End This Damaging Tax and Trade Charade

Institute for International Economics ^ | March 8, 2004 | Ernest Christian and Gary Clyde Hufbauer

[Conservative Goddess]

No Lewis, The so-called "huge tax breaks" afforded to US companies were nothing more than an attempt to counter the full border-adjustability of the VAT.....which in fact acts as a subsidy.....more on that later.

With respect to the FairTax being fully border adjustable, I see absolutely no reason why the WTO could deny it.

The day that the tax panel released their findings/recommendations, they also released a convoluted recommendation which they deemed a "consumption tax". It was, and still is, unclear whether that tax system they proposed would be eligible for border adjustment. If was a backward, left-handed way of only taxing consumption, but it was based on income. My hunch is that the consumption tax as proposed by the panel would not be border-adjustable because the true incidence of the tax would depend on the decisions of individuals, and therefore, blanket generalizations would NOT provide a valid basis for border-adjustment.

The WTO denies border adjustment to the Corporate Net Income tax precisely because its true incidence is not predictable or quantifiable....arguing that full border adjustment would amount to a subsidy in those industries where it is incident on the shareholders or employees. And that is a true statement. The only problem is this: The VAT suffers from the same defect.

INCIDENCE 101:

The VAT is thought to be fully incident on the consumer, therefore it is eligible for border adjustment. The premise is false. The VAT is potentially incident on the same three groups of people as the CNI(shareholders, employees and consumers).....and here's why:

To the extent that the VAT, by raising the final price, reduces consumption it reduces sales volume....the incidence of the VAT is therefore shifted back to the investors via lost profits and back to the employees via lost wages. To the extent that the VAT is incident on employees or shareholders, full border adjustment amounts to a subsidy. The US response to this (via the DISC, FSC, ETI) was nothing more than an attempt to counter the hidden subsidy. By dis-allowing these preferential tax treatments, the WTO tilted the playing field in the direction of Europe....all under color of law. Nuts to that.

The WTO is a redistributionist NGO, and we have to remove an arrow from their quiver: The Corporate Net Income Tax.

[pigdog]

You have a quaint idea that the:

"National Sales Tax is unconstitutional"

... since it clearly is nothing of the sort. Please present your reasoning on why you think it might be. The FairTax is actually in the nature of an excise which certainly is specifically enumerated under the Constitution.

There have been threads on this in the past and the FairTax comes away with being as constitutional as can be.

[1rudeboy]

We won't even get into the sanctions the WTO would place on us.

Technically, the WTO would look the other way when other countries place sanctions on us. Do you see what you've done? You've set off the hedgtrimmer failure-of-logic alarm.

[hedgetrimmer]

Section VIII --- The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States

The National Sales Tax is not an Excise. It is not a specific, fixed, absolute charge on a particular commodity. It is a general, percentage-based and therefore variable (based on variable market price) Tax which is charged universally on all transactions, commodities or services.

The National Sales Tax is not a Duty or Impost. It is not a tax solely levied on imports or exports.

Section IX --- No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken

The National Sales Tax is not a Direct Tax proportional to the actual census of the population of the Several States. It is a Direct Tax which is proportional to consumption - which can vary a great deal from State population to State population.

It is not a Constitutional Tax.

It is, however, an "absolute violation" of the Commerce Clause, by Unconstitutionally introducing the Taxing Power of the Federal Government into the transactions of one man with another, internally transacting commerce within the boundaries of the Sovereign State.
--Robert S. McIntyre, New York Times, Jan. 25, 1998

[Extremely Extreme Extremist]

Post #1 well said! On every tax and trade thread I have always made it a point that the reasons why jobs go overseas is because of our tax policies.

Too many sheeple just don't get it. They keep blaming corporations and businesses.

[hedgetrimmer]

the reasons why jobs go overseas is because of our tax policies.

This isn't entirely correct.

[Bigun]

It is not a Constitutional Tax.

Sigh!! I don't know WHY we have to go back and plow this VERY old furrow again but I guess we must.

Hedgetrimmer I would ask you to please do us all the favor of going and reading this old thread before we continue with this discussion.

[pigdog]

Stuff and nonsense. Check the link given in #47 for the detailed reading from a Profewaaor of Law at Georgetown where he teaches advanced constitutional law.

I'd certainly recognize his views over your odd notions unless you can demonstrate you have some similar legal/constitutional standing.

Thanks, Bigun.

[pigdog]

Sorry ... "Professor" of course.

[n-tres-ted]

The last time the U.S. was required by the WTO to repeal provisions of the FSC, doing so involved savings of about $30-$40 billion/year in "subsidies." Chairman Bill Thomas of Ways & Means used that "savings" to fund general tax cuts for corporation, I think including the cuts in tax rates on capital gains and dividends, plus improved depreciation schedules, etc. This article says nothing about the amount of "savings" involved in this repeal of FSC. It must be substantial, or it would be no big deal. Do you have any idea how much?

[Conservative Goddess]

The latest action forced by the WTO was the repeal of the Extra-Territorial Income Regime, aka "ETI"......but the impact of the repeal was spread across the board, not specifically targeted to exporters....as that was the crux of the WTO beef. Here's a link to the scoring of the final bill: http://www.house.gov/jct/x-68-04r.pdf

And here's a link to everything you ever wanted to know about HR 4520, The American Jobs Creation Act of 2004: http://waysandmeans.house.gov/Links.asp?section=1559&keywords=HR+4520

Here's a link to the Senate Finance Website, specifically "The Role of the Extraterritorial Income Exclusion Act in the International Competitiveness of U.S. Companies", where there was a LOT of REALLY GOOD testimony: http://www.finance.senate.gov/sitepages/2002HearingF.htm/hearing073002.htm

[n-tres-ted]

Thank you very much. Very thoughtful and helpful.

[pigdog]

Great links, there, CG ... TYVM.

I note that the Catapillar, Inc. exec uses the figure of $5 billion for just the repeal of the EIT stuff. Wow.

[Conservative Goddess]

Thank You for posting that link. That is very persuasive.