TAX REFORM URGENTLY NEEDED TO SPUR STRONGER ECONOMIC GROWTH
Tax Reform Should Incentivize U.S. Manufacturing
Because the U.S. tax code is outmoded and increasingly uncompetitive in today’s global economy, major tax reform is urgently needed to spur stronger economic growth and job creation.
Last overhauled in 1986, the U.S. tax code is a global outlier in many ways. Its 35% corporate tax rate is exceedingly high. Furthermore, the U.S. tax code focuses on where profits are booked, not where sales are made. In contrast, tax codes for virtually every other major economy rely on the opposite, as evidenced by commonplace destination-based value-added (VAT) taxes that encourage exports and discourage imports.
HOW VATS TILT THE PLAYING FIELD:
Countries with VATs, often referred to as consumption taxes, assess them on imports, including the value of any duty imposed, and rebate them on exports. This makes U.S. goods more expensive overseas while foreign goods benefit from a World Trade Organization (WTO)-legal export subsidy.
Approximately 150 countries utilize a VAT, and the average rate is 15.6% worldwide and 19.2% among OECD countries. As global trade negotiations have lowered tariffs over time, the rules governing international trade have not regulated the rates of VAT taxes that countries may apply to imports. Consequently, as countries have lowered tariffs in accordance with commitments under international agreements, they have often raised VAT rates, thus denying U.S exporters any additional market access.
Economists claim that any U.S. disadvantage under this scenario is washed away by fluctuations in currency exchange rates, i.e. the value of the dollar weakens in relation to currencies of VAT countries. While the theory may be true to a significant degree, exchange rates are only as perfect as the humans who set them – meaning they may not be perfect all the time. Moreover, many countries, China being the prime example, flatly refuse to allow their currency to float freely on the market. Consequently, there is no guarantee that floating exchange rates will eliminate any disadvantage in its entirety.
As proof for the argument that U.S. production is hurt by foreign border-adjusted taxes, simply look at the persistent astronomical trade deficits the United States has run in recent decades and the loss of manufacturing jobs. While many U.S. textile jobs have been lost to automation and other productivity gains, many more have disappeared due to the loss of markets and the resulting lack of output growth.
Introducing border adjustability to the U.S. tax code would help U.S. manufacturers eliminate some of the competitiveness disadvantages in relation to their VAT-benefiting foreign counterparts.
President Trump made tax reform a central plank in his campaign, and both the House and Senate actively are formulating legislative proposals. U.S. House Speaker Paul Ryan floated a comprehensive tax reform plan in June 2016 that included a border adjustable component.i Ways and Means Committee Chairman Kevin Brady has been working hard to sell the concept, touting border adjustability in a January 2017 speech to the U.S. Chamber of Commerce.ii Finally, the Tax Foundation has released a short paper explaining the border adjustable concepts in the Speaker’s tax plan.iii
i See: http://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf
ii See: https://waysandmeans.house.gov/chairman-brady-delivers-remarks-u-s-chamber-commerce/
iii See: https://taxfoundation.org/house-gop-s-destination-based-cash-flow-tax-explained/