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Mankiw, N. Gregory, “One Way to Fix the Corporate Tax: Repeal It,” The New York Times, 08/23/14

August 23, 2014 By

“Perhaps the boldest and best response to corporate inversions is to completely rethink the basis of corporate taxation. The first step is to acknowledge that corporations are more like tax collectors than taxpayers. The burden of the corporate tax is ultimately borne by people — some combination of the companies’ employees, customers and shareholders. After recognizing that corporations are mere conduits, we can focus more directly on the people.

A long tradition in political philosophy and economics, dating back about four centuries to Thomas Hobbes, suggests that the amount that a person consumes is the right basis for taxation. A broad-based consumption tax asks a person to contribute to support the government according to how much of the economy’s output of goods and services he or she enjoys. It doesn’t matter whether the resources for that consumption come from wages, interest, rent, dividends, capital gains or inheritance.

So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.”

http://www.nytimes.com/2014/08/24/upshot/one-way-to-fix-the-corporate-tax-repeal-it.html?emc=eta1&_r=0&abt=0002&abg=1

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Forbes: Tax Reform to End Inversions & Grow Economy/Jobs

August 8, 2014 By

 

There is a bold but promising solution to end corporate tax avoidance schemes including inversions: sweeping tax reform, replacing the corporate income tax with a clean consumption tax with zero exceptions.

Forbes Op/Ed by Steve Abramson, VATinfo.org

 

 

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Porter, Eduardo, “A Tax Code of Politics, Not Practicality,” NYTimes.com, 04/10/2012

April 10, 2012 By

“Our byzantine tax code is built upon a longstanding political deal: Democrats wanted a tax scale with higher rates for richer Americans to finance social programs aimed at the poor and the middle class. Republicans countered by pushing for tax exceptions, exclusions and deductions that shielded the incomes of the rich from the taxman and reduced government revenue.

This compromise has left us with a loophole-riddled code that isn’t very good at raising money. The richest 1 percent of Americans, who make $1.5 million on average, pay 28 percent of their income in federal taxes, according to the nonpartisan Tax Policy Center. That’s way below the top rate of 35 percent. The rest of us also pay little. The bottom 85 percent of taxpayers have an average federal tax rate of 12 percent. The poorest 25 percent pay less than 1 percent of their income — $77 a family, on average.

Compared to other developed countries, the United States doesn’t collect much tax at all. Tax revenue at all levels of government adds up to less than 25 percent of the nation’s gross domestic product, putting us behind every other rich country and even some poor ones. Among the 34 nations in the Organization for Economic Cooperation and Development, only Mexico and Chile collect less in taxes. The average across the O.E.C.D. is 9 percentage points higher.”…

“…(F)ederal tax revenue has not surpassed 21 percent of the nation’s output. Last year it was under 15 percent. Not only is our tax code bad at raising money, it is also plagued with perverse incentives that, added up across the population, can push us to distort the economy and slow it down”….

“ …What would a better tax system look like? Most other rich countries have one. While each country has a different version, they share a core feature: they raise a lot of money taxing people’s consumption, at the point of sale.

Consumption taxes create fewer perverse incentives because taxing what people buy doesn’t affect their choices about work and investment. If anything, such a system might promote savings, generally good for growth. These taxes are also easy to collect and hard to evade. They don’t add complexity to your tax return. Because they produce few perverse incentives, they can be used to raise a lot of money.

Consumption taxes are supported by a vast majority of economists. They underpin Western Europe’s welfare systems, which are based on the proposition that all citizens are entitled to similar income support and services to guarantee a minimum standard of living, and that everybody should pay proportionately for them. Denmark and Sweden collect about 10 percent of their gross domestic product with a value-added tax, a modern tax on consumption.

In the United States, by contrast, states raise only 2.2 percent of G.D.P. through various sales taxes.  There is no federal consumption tax at all.

