Simpson-Bowles and a Smarter Tax System to Spur Growth

Sen. Alan Simpson and Erskine Bowles have released their newly revised plan for curbing the deficit and reducing the debt.  Included in the plan is a call for $600 billion in increased tax revenues to be accomplished by reducing deductions for corporate and individuals while reducing tax rates.

In calling for this approach to tax reform, Simpson-Bowles takes aim at our bloated, inefficient tax system:

Reform the Tax Code in a Progressive and Pro-Growth Manner. The current tax code is complicated, confusing, costly, anti-growth, anti-competitive, unfair, and riddled with well over $1 trillion of tax expenditures – which really are just spending by another name. Tax reform must reduce the size and number of tax expenditures to reduce the budget deficit and lower marginal tax rates for individuals and corporations. At the same time, tax reforms must maintain or improve the progressivity in the tax code and promote economic growth. Tax reform will make the tax code more efficient, effective, and globally competitive.”

The last goal, to create a “globally competitive” tax system cannot be overemphasized.  In this era of globalization, the U.S. remains at a major competitive trade disadvantage by virtue of its tax system.  Eliminating this disadvantage is the prime key to growth that government policy could provide.

According to the new Census Bureau report, the 2012 U.S. trade deficit dropped nearly $20 billion to $540 billion, mostly due to a decrease in expenditures for foreign oil.  But, our manufacturing trade deficit reached a record deficit of $684.5 billion, an increase of 7%.

The goods deficit with China increased $20 billion, to $315 billion from $295 billion, accounting for 58% of the imbalance. U.S. exports to China increased $6.7 billion (primarily soybeans and civilian aircraft, engines, equipment, and parts) to $110.6 billion, but imports increased $26.3 billion (primarily cell phones and other household goods) to $425.6 billion.

The goods deficit with European Union increased from $99.9 billion in 2011 to $115.7 billion in 2012.  Exports decreased $3.3 billion (primarily non-monetary gold and petroleum products) to $265.1 billion, while imports increased $12.5 billion (primarily passenger cars, civilian aircraft engines, and petroleum products) to $380.8 billion.

Achieving Growth through Tax Policy.  The most positive reform to stimulate growth in exports, domestic production and jobs would be to replace the Corporate Income Tax with a Value Added Tax.  VAT is now utilized by all our trading partners and over 150 countries to exclude the cost of government from the price/value relationship of goods and services in international trade.  By definition under GATT rules, unlike corporate income taxes, the VAT is border-adjusted, i.e., subtracted from exports and added to imports. Without a VAT of our own, imports have a decided price advantage, and our exports carry a price disadvantage.

Replacing the CIT by a VAT would eliminate the double-taxation of dividends, encourage the return of multi-national profits now parked in countries with lower corporate tax rates, and stimulate foreign investment here.  Imports would carry an equal burden, so American goods would become more competitive at home and abroad.  An additional consideration to stimulate jobs would be to replace the corporate contribution to FICA by the VAT to reduce a direct disincentive cost to employment.

Governor Mitch Daniels, echoing Herman Kahn of Hudson Institute, once suggested that replacing our current tax system by a VAT coupled with an individual income tax with a high threshold would produce a tax system that is fair, competitive, and stimulative for growth.  And, with zero tax preferences (no exclusions and deductions), gone would be the corrupting lobbying for loopholes, once and for all.

Hope of Tax Overhaul?, 10/24/2011

Cain & Perry are riding the public animus for the tax code and appetite for sweeping tax simplification.  Curiously, in apparent contradiction Republicans have abandoned Keynesian stimulus at the same time they seek corporate tax cuts through tax reform.  Then, too, both 9-9-9 and the FlatTax have Value-Added-Tax components, which Republicans have branded as misguided European-style taxation.

Meanwhile, POTUS has lost still another opportunity to lead - this time on tax overhaul. Sweeping tax reform, if done right, holds the promise of making the U.S. more competitive in world trade.  VAT, which is used by all our trading partners and over 150 countries subtracts the burden of government from the price/value comparison, i.e., the VAT is subtracted from exports and added to imports.  No other tax has this permission under GATT rules, and the U.S. remains at a competitive disadvantage for not employing the VAT.

The Perry FlatTax endorsed by Steve Forbes, has as a tax base value added less wages, i.e., taxes wages only once, however it is not recognized under GATT rules for border-adjustability.  Gov. Mitch Daniels, who headed OMB under Pres. George W. Bush, has endorsed a balanced tax plan of a VAT plus a FlatTax on personal income (video):



Energy Tax Policy & Tax Reform, statement of Steve Abramson, VATinfo, submitted to Joint Hearing of House Ways and Means Committee, 09/22/11

Dear Chairman Tiberi, Chairman Boustany and Members of the Committee,

Thank you for the opportunity to provide you with this submission for your hearing on Energy Tax Policy and Tax Reform.

