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End This Damaging Tax and Trade Charade
Institute for International Economics ^ | March 8, 2004 | Ernest Christian and Gary Clyde Hufbauer

Posted on 01/13/2006 9:34:17 AM PST by Conservative Goddess

US Congress is about to increase the tax burden on exports of American-made goods and services. Why? Because the World Trade Organisation says it must. To avoid a trade war, Congress will probably go ahead and repeal the Foreign Sales Corporation, a tax relief device that has been used in one form or another for 30 years. But when Congress does repeal FSC, it should call a halt to the charade that forces the US to tax its exports, while allowing other countries not only to exempt exports from value-added tax but also to impose VAT on imports from the US.

The WTO says this huge distortion of free trade—a net disadvantage for US exporters of more than $100 billion annually—is justified because our corporate income tax is a "direct" tax, whereas tax on value added is an "indirect" tax. That distinction is a pernicious fiction, created and perpetuated by trade mandarins, that has no place in either logic or fact and no place in America's trade relations. Enough is enough, and Congress should so declare.

When it repeals FSC, it should also call on the European Union and all other countries to join the US in correcting the mistaken distinction between direct and indirect taxes. Congress should simultaneously urge US trading partners to cease exempting their exports from VAT and cease imposing those taxes on imports. If they do not amend their tax practices within a decent period, the US tax code should at least be amended to exclude export income from US corporate income tax and allow American-made goods and services a fair opportunity to compete in world markets.

The mistaken distinction between direct and indirect taxes dates from the late 1960s, when the French were converting their old "cascade" taxes on gross business receipts to new taxes on net business income that later came to be called value-added taxes. The French desperately wanted to exempt exports from VAT and impose it on imports, so their trade mandarins pretended that VAT was an indirect tax, like the duty on whisky. Our trade mandarins acquiesced, because that was the era of European reconstruction and dollar shortages. All the US asked was leeway to reduce the corporate tax on exports, a request that was consistently denied by the EU, the General Agreement on Tariffs and Trade and its successor, the WTO. Today, the pretence is all that remains—and the enormous artificial trade advantage enjoyed by the EU and others.

For more than three decades, Congress has laboured under the false impression that basic principles of international law and economics having to do with direct and indirect taxes require the US to tax its exports in full—unless it joins other industrial countries and adopts a VAT system. Deep political misconceptions have made it impossible for Congress to consider the merits of value-added taxation. The EU and others, as part of a prolonged game of "Gotcha", have insisted that the only way the US can ever exempt its exports from tax is to adopt the European tax system. Who can blame the Europeans? In 1970, they pulled off one of the biggest trade heists in history and they want to keep their multibillion-dollar advantage—even though it is based on a false premise.

The false premise is the assumption that the economic burden of the VAT falls totally and uniformly on the purchasers of goods and services (like an excise tax on whisky), whereas the economic burden of the US corporate income tax falls totally and uniformly on the producers of goods and services (like a tax on property). But the predominant view today is that, in the absence of tax adjustments at the border, the economic burden of both corporate income tax and VAT falls primarily on the labour and capital that produce goods and services. In this sense, both taxes are direct taxes.

Whatever may have caused past presidents and Congresses to accept the false distinction between direct and indirect taxes, this Congress and this president should re-examine the issue as they repeal FSC, and think about what comes next. There is a compelling need for a coherent policy on the role that taxes play in distorting free trade. The stakes are high, payable in US jobs in sectors that make traded goods and services. In a global trading system free of distortions, US jobs lost to foreign competition are usually replaced by even better ones. But when US jobs go overseas because of tax distortions, something is badly wrong.


TOPICS: Business/Economy; Foreign Affairs; Government
KEYWORDS: economics; fairtax; freetrade; international; taxation; trade; wto
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Truly free trade is not the enemy of US business....our tax code is the enemy within.

When you consider that the US has the highest Corporate Net Income Tax rate in the OECD in conjunction with the disadvantages borne of the fallacious distinction between a direct and an indirect tax.....it is frankly amazing that we have any jobs left in the US.

Imposing protectionist tariffs will only trigger retaliatory measures and exacerbate the problem. It is past time to lay blame for the loss of US jobs precisely where it belongs: At the feet of the US House and Senate.

A heaping helping of blame should be reserved specifically for the members who insist that "Corporations must pay their fair share." Nonsense. Corporations don't pay taxes, people do. The corporate net income tax is the most deceptive and destructive tax we inflict on ourselves and we simply must insist that Congress put an end to the tax and trade charade. Call, fax or e-mail your Congressman and Senators today.

1 posted on 01/13/2006 9:34:20 AM PST by Conservative Goddess
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To: pigdog; ancient_geezer; Badray; smokeyb

Technical distinction and disertation ping.


2 posted on 01/13/2006 9:36:07 AM PST by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)
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To: Conservative Goddess

This problem is solved with the replacement of the income tax with the Fair Tax, or National Sales Tax. This allows "untaxed goods" to be sent overseas, while consumer products entering the US will subject to the Sales Tax.

Sort of evens the playing field ... doesn't it.


3 posted on 01/13/2006 9:40:47 AM PST by Mack the knife
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To: Mack the knife

It most certainly would level the playing field....given that a consumption tax such as the FairTax is fully border-adjustable.