A federal consumption tax has been proposed more than once. A report last year by the Congressional Research Service found that for every 1 percent levied in a value-added tax, the federal government would raise up to $55 billion a year. This new source of money could help change the political deal underpinning our tax system and pave the way to cull loopholes and reduce our top tax rates.”

 http://www.nytimes.com/2012/04/11/business/economy/a-tax-code-of-politics-not-practicality.html

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Burman, Leonard E., “Tax Reform to Encourage Growth, Reduce the Deficit, Promote Fairness,” Senate Budget Committee Hearing, 03/01/12

March 13, 2012 By

Dr. Leonard E. Burman, Daniel Patrick Moynihan Professor of Public Affairs, Maxwell School of Syracuse University

“As noted, the BPC proposed to introduce a small VAT in the U.S. The advantage of a VAT is that it does not tax saving and is thus thought to be more conducive to economic growth than the income tax.  The tax has never gained traction in the U.S. because conservatives are concerned that it would fuel more growth in government and liberals worry that it is regressive. To address the first concern, I have suggested that a VAT be earmarked to pay for government’s health care costs. I believe this would actually help to constrain spending since, for the first time, consumers would see a connection between their health benefits and their tax bill.  If health care costs continue to grow faster than the economy, the VAT rate will rise, which taxpayers would dislike.  This could build support for sensible measures to constrain government health care spending.

The regressivity of a VAT may be offset by refundable tax credits designed to match the typical VAT levied on a family at the poverty line. This is similar to, although much smaller than, the “prebate” proposed as part of the national retail sales tax (or “FairTax”).”

http://budget.senate.gov/democratic/index.cfm/committeehearings?ContentRecord_id=553aa480-29a4-44b4-8b3f-9fc8004f4e81&ContentType_id=14f995b9-dfa5-407a-9d35-56cc7152a7ed&Group_id=d68d31c2-2e75-49fb-a03a-be915cb4550b

 

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Hollings, Sen. Fritz, “Shameful Conduct,” HuffingtonPost.com, 10/05/11

October 5, 2011 By

“I don’t know what the demonstrators want Wall Street to do, open earlier; cut the price of stocks? Demonstrators mistake result for cause. Business doesn’t create the business climate or economy. Government does. Business takes advantage of the business climate that the U.S. government has developed. Capitalism has a tendency to monopolize.

That’s why government institutes anti-trust laws and restrictions to keep the market open. But an open market doesn’t mean a free market. In globalization, with China setting the competition, the market is definitely not free. Corporate America shouts “free trade” but creates jobs and develops the most closed market in China…”

“…The first order for government is to take the tax benefit for corporate America to off-shore jobs and give it to corporate America to on-shore jobs — cancel the corporate tax and replace it with a 6 percent value added tax. Last year’s corporate tax produced $194.1 billion, whereas a 6 percent VAT for 2010 produces $700 billion in revenues. Exemptions for the poor leaves billions to pay down the debt.

With no loopholes, a VAT produces instant tax reform, which puts the tax lobbyists out of business. The VAT replacement releases $1.2 trillion in off-shore profits for corporate America to create jobs in the United States. The VAT is like a sales tax, but not on the sales price — only on the value added or seller’s mark-up…”

“…Wall Street, the big banks, and corporate America are happy for Congress to do nothing. They oppose the enforcement of trade laws; oppose a VAT because it increases the cost of imports, and oppose the repeal of the subsidy to off-shore jobs. Wall Street, the big banks, and corporate America are the biggest contributors to the president and Congress. So the president refuses to enforce our trade laws. The president and Congress oppose the VAT solution even though they are for tax cuts; and they oppose repeal of the subsidy to off-shore profits.

Replacing the corporate tax with a 6 percent VAT would make it profitable for corporate America to produce and create jobs in the United States…”

http://www.huffingtonpost.com/sen-ernest-frederick-hollings/value-added-tax_b_996626.html

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Barro, Robert J., “How to Really Save the Economy,” New York Times, 09/11/11

September 11, 2011 By

“I received vigorous criticism from conservatives after advocating a VAT in an essay in The Wall Street Journal last month. The main objection — reminiscent of the complaints about income-tax withholding, which was introduced in the United States in 1943 — is that a VAT would be a money machine, allowing the government to readily grow larger. For example, the availability of easy VAT revenue in Western Europe, where rates reach as high as 25 percent, has supported the vast increase in the welfare state there since World War II. I share these concerns and, therefore, favor a VAT only if it is part of a package that includes other sensible reforms. But given the likely path of government spending on health care and Social Security, I see no reasonable alternative.