Historically, with the notable exception of the internet bubble, to climb out of recession we have needed growth in one of two core industries, automobiles or housing. Today, automobiles are a smaller portion of our economy, with much of that industry comprised of imported cars and outsourced parts. The housing market is sitting on a huge inventory, and heightened foreclosures threaten further price decline.

There is no more promising industry to create economic growth and jobs than in renewable energy, particularly solar and nuclear, but that will require a robust industrial policy to support private investment. This is the role that government should play ⎯ to encourage the private sector creation of jobs, while reducing our dependence on imported oil. China now produces over half the world’s supply of solar panels and exports 96% of them to the U.S. and Germany. This is an industry in which we must successfully compete. Our industrial policy will have to include domestic content provisions that skirt WTO restrictions, just as China has managed to do in building its industries. Domestic content provisions will assure that we capture solar manufacturing jobs, here, for our middle class.

Overall, we must find the way to create and hold these domestic manufacturing jobs in the face of low Asian labor costs and subsidies. In the absence of such policies, CEO’s can be expected to outsource all the new ideas for production to Asia for the benefit of their shareholders and their own stock options. In January 2011, Evergreen Solar, the third largest domestic solar panel producer announced that it was closing its main U.S. factory, eliminating 800 jobs, and shifting its proprietary technology to China. In August 2011, Evergreen filed for bankruptcy, as did Solyndra and SpectraWatt. In May 2011, BP closed its U.S. solar manufacturing plant in Maryland and shifted its production to India, China and other low-cost countries. Then CEO, BP’s Tony Hayward said: “We remain absolutely committed to solar, (but BP was) moving to where we can manufacture cheaply.”

The Evergreen example, particularly, should be another wake-up call for the need of a protective renewable energy industrial policy. Even though Evergreen received $43 million in tax credits and grants from Massachusetts, Evergreen is not to blame for making the decision to sell their technology and outsourcing their labor. The business motive is rightfully the bottom line, and not to protect domestic jobs. Incentivizing job creation is the policy role of government.

About Solyndra.  The failure of this manufacturer has much to do with the hyper-competitiveness of the industry, including the plummeting cost of silicon (which Solyndra does not use) and lower costs in Chinese manufacturing (labor and overhead plus subsidies). Solyndra’s technology is unique (, and their robotic manufacturing plant with one-of-a-kind systems represents hugely expensive start-up costs. However, the Solyndra solar panels have features and benefits not available with other systems, and are superior for commercial flat roofs and apartment buildings: lower installation costs, wind resistance, omni-directional placement affording more wattage per square meter, zero-visibility on flat roofs, no need for roof-penetrating fasteners. Hopefully, by virtue of the public investment in this technology (plant and equipment), Solyndra will emerge from bankruptcy in the hands of an American company, rather than see this promising breakthrough technology exported to China as was Evergreen’s.

A U.S. Patent Restriction?  Recently, it was revealed that the Defense Department is requiring domestic content for solar panels. This is a step in the right direction to build and retain a home-grown industry and jobs. Government policy could also make it more difficult for companies like Evergreen to transfer their technology abroad. For example, U.S. Patent protection could be restricted to products with a minimum 80% domestic value-added in manufacturing.

On January 9, 2011, The New York Times reported that China is disturbed that the Pentagon, a rapidly growing consumer of renewable energy products — in insisting on buying solar panels made here is interfering with world trade. This despite China’s pervasive export subsidies and local content requirements. China has subsidized their solar panel manufacturing industry, something the U.S. is loath to do. Our policy has been to subsidize consumers and let them choose in the “free market.” But, the price advantage to Chinese panels gives them an almost insurmountable advantage. The result: today, China produces well over half the worlds solar panels and exports 96% of them to Germany and the U.S.

The intent of the Buy American provision in the defense appropriations section of the 2009 stimulus legislation is that Chinese manufacturers, and others, will be encouraged to establish manufacturing production in the U.S. This restriction can and probably will be challenged under WTO free trade rules. However, the U.S. would be wise to look at additional barriers to protect nascent industries for future U.S. jobs. Innovators will make their initial products in the U.S., but if successful in finding a market, will look to scale-up in lower-waged countries with fewer workplace and environmental restrictions.

Replacing the Corporate Income Tax with a VAT.  Under GATT rules, the value added tax is subtracted from exports and added to imports with the purpose of excluding the burden of a producing country’s government from the price/value relationship of competing goods and services. Currently, all U.S. trading partners and over 120 countries use a VAT to the competitive disadvantage of the U.S. The U.S. should consider replacing the Corporate Income Tax and other taxes including the payroll tax with a VAT balanced by a flat personal income tax with a high threshold as recommended by Gov. Mitch Daniels.