4 posted on 01/13/2006 9:44:52 AM PST by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)
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To: Mack the knife; Conservative Goddess
Both your comments are accurate. Free trade (overall) is good for all countries concerned. Also, income taxes should be eliminated and replaced with consumption taxes. Problem is, even the GOP can't agree on tax reform. Many want a flat tax (Dick Armey, Steve Forbes), which is better than what we have now, but not as good as the Fair Tax. I don't think it will happen. It only taxes 40 Senators to filibuster such a major change to US policy, and we probably cannot get 40 senators for the Fair Tax.
5 posted on 01/13/2006 9:52:47 AM PST by GeorgefromGeorgia
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To: GeorgefromGeorgia

But it takes many fewer than 40 to vote it out of committee - and once that happens people will begin to wake up as to the possibilities the FairTax brings - even the pols.


6 posted on 01/13/2006 10:14:57 AM PST by pigdog
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To: Conservative Goddess

Great post, CG!!!


7 posted on 01/13/2006 10:15:33 AM PST by pigdog
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To: pigdog
Thanks for the suggestion! This is a technical distinction that has to be at the very foundation of any discussion of tax reform.....or international trade. Until this obstacle to our prosperity is removed....we'll continue to struggle. Like true charlatans, Congress has diverted America's attention to wage differentials in developing nations......instead of dealing with the root problem.

When this obstacle is removed...the productivity of the American worker will shine like a beacon for the rest of the world to follow.
8 posted on 01/13/2006 10:27:15 AM PST by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)
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To: Taxman; pigdog; Principled; EternalVigilance; rwrcpa1; phil_will1; kevkrom; n-tres-ted; Zon; ...
A Taxreform bump for you all.

If anyone would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information:


9 posted on 01/13/2006 10:50:57 AM PST by ancient_geezer (Don't reform it, Replace it!!)
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To: Conservative Goddess

Remove the taxation of the producer and tax only at retail sale. A lot of good things happen, not only in regards to international trade but to our economy as well.

The increase in demand for our goods and services with leveling the tax barriers that currently exist due to our corporate income and payroll taxes will quite literally reverse the flow of manufacturing out of this nation overnight.


10 posted on 01/13/2006 10:56:36 AM PST by ancient_geezer (Don't reform it, Replace it!!)
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To: Conservative Goddess

bttt


11 posted on 01/13/2006 11:16:43 AM PST by Badray (In the hands of bureaucrat, a clip board can be as dangerous to liberty as a gun.)
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To: ancient_geezer

Sounds like a good thing all right - why didn't we do it sooner??? Is someone in favor of retaining the I.T.??? Wonder why???


12 posted on 01/13/2006 11:44:26 AM PST by pigdog
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To: Conservative Goddess

It may be that the SQL crowd and other "anti FairTax" types do not even begin to grasp the effects in foreign trade and US businesses involved therein that this will have.

Seems to me that this effect will be hugely beneficial to the country and its taxpayers also. I think, perhaps, that many of them are so shortsighted as to not care.


13 posted on 01/13/2006 11:49:09 AM PST by pigdog
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To: Conservative Goddess

"When it repeals FSC, it should also call on the European Union and all other countries to join the US in correcting the mistaken distinction between direct and indirect taxes. Congress should simultaneously urge US trading partners to cease exempting their exports from VAT and cease imposing those taxes on imports. If they do not amend their tax practices within a decent period, the US tax code should at least be amended to exclude export income from US corporate income tax and allow American-made goods and services a fair opportunity to compete in world markets."

Isn't this where the SQLs chime in to say that removing taxes or making them border adjustable won't do any good because currency adjustments would quickly offset any such changes?

Oh, I forgot, that only applies to the FairTax.


14 posted on 01/13/2006 11:50:17 AM PST by phil_will1 (My posts are in no way limited or restricted by previously expressed SQL opinions)
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To: phil_will1

Yup - they've been terribly quietly lately, haven't they? Perhaps they realize they've lost.


15 posted on 01/13/2006 1:11:43 PM PST by pigdog
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To: pigdog

Nahh, I doubt that.

More likely they are too busy filling their income tax returns to post ;O)


16 posted on 01/13/2006 1:35:55 PM PST by ancient_geezer (Don't reform it, Replace it!!)
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To: Conservative Goddess
BTTTT!!!!

Great find!

17 posted on 01/13/2006 1:41:09 PM PST by Bigun (IRS sucks @getridof it.com)
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To: phil_will1

Precisely.....

As Dan Burton said to me, paraphrasing: "If you believe that currency adjustments are going to wipe out this difference, then you've got to believe that price theory is meaningless, and that the trade tail will wag the dog of all dollar denominated assets in the world."

I hope I did his words justice.


18 posted on 01/13/2006 1:45:08 PM PST by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)
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To: ancient_geezer; neutronsgalore

Roger that.


19 posted on 01/13/2006 1:47:05 PM PST by Conservative Goddess (Politiae legibus, non leges politiis, adaptandae)
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To: pigdog; All

Well, my two senators are on board. Now light a fire under all of yours.


20 posted on 01/13/2006 1:49:05 PM PST by groanup (Shred for Ian)
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