Fundamental Tax Reform: The Key to American Competitiveness

Not Overtaxed, Badly Taxed • The U.S. is not overtaxed • EU15-- 40.3% of GDP • US -- 25.4% of GDP • The U.S. is badly-taxed • Our tax system relies too heavily on non-border adjustable income taxes • This hurts Americans’ ability to save and invest domestically • US exports are taxed twice • US imports escape any consumption tax © 2009 IAS Group

Empowering Americans to Compete in a Globalizing World • The US tax system has become increasing out of step with the rest of the world • 150 countries apply a consumption tax to their imports, doubling the tax burden on US exports • The same countries rebate their tax on their exports; the US almost alone does not apply an offsetting tax on its imports • Our two-way disadvantage now amounts to an estimated $474 billion © 2009 IAS Group

The Effect on Relative Prices U.S. Price PLUS 17% VAT $117.00 U.S. Local Price:$100 China Local Price: $100 VAT Rate: 17% Chinese Price MINUS 17% VAT $85.89 U.S. Price PLUS 16% VAT $116.00 U.S. Price Local Price: $100 Germany Local Price: $100 VAT Rate: 16% German Price MINUS 16% VAT $86.56 German Price MINUS 16% VAT PLUS 17% VAT $101.27 Germany Local Price: $100 VAT Rate: 16% China Local Price: $100 VAT Rate: 17% Chinese Price MINUS 17% VAT PLUS 16% VAT $99.63 © 2009 IAS Group

A Self-Inflicted Wound • The large and growing tax disadvantage is a major reason for the enormous US trade deficit • It forces us to borrow from the rest of the world to finance the trade deficit • Unlike many trade problems, it is within our own power to correct © 2009 IAS Group

Three ways to go forward…. Attempt to change the international rule. First in the Omnibus Trade and Competitiveness Act of 1988 “The principal negotiating objective of the United States regarding border taxes is to obtain a revision of the WTO rules with respect to the treatment of border adjustments for internal taxes to redress the disadvantage to countries relying primarily on direct taxes for revenue rather than indirect taxes.” -Bipartisan Trade Promotion Authority Act of 2002 Result: No progress in Uruguay Round, Doha Round; 90+ new users of consumption taxes Options for Eliminating US Disadvantage © 2009 IAS Group

Options for Eliminating US Disadvantage(cont’d) • H.R. 2600, “Border Tax Equity Act of 2007,” approach • If no international agreement is made by 2009: • Apply a Countervailing Duty on imports equal to value of tax subsidy, effective 4/1/2009 • Use revenue to reimburse exporters, effective 7/1/2009 • Result: U.S. violation of WTO rules; likely trade war © 2009 IAS Group

Common-Sense Approach to Fundamental Tax Reform: Potential Consensus Principles for U.S. Producers • Shift tax burden substantially away from income and onto consumption • Institute border-adjustable consumption tax at rate high enough to impact trade flows • Eliminate, reduce, and simplify all other federal taxes • Ensure internationally competitive treatment of capital investments • Ensure fair transition rules (e.g. loss, carry forward, and asset depreciation balances) © 2009 IAS Group

Fundamental Tax Reform Could: • Institute a VAT in the range of 15-20 percent on all internationally tradable goods • Tax tuition, health care and perhaps a few other (non-tradable) items at a lower rate or zero • Eliminate most income taxes • Eliminate the personal income tax on family income below $100 - $120,000 • Expand the refundable Earned Income Tax Credit for lower income families to compensate for consumption taxes paid • Eliminate the corporate tax on net revenues below a certain level • Simplify remaining income taxes • Enhance new investment in new plant and equipment • Replace depreciation with expensing (immediate, 100 percent write-off) • Use expensing bonuses of more than 100 percent to stimulate even faster investment © 2009 IAS Group

Fundamental Tax Reform Could (cont’d): • Permanently index the AMT for individuals and corporations • Apply only to the highest levels of income, now and in the future • Permanently index the Estate Tax • Apply only to the highest levels, now and in the future • Exclude business assets from the calculation • Invert the FICA: apply only to incomes above a certain level with no upper limit • Eliminate many other Federal taxes that burden consumers and businesses © 2009 IAS Group

If this were done: • All Americans would have strong incentives to save and invest in this country • Goods produced in the US would be more competitive in international trade • the border tax adjustments on exports and imports • lower corporate income tax rates • elimination of nuisance taxes • lower capital costs for new investment • Business would have fewer penalties to hire additional workers • The economics of small businesses in all sectors - manufacturers, service providers, and farmers and ranchers- would be strengthened • The need to file tax returns for millions of individuals and most small businesses would be eliminated • Imports and the underground economy would pay their fair share of the cost of government • The cost of tax compliance would be slashed • make tax avoidance and evasion harder, ensuring an improved fairness for law-abiding citizens © 2009 IAS Group

The Bottom Line • A fundamental tax reform built around an internationally-competitive consumption tax is the only way to achieve simultaneously: • A fairer tax system • A simpler, more efficient and less costly tax system • Powerful incentives to invest and produce in the US • Expanded exports and reduced imports © 2009 IAS Group

Fundamental Tax Reform: The Key to American Competitiveness