That is the main finding of an analysis by Raymond Keating, an economist for the Small Business & Entrepreneurship Council. Keating computed what GDP would have been if the US economy had grown at the rate that normally prevails during a period of economic recovery and expansion. Real GDP growth has averaged 2.1 percent during this recovery/expansion giving rise to an estimated real GDP of $16.692 trillion in 2016. Using the growth rate of 4.3 percent, the rate which prevailed during periods of economic recovery/expansion and excluding recessions from 1956 to 2016, real GDP would have reached $19.361 trillion, thus a shortfall of $2.7 trillion.
This highlights how poor economic performance has been over the last several years and the importance of making improved economic growth the cornerstone of tax reform policy.
Under the income tax system, our exports are double taxed – once in the U.S. through income and payroll taxes and once again through value added taxes upon arrival at foreign countries’ shores. Foreign countries rebate the VAT upon export, and the U.S. does not apply the tax at our border.
In this regard, the GOP Blueprint tax reform plan purports to level the playing field and restore the competitiveness of American industry. But does it really? This plan states that a “cash-flow based approach will replace our current income-based approach for taxing both corporate and noncorporate businesses” and that this “consumption-based” tax system will be “applied on a destination basis.”
The plan also states that the proposed border adjustments will be “consistent with World Trade Organization rules regarding indirect taxes.” However, a recent tax service newsletter by PricewaterhouseCoopers, LLC, makes this astute observation:
“Previous US income tax provisions seeking to benefit exports (e.g., foreign sales corporations and extraterritorial income provisions) have been successfully challenged by other countries as being in violation of US trade agreements. The World Trade Organization generally has ruled that border-adjustable indirect taxes (e.g., value-added taxes or VATs) are permitted, while border-adjustable income taxes are not permitted.” [emphasis added]
As a pure consumption tax, the border adjustability of the FAIRtax is not in question. And it is a key factor in the FAIRtax surpassing all other tax reform plans in promoting economic growth. Here’s how The FAIRtax restores international competitiveness to American manufacturing, agriculture and trade.