Abolishing the corporate income tax is similarly controversial. Any tax on capital income distorts decisions on saving and investment. Moreover, the inefficiency is magnified here because of double taxation: the income is taxed when corporations make profits and again when owners receive dividends or capital gains. If we want to tax capital income, a preferred method treats corporate profits as accruing to owners when profits arise and then taxes this income only once — whether it is paid out as dividends or retained by companies.

Liberals love the idea of a levy on evil corporations, but taxes on corporate profits in fact make up only a small part of federal revenue, compared to the two main sources: the individual income tax and payroll taxes for Social Security and Medicare.

In 2009-10, taxes on corporate profits averaged 1.4 percent of G.D.P. and 8.6 percent of total federal receipts. Even from 2000 to 2008, when corporations were more profitable, these taxes averaged only 1.9 percent of G.D.P. and 10.3 percent of federal receipts. If we could get past the political fallout, we could get more revenue and improve economic efficiency by abolishing the corporate income tax and relying instead on a VAT.”

http://www.nytimes.com/2011/09/11/opinion/sunday/how-to-really-save-the-economy.html?pagewanted=1&tntemail0=y&_r=1&emc=tnt

 

 

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Bloomberg.com Editors: Value-Added Consumption Tax Would Make U.S. Deficit Reduction Easier, 08/16/11

August 16, 2011 By

When lawmakers on the congressional supercommittee charged with solving the U.S.’s fiscal problems get to work, they will quickly realize that, without fundamental tax reform, their job will be arduous.

They would do well to consider an innovation that every developed nation except the U.S. has already employed: the value-added tax.

The government’s structural budget deficit — the gap that must be closed to achieve long-term sustainability — is now between 5 percent and 6 percent of annual economic output, or more than $800 billion. That’s more than the defense budget, and over 10 years would be about four times larger than the $2.1 trillion debt-ceiling deal Congress just passed. U.S. tax revenue, meanwhile, is running well below the long-term trend — by about 3 percent of gross domestic product. Just getting taxes back to the average would cover about half the gap.

The question, then, is what kind of tax increase would be the least-bad option. Simply raising rates would be politically difficult, to say the least, and would waste an opportunity to change the country’s unduly complicated tax system. The deficit commission led by Republican Alan Simpson and Democrat Erskine Bowles has rightly advocated an income-tax reform that would eliminate most deductions, lower rates and get more people to pay what they owe. Along with such reforms, a VAT could generate a lot of added revenue with minimal cost, and might even provide a short-term stimulus to the economy.

Sales Tax

First developed in the middle of the 20th century, the VAT is similar to a sales tax. The crucial distinction is that it is collected in stages along the supply chain, an approach that spreads the burden among all businesses and ensures that goods don’t get taxed multiple times before reaching the consumer.

Under a 10 percent VAT, for example, a farmer selling $20 in wheat to a miller would charge $2 in tax, which he would pass on to the government. If the miller made flour from the wheat and sold it to a baker for $40, he would collect $4 in VAT. But he would remit only $2 — the difference between the $4 he collected and the $2 he already paid when he bought the wheat. If the baker used the flour to make cakes and sold them for $100, he would collect $10 in VAT and remit $6, because he already paid $4 when he bought the flour. Ultimately, the final consumer pays the whole tax. Businesses collect it on behalf of the government.

More Efficient

The system may sound complicated, but it’s actually much more efficient than other types of tax. All the buyers and sellers along the chain already keep track of the transactions for their own books, and the VAT is very difficult to game or cheat: If you consume something, you pay the tax. Estimates of administrative costs range from 0.5 percent to 1 percent of the amount collected, compared with more than 3 percent for state and local sales taxes in the U.S. In onepaper, a group of economists found that replacing the entire U.S. tax system with aconsumption tax like a VAT would increase the economy’s long- term output by 9.4 percent.

Democratic opponents of the VAT point out one big flaw: The tax falls more heavily on the poor, who mostly spend rather than save their income. Many countries try to compensate for this regressive trait by exempting basic food items and other necessities — an imperfect fix that complicates the system, distorts the economy and doesn’t adequately help the poor.