Federal FIT Match for States Paid-for with Gas Tax.  The uncertainty of the incentive price for clean energy production is a large impediment to domestic demand. In 2010, I had the opportunity to ask then energy czar Carol Browner about the potential for a national Feed-In Tariff (FIT), i.e. the incentive price at which green energy could is sold back to the grid. The FIT has propelled Germany into first place in the installed base of solar panels; this, even though Germany is at a latitude close to New York City’s, i.e., far from the maximum incidence of light. Ontario, too, which has recently implemented a VAT, is rapidly expanding solar installations. Ms. Browner responded that a FIT would not work here because the U.S. has diverse power companies regulated by individual states. However, that should not preclude the incentive of a federal matching FIT subsidy to the states. Electric utilities would be responsible for their average production cost per kilowatt hour and the FIT incentive overage would be shared by the states with a federal match. The FIT demand incentive expense should be paid-for by an increase in states’ gasoline taxes, adding an economic disincentive for imported fossil fuel.

Fully Deductible PACE Financing.  Demand would also be fueled by the state and local government adoption of fully deductible PACE bonds (Property Assessed Clean Energy Bonds) that would enable the deduction of principal as well as interest for residential installations of solar panels. Fannie Mae and Freddie Mac are known to oppose this incentive since the liens would come before their mortgage liens. Congress could and should legislate this hurdle away. Again, thank you for the opportunity to submit these ideas for your consideration.

Peter Orszag Interview (with Jeff Madrick at Hamptons Institute, East Hampton, NY), 04/16/11

Notes taken by SA,, at interview on subject, “America’s Fiscal Fitness: Where do we go from here?”

This interview was to have been conducted by Steve Kroft, who was replaced by Jeff Madrick.  The interview lasted about 40 minutes and was then opened to questions from the audience.  The questioning began with regard to the pending issue of the debt ceiling.

Following were Mr. Orszag’s major comments.

Not binding the debt ceiling would be “catastrophic,” and, therefore, he expects it to happen.  However, there is no chance that there will be an agreement until emergency measures are pressured by the financial markets.  Explaining his point, he emphasized it was “unfortunate that we didn’t go over a cliff on the budget agreement”; he expects that the deadline for the budget ceiling will not be met, and that by July a temporary disturbance can be expected in financial markets.  There is a real risk that a shift in the financial markets could come quickly, but it will take a crisis for Congress to act.

He gave a back-handed compliment to the Ryan plan, in that it is bold and offers some details, but he labeled it  a “huge” political gift to the Democrats.  Repeating CBO’s commentary earlier in the week, the heart of Ryan’s deductions affects Medicare, changing it to a consumer directed plan and raising costs to beneficiaries in 2030 by more than $6,000.  He affirmed that CBO is not a biased arm of government.

The Obama plan presents a stark difference from the Ryan plan, which difference he cited as a “manifestation of polarization.”  The Ryan plan, he says, lacks a basic theory on how to constrain healthcare costs, and the cuts hit the poor.  Cost containment of healthcare benefits must deal with the highest cost cases, which come disproportionately from the end of life years.  “To call the Ryan plan ‘radical’ is not an overstatement.”  Ryan’s plan moves Medicaid to block grants to the states without indexing, and will put a strain on the states.

Fundamentally, we do not have the tolerance for the tax increases needed to pay for the benefits we expect.  Ryan would make the tax code significantly less progressive.

With our bad fiscal situation we should cancel the Bush tax cuts for the middle-class as well as for the top income earners.

Referencing the increasing political polarization of the country, he noted a recent demographic study showing that our population is shifting to Republican or Democrat leaning neighborhoods, not mixed.

Regarding economic outlook, he is of the camp that believes we need more stimulus now and a plan for deficit reduction in two to three years when the fragile economy stabilizes.  He predicts that the spending reductions just passed will result in the cost of 1/4-1/2% GDP.  Our revenue base is inadequate, causing an infrastructure deficit.  We face a permanent unemployment risk, he said, from the loss of skills among the unemployed.

The deficit for 2015 is projected at 5% of GDP, but the margin of error is 5%, so that means it could be in the 0-10% range. Growth, of course, would be important, but dismissing tax cuts as the answer, he said that there is no empirical evidence for the Laffer curve. Bowles-Simpson is laying the groundwork for general construct in deficit reduction.

While the situation is anxious, there are still no other plausible safe havens besides the U.S., which is keeping turbulence at bay.  He expects that a “sharp” depreciation of the dollar is more likely than Fed action to increase interest rates.  He said we are taking a risk with investor confidence without having developed a fiscal path.

