Writing recently in Forbes, Brian Wesbury continued a theme that is popular among Beltway Republicans, warning about the dangers of a consumption tax system known as a Value-Added Tax (VAT). Wesbury advances the specious argument that a VAT is bad because it would be placed “on top of the income tax” and “will harm the competiveness [sic] of the U.S., reduce growth and lead to even fewer jobs and higher unemployment.”
Wesbury’s premise is faulty. He assumes that a consumption tax in the form of a VAT would be a new form of taxation, which would be added to all taxes already in existence. But that is not an argument against a VAT; it is an argument against increasing the tax burden. That would be the case for any proposal that would increase income taxes, payroll taxes, or corporate taxes without proposing a reduction in other taxes. The key to achieving a business consumption tax’s objectives—getting the private sector working again, rebuilding the U.S. manufacturing base, reducing the trade deficit, and bringing jobs home to America—is to replace completely the current corporate tax system with a business consumption tax. Obviously, the current system of business taxation isn’t working. The United States had zero private-sector job creation in the first decade of the 21st century, under both Republican and Democratic administrations.
This basic error—criticizing an idea that is tangential to the VAT as though it were the VAT itself—is committed repeatedly by critics of the VAT. Thirty years ago in the libertarian Cato Journal, Charles W. Baird dealt with similar charges: “the nature of the value-added tax and the argument that it is superior to existing taxes stand apart from the danger that the government will merely add it on to present taxes. I don’t believe we should refrain from identifying a superior tax plan merely because politicians might treat it as a supplement rather than an alternative.”
If we truly want to get this economy moving again and bring jobs home to America, a border-adjusted consumption tax—as an alternative to the current business income-tax structure—offers the best hope.
Such an approach would eliminate the onerous corporate tax system, with its 35-percent income-tax rate and its 7.65-percent employer portion of the payroll tax, and replace it with a revenue-neutral, border-adjusted consumption tax of 8 percent. Our current business tax system rewards the Wall Street financial engineers and corporate-buyout moguls, since debt is deductible, while punitively taxing capital investment, employment, and equity—the engines of economic growth. Given the current tax system, it is no wonder that we are exporting prosperity and American jobs overseas. Our manufacturing sector has been particularly hard hit. From 2001 through 2010, we lost one third of our manufacturing base; 5.6 million jobs were outsourced, shipped overseas, or simply went away.
Changing tax policy from one that encourages the outsourcing of capital and labor to one that rewards investing in America would have an immediate impact on private-sector job creation here at home. Capital investment in the United States would be allowed to be expensed against revenues every year. By eliminating the corporate income tax and the employer portion of the payroll tax, there would be no tax reason anymore to move corporate headquarters overseas and park corporate funds abroad. All goods and services coming into the United States would be taxed at eight percent, with the result that many outsourced service jobs would come home quickly, as well as much of the marginal manufacturing work that has gone overseas. At the same time, U.S. exports would be encouraged, since U.S.-based companies exporting overseas would receive a corresponding tax credit against, or abatement of, their business consumption tax.
It is true that, under a business consumption tax, we would see a rise in tax revenues as the private sector would start growing again. But that is not a bad thing, so long as those increased tax revenues go to close our massive federal budget deficits (and eventually to pay down the federal debt), and not for higher spending.
This change in tax policy would make the United States competitive and level the international playing field by removing much of the tax advantage our trading competitors now enjoy as a result of their own VATs.
Bottom line: Under a business consumption tax (or a VAT), domestic companies would pay less, and foreign companies shipping goods into the United States would pay their fair share.
So no, Mr. Wesbury. A business VAT isn’t our least-preferred option in a stormy economy. Rather, a consumption tax structure put in the place of our onerous existing system of business taxation would return economic power to Main Street producers and small-business owners, while putting Americans back to work.