An income-tax credit, in which all taxpayers receive a cash payment to offset VAT paid on a fixed, minimal amount of purchases, would work better. A study by the Urban Institute and theBrookings Institution found that such a credit could turn a VAT into a progressive levy, with the bottom fifth of earners gaining 1.7 percent in after-tax income (see chart). It would also provide an added incentive for people to come out of the shadows and into the income-tax system.

Major Concern

Another major concern with the VAT involves state and local governments, which might consider a federal VAT to be in competition with their sales taxes. In reality, they are more likely to gain by converting their sales taxes into VATs. In doing so, cities and states could share administrative costs with the federal government and should be able to capture the sales of more service enterprises and Internet retailers, such as Amazon.com.

The VAT is also more conducive to investment than a sales tax, which tends to fall disproportionately on certain types of businesses, such as manufacturers. In Canada, for example, some provinces converted their sales taxes into VATs after the national government introduced its VAT in 1991. The converts saw a significant boost in machinery and equipment investment.

Third Objection

A third objection to the VAT, typically leveled by Republicans, is that the government would become addicted to the revenue it generates, hindering efforts to control taxes and spending. The experience of Canada, which ultimately lowered its federal VAT to 5 percent from 7 percent, suggests this concern is overblown. In any case, it can easily be addressed by making the VAT part of a focused deficit-reduction program.

A 10 percent VAT with an income-tax credit would generate revenue equal to about 2 percent of GDP, covering about a third of the U.S. government’s fiscal gap. If states converted their sales taxes, the combined rate would be about 15 percent to 17 percent, lower than in most European countries. The time needed to implement a VAT — as much as two years — could even provide a much-needed economic stimulus. If people knew the tax was coming, they would probably make big purchases now.

Make no mistake: The VAT would be a new tax. It would raise the total burden on U.S. taxpayers and, once it takes effect, would almost certainly take a bite out of consumer spending. But done in concert with broader tax reform, it would go a long way toward solving the country’s fiscal crisis.

If there’s a better way, we’d love to hear about it.

http://www.bloomberg.com/news/2011-08-17/consumption-tax-would-make-it-easier-to-reduce-u-s-budget-deficit-view.html

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Tyson, Laura D’Andrea, “The Logic of Cutting Corporate Taxes,” Economix blog, The New York Times, 04/08/11

April 11, 2011 By

Professor Graetz, and more recently, William G. Gale and Mr. Harris have proposed introducing a value-added tax to reduce the deficit and to finance a reduction in the corporate tax rate.

Most countries that have reduced their corporate tax rates have a value added tax that accounts for a significant share of their tax revenues. To offset the regressive effects of a value added tax, countries have used lower value-added-tax rates on items like food, health care and education, as well as cash subsidies for poor households.

I believe that a federal value added tax with such offsets should be considered as part of a balanced multiyear deficit-reduction package that includes a sizeable reduction in the corporate tax rate.

http://economix.blogs.nytimes.com/2011/04/08/the-logic-of-cutting-corporate-taxes/?smid=tw-nytimes&seid=auto

 

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Toedtman, Jim, Editor, “The Great Tax Debate That Wasn’t,” AARP.org/Bulletin, 11/10/10

November 4, 2010 By
“Our tax code barely reflects the 21st-century world.  Instead vast changes have been accommodated by piecemeal patches and tweaks and an ever-growing list of tax breaks and loopholes that now total $1 trillion a year.
One trillion dollars!  Consider two of the largest deductions for businesses’ health care expenses and home mortgage interest.  A proper discussion would start with them.  Employers’ health care insurance for employees is a cornerstone of the new health care plan.  Is that the best way to encourage business to continue to protect employees?  Should we address the mortgage interest deduction, debt and the housing bubble we still haven’t escaped?
In our global economy, shouldn’t we consider the value-added tax already in place in virtually every other industrialized nation?  How many more companies must move their operations overseas to escape our 35 percent corporate tax rate before we alter that tax strategy.”
http://www.aarp.org/money/taxes/info-10-2010/the_great_tax_debate_that_wasnt.html

 

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