paying higher taxes in countries where they move jobs and factories to, then what accounts for the move? The only reason it could be are foreign industrial policies that grant subsidies for that sector at the expense of other.

            Once again if we look at countries like Germany, Japan, China, and South Korea. We see that these are countries when compared to the US have higher and lower valued exchange rates, higher and lower taxes, more and less regulation, more or less natural resources, higher and lower labor costs, at certain times even higher and lower unemployment, etc yet they all have a vibrant manufacturing sector. Even countries with trade deficits can have a vibrant manufacturing sector. So if the sector is not funded regularly then there won’t be any manufacturing in the US.





  2. For the last four decades, and especially the last decade and a half, U.S. Corporate tax policy seems to have failed “we the people” miserably. Reversing those policies, but not eliminating U.S. Corporate tax, per se, may have great merit and potential wide support from common interest groups, which have been left behind by the current tax model.

    Maintaining the current corporate tax rate, with scaled tax credits (of between 0% and 100%) based on the proportion of domestic sourcing, would potentially give U.S. corporations the opportunity of enjoying the lowest effective net global corporate tax. With this potential for zero U.S. Federal corporate taxes, the defenders of reduced Federal tax rates on dividends and capital gains rates would lose their double taxation argument, so the Bush dividends and capital gains tax-cuts should expire.

    The aforementioned, Bush tax-cuts, were of absolutely no benefit to non-profits, pension funds, and self-directed tax-deferred retirement plans etc., but were a huge benefit to taxable investors. Ironically, most of these taxable investors have much shorter investment time horizons than tax-free/deferred investors, so why does our Federal Tax code favor those who prioritized the short-term gain and the expends of long-term pain.
    The aforementioned tax changes can’t but help improve our trade situation and when coupled with a balanced trade model and/or a value-added tax (VAT), which need not be regressive if it replaced the employee’s share of social security, could do wonders.

  3. Tom T. says:

    Sooo…… we have a 35% tax rate on U.S. corporations and NONE on foreign goods that enter the U.S.? This is certainly a free trade policy or in other words a tax domestic goods but not foreign goods policy. This is 5th grader logic that goods from one are priced differently than good from the other. This incentivizes off shoring of manufacturing. The corporate answer is to decrease corporate taxes. How about helping solve the U.S. budget deficit by taxing those imports the same as domestically produced goods at 35%? Just who is the Congress trying to make incentives for— the U.S. manufacturers and economy or China’s?

    Perhaps we should put our Congressmen who support such policies on a 5th grader’s allowance and ask for a claw back of all monies received from the government while this policy was in effect!!!

    Tom T.

    • Under my proposal, material, labor and overhead sourced domestically would qualify for a 100% corporate tax credit for a net zero % tax rate, however foreign sourced material, labor and overhead would not qualify for the domestic-sourcing tax credit and therefore pay the current tax rate. This proposal is designed to incentivize domestic-friendly behaviors, the exact opposite behaviors incentivize by the federal tax code over the last 15 years.


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