The main economic reason for true tax reform is to fix unfair global trade, in order to create more USA based jobs and grow our GDP.
In 1995 the World Trade Organization (WTO) was created as a follow on to the General Agreement on Tariffs and Trade (GATT) created after WWII. Today, the WTO has 164 members and 23 observing members. These members represent approximately 97% of worldwide trade. Each member has one vote, in dealing with global trade rules and disputes. The USA has one vote just like every other member. (This is public information and can you can research more detailed information online.)
As of 2018, 166 of the world's approximately 200 countries employ a “value added tax” (VAT). This number includes all of the G20 countries, with the exception of the United States . The USA uses a sales tax system, at both the Federal and State level. The value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of general “consumption tax”. This VAT is collected incrementally, based on the increase in value of a product or service at each stage of production or distribution. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. VATs raise about a fifth of total tax revenues worldwide.
The main method of calculating VAT, used by almost all 164 countries, is the credit-invoice or invoice-based method. Using the credit-invoice method, sales transactions are taxed, with the end customer paying VAT on the transaction to the government, and businesses receiving a credit from the government, for VAT paid on input materials and services. This credit is an important point to understand.
The government collects the VAT from the consumer, and then pays a credit to the manufacturer (company) based on what they have paid to their supply chain vendors. This concept is what President Trump and Secretary Wilbur Ross are trying to articulate to the US public, all our politicians, and media, about why we are in negotiations about unfair trade agreements.
Some countries, are recruiting our companies to leave the USA and manufacture in their country, and receive VAT credits when shipping back into the USA. This VAT credit is in effect, a government, subsidizing of the product in the 15-25% range. Countries using VAT credits, to recruit manufacturing out of the USA ( costing U.S. jobs) to their country, and shipping product back into the USA, undercutting USA based manufacturers. This is the problem we face as a nation. We are now negotiating with individual countries, targeting individual industries unfairly. This is why we need individual trade agreements, with individual countries, as the largest economy in the world.
Our New Federal Tax Code:
Although Congress has passed a new Federal tax plan, it is based on our existing complicated Federal tax code. Not true Tax reform, rather a modification of our existing tax code. Our Federal tax code still includes a payroll tax, income tax, corporate tax, national gasoline sales tax, and estate tax. Our State tax codes are still based primarily on property tax, income tax, and sales tax. In our new Federal tax code, changes were made to rates and amounts on each of these elements. That said, the main focus of the new tax plan was, and is, on job creation. A principled goal. The biggest focus was a reduction in taxes on job creators; private sector businesses of all sizes. The most visible component of the plan was the corporate tax rate cut from 35% down to 21%. This decision is an attempt to attract more investment back to the US, and bring the US corporate tax rates more in line with other countries, in order to make US goods and services more competitive. A principled goal.
The reality is, the price of any product is made up of the cost of materials of the product, the labor to make that product, and the taxes (or lack there-of) imposed on that product. The problem is, our new Federal tax code does not address all these inputs
The first point is, changes to the tax code do not address the tax we impose on labor. We still have a payroll tax. Our payroll tax is an effective 15% tax on our labor; half paid by the employer and half paid by the employee. The second point is, changes to our tax code do not address the fact 164 countries in the world implementing a “value added tax” (VAT) that effectively subsidizes the shipment of their products into the USA with a 15% + pricing advantage. As I wrote above, our tax code does nothing about the fact other countries are using their VAT based tax code, to encourage manufacturing to be in their country. If a company manufactures their product in their country, but ships their product outside of their country, the company is subsidized the VAT amount with a credit. So, our companies are charged the VAT when shipping into another country, without get reimbursed, and their companies are reimbursed the VAT credit when shipping their product into the USA. A double whammy on our US based manufacturing based industries. This is the reality our industries face. It is the reality of another country effectively subsidizing an industry, to compete against our privately-run US based businesses. This is why our steel and aluminum industries, and all other manufacturing based industries, have been effectively been shrinking or put out of business. This is why our economy has been forced to be a disproportionally services based economy. Although we have lowered our corporate tax rate to be on par with other countries, we are still not competitive when another country uses VAT credits to subsidize their manufacturing based companies. This is why President Trump and Secretary of Commerce Wilbur Ross are talking about tariffs to counter and normalize this reality.
Doing nothing, is not good strategy for this generation, let alone our next generation.
Doing something, we have three options to deal with this problem. (1) We can keep our current tax code and use tariffs to counteract the effective VAT tariff imposed on our manufacturers, and credit subsidy, to their manufacturers. (2) We can change our tax code at the Federal and State levels, and implement our own VAT approach. (3) We could implement The Fair Tax. A unique form of a consumption tax, federal sales tax, that would be unique to our country as the world’s largest economy
Obviously, Congress and President Trump’s Administration has chosen option one. The tax reforms are only one component of trying to create more US based jobs and grow our GDP. The negotiation of better individual fair trade agreements to deal with this VAT issue is the second component. Somehow the US needs to deal with unfair VAT pricing from the 164 countries when it arises. With our current tax code, that tool is tariffs.
I submit option two, of adding a VAT to our Federal and State tax codes, would add to the already complex and politically charged tax system. If people think our current 70,000 tax code is too complex and riddled with abuse, adding another layer will only make it more complex and open to more abuse.
I further submit that the Fair Tax is the fastest, and easiest way to deal with the problem. The Fair Tax as a unique form of a consumption tax, a federal sales tax, is the best way to compete in this new global economy
Why the Fair Tax
The Fair tax:
- Is a consumption tax.
- Is a Federal Sales Tax at retail only on new goods and services.
- Replaces our current Federal tax code of payroll tax, income tax, corporate tax, and estate tax with this simple consumption tax.
Used goods are not taxed in the Fair Tax plan. It is fair. Wealthier people consume more goods and services and will pay more taxes. There would be no more complex tax returns for individuals or businesses to fill out. There would be a greatly reduced IRS working with states to collect sales tax receipts from businesses, minimizing abuse. The states would get a small percentage of collections. The states would also continue to get the majority of their tax collections from property taxes. The Fair tax would reduce our cost of labor by 15% with elimination of the payroll tax. The Fair Tax would eliminate the corporate tax; taking it to 0.
A corporate tax rate of 0% here in the USA, would negate the ability of all 164 countries in the world to use their VAT tax based systems to subsidize specific products and industries against our privately-run businesses here in the USA. The Fair tax would encourage companies to manufacture here in the USA, with a lower cost: No VAT on supply chain. No corporate tax. No payroll tax. If other countries charge 15% VAT, or reimburse VAT, our companies will be competitive shipping globally or selling within the USA
Instead of spending time trying to renegotiate with our one vote in the WTO, or spending our time trying to manage individual trade agreements policing the bad VAT behavior from all the specific countries, we should pass the Fair Tax.
The Fair Tax is the fastest, simplest way to making our USA manufacturing based businesses competitive in this global economy.
Keith Fox worked at Apple for 15 years in a variety of roles and his last position was Vice President and General Manager of Apple Computer’s Worldwide Consumer Group. Then he moved to Cisco Systems and served as Vice President of Worldwide Corporate Marketing for six years. For the last fifteen years Keith has served on numerous public and private boards and is the Chief Executive Officer of the Fox Family Foundation.