Answering questions on healthcare costs, he said that patients should not be able to sue physicians if doctors are following best-practice protocols.  Asked (by SA, VATinfo) why the OMB did not support Dr. Ezekiel Emanuel’s plan − for universal healthcare with a dedicated VAT paying for insurance vouchers to be used in an exchange, he said that a VAT was not politically viable.  But, he acknowledged that the Emanuel plan, like the Ryan plan, was consumer driven and might therefore help to curtail costs.

As to Social Security, he said the fix was not hard, and taking this step would show our ability to deal with a problem, which would be a confidence builder.  He opined that it is not politically plausible that the Ryan plan’s private Social Security accounts could happen. Raising the Social Security tax base by increasing the wage cap has more Congressional support than any other fix.

Mr. Orszag also noted that Social Security is becoming less progressive, as there is a disparity in longevity based upon wealth, and there is a correlation between longevity and medical costs.  But, he is confident that the Obama healthcare bill will deliver efficiencies from learning best practices.  Expressing concern about the growing cost of prescription drugs, he noted that pharmaceutical spending has decreased in Medicare due to the greater use of generic drugs.

Catching up to Mr. Orszag after the interview to ask him about Gov. Daniels’ sweeping tax overhaul vision, SA queried if OMB has vetted the concept, and he responded “no.”

Geithner: No “Enthusiasm” Expected for VAT

No surprise.  Tim Geithner expects that there would not be any “enthusiasm” for a VAT at this time.  Today’s political scene, dominated as it is by demagoguery is perfect for knee-jerk opposition to any new ideas.  America is supposed to be the wellspring of creativity, but not when it comes to government finance.  The problem is there is no political leader in the forefront promoting sweeping tax reform, even if it would make the U.S. more competitive in world trade, even if it would stimulate business, even if it would fairly collect from multi-national corps that now park profits in lower-taxed countries, even if it would make tax loopholes vestigial remnants of a corrupt tax code, even if it would eliminate absurd complexity.

The one leader who might emerge to make a difference, Gov. Mitch Daniels of Indiana, is still in the background, not having made a commitment to run for president.  However, he has a vision of sweeping tax overhaul that would be good for the economy.  It replaces the entire tax system with a value-added tax plus a flat income tax with a high threshold to achieve balance and fairness.  He spoke of this vision for a new, smart, competitive tax system while accepting the Herman Kahn Award at the Hudson Institute last year.  The press, if it would play an investigative role in examining tax reform would do well to interview him on the subject.  After all, among Daniels’ credentials are experience as head of OMB, and corporate management, as well as govenorship.

VAT Gaining Momentum?, 12/21/10 surveyed 23 economists about where the economy is headed and how tax reform might be used to stimulate growth and to address America’s debt crisis. Nearly half the economists surveyed believe “overhauling the current system would be the best tax policy going forward,” including lower tax rates combined with ending certain tax preferences. “Several of the economists favor implementing both tax reform and a VAT. ‘Actually, we need a combination,’ wrote David Wyss, chief economist with Standard & Poor’s. ‘The fiscal outlook is disastrous, and unless draconian cuts in Medicare and Social Security are made, taxes will have to rise.’”

On “60 Minutes,” Federal Reserve Chairman Ben Bernanke remarked that “The tax code is very inefficient. Both the personal tax code and the corporate tax code. By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest.”

The Domenici-Rivlin plan from the Bipartisan Policy Center calls for a VAT offset in the first year by a payroll tax cut. Gov. Mitch Daniels of Indiana has suggested sweeping overhaul with a VAT paired with a flat tax on income with a high deductible. And, President Obama has indicated he would like to see the tax system reformed before the end of the two-year extension of the tax cuts.

(Gov. Daniels) Herman Kahn on Tax Reform & VAT, 11/27/10

It was smart marketing for Domenici/Rivlin to label their VAT a DRST (deficit reduction sales tax), and as a result there has not been much outcry about the VAT component.

Contrast that response with the well-publicized criticism that followed Indiana Gov. Mitch Daniels’ endorsement of sweeping tax reform including a VAT. Gov. Daniels, on the occasion of accepting the Hudson Institute’s Herman Kahn Award, Gov. Daniels had quoteed from Kahn’s 1982 book, “The Coming Boom.” Herman Kahn was co-founder and Director of the Hudson Institute, a conservative think-tank, so it is somewhat curious that the critical response to Gov. Daniels’ endorsement of Kahn’s tax reform proposal came almost entirely from conservatives.

Of course, the makeup of our economy has changed in the eighteen years since Kahn’s book was published, but the principle should still apply. It would be instructive to have OMB run the numbers based on different percentages and proportions.