It is our view that the United States needs to tackle its trade deficit before we consider the government budget deficit.
This priority—tackling the balance of trade deficit first and the government budget deficit second—is essential. Note the timing consequences here. If the United States can eliminate the trade deficit, the United States will be able to clear all of its debts with other Americans, as opposed to strangers. We’d then be just paying interest to ourselves. America will then avoid the power over us that foreign creditors bring. Then, afterward, with our trade deficit ended, we can address the government budget deficit with pride.
How America’s Trade Deficit Happened
America’s trade deficit is now more than $40 billion per month, more than a half a trillion dollars per year. In fact, 1975 was the last year in which the United States had a surplus. Consider the positive impact on America that the balance of trade would bring if we could recapture the trillions of post-1976 amounts. We are talking about the trillions of trade dollars that should be ours. To paraphrase and extrapolate from Everett Dirksen’s remarks (because of inflation), a “trillion here, a trillion here, and soon you’re talking about real money.”
As Americans, and as tax professionals, we have to realize that the trade deficit accelerated during the Reagan era and continued unabated afterward. U.S. domestic and international tax policies exacerbated our trade policy. Savvy investors, attuned to the government’s tax policies, built big box retail stores filled with imported merchandise rather than by building U.S. manufacturing facilities that exported U.S. goods. In contrast, if you go back before Reagan, the Johnson, Nixon, Ford, and Carter administrations encouraged manufacturing and exports, and America was able to keep our balance of trade in check.
It seems that America, in its trade policy beginning with the Reagan era, has ignored the admonition of Sir Thomas Smith in his 1549 book Discourse on the Common Wealth of this Realm of England, “We must always take heed that we buy no more from strangers then we sell them, for [to do so] we impoverish ourselves and enrich them.”
The Simple Tax Fix Works
In light of the severity of America’s trade deficit, we have developed a simple tax fix that should help bring America’s trade deficit into balance. Quite simply, we suggest that the United States tax imported sales and services at a higher rate than taxing exported sales and services. Our simple tax plan would be independent of our obligations to the General Agreement on Tariffs and Trade and the World Trade Organization.
Here’s how our conceptual principles of a simple tax fix would work:
• The U.S. government should increase the tax rate for a business that imports the goods and services it sells.
• The U.S. government should decrease the tax rate for a business that exports the goods and services it sells.
• Under the tax fix, there would be no tax change to a business that equally buys imported goods and exported goods.
• There would be no change in tax rate for a business that does not import or export.
Now let’s put the theory into practice. Consider the following tax formula:
“T” is the company’s tax rate; the tax rate that applies to the company before the company applies the simple tax fix formula. “S” is the company’s total gross sales and services, whether it imports or exports for the tax year. “E” is the company’s gross export sales and services for the tax year. “I” is the company’s gross import sales and services for the tax year
Here is the way the company would apply the simple tax fix formula to increase or decrease the tax rate for the tax year:
T x S – E + I
S
Here is an example that illustrates how the simple tax fix formula would work: Assume that the standard rate for the year would be 30 percent. Company X would otherwise be subject to tax at the 30 percent rate before applying the simple tax fix formula. Company X‘s net income is $10 million, its tax is $3 million and its gross sales are $100 million. The company does not export. Its imports (included in the $100 million gross sales) are $40 million. The remainder of the company’s sales, $60 million, is domestic. Company X’s tax rate fix formula is (S+I)/S or ($100 million + $40 million) / $100 million). Its tax rate, after applying the tax fix formula, is 1.4 times the 30 percent tax rate, or an effective tax rate of 42 percent.
The simple tax rate formula for Company X would be equal to $ 4.2 million on the income of $10 million. The simple tax rate fix formula for the company would then increase the tax rate from $3 million to $ 4.2 million to reflect the $40 million imports. Here the company pays a higher tax rate because it is a net importer, so it would pay a 42 percentage rate compared with 30 percent.
Our goal here is to provide U.S. companies with a tax disincentive for excess importing. A company would pay an equivalent lower tax rate if the company were a comparable net exporter. Thus, companies would have more of a tax incentive for exporting.
Margaret Kent and Robert Feinschreiber are attorneys and counselors with TransferPricingConsortium.com.
7 Comments
RogerC has hit the nail on the head. U.S. tax policy discourges, even prevents, qualified Americans from working overseas to develop exports.
The authors' proposal is far out of the norm. It would be much better for the United States to adopt a Value Added Tax (VAT), thereby aligning its tax policies with all other major indusrial countries. The VAT is a form of national sales tax integrated into the price of the goods sold. If a company exports goods or services, the VAT is reimbursed to the company, thereby encouraging export activity If a company imports goods, the VAT is added to the price of imports, thereby encouraging manufacture in the U.S. Adopting a VAT along with territorial taxation for U.S. corporations and lower tax rates (compensated for by elimination of tax deduction loopholes)would put U.S. companies on a competitive playing field to promote U.S. exports. But this will only be truly successful if the United States adopts at the same time residence-based taxation for its citizens.
Posted by: jackieb | March 22, 2013 10:58 PM
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At first I thought this might be a joke, but we are a few days from April fools.
Anyone with even a basic understanding of economics knows that this article is complete and utter hogwash. Its authors should visit a local community college and sign up for an Economics 101 course. Why not just ban imports completely? Sure, that will make us rich.
It is sadly amusing that the authors think they have developed some brilliant plan for solving the trade deficit 'problem' - despite the fact that an export subsidy such as they suggest is clearly illegal under the WTO rules (remember the FSC? The DISC? ETI? Those were all ruled export subsidies). But our fine writers here would be happy to spark a global trade war, similar to the one that took place during the 1928-1932 period. Gee, that one didn't work out too well, I seem to recall...
It is sad, but a fact, that there is so much economic illiteracy among the citizens of the US. That is the fault of our educaton system in general. It is almost criminal, though, that a publication like Accounting Today sees fit to print such nonsense. Are none of the editors here even loosely educated?
Posted by: Freetrader | March 22, 2013 7:09 PM
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Thumbs up to RogerC
Posted by: Just Me | March 22, 2013 1:58 PM
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The talk and wasted print and all the fol-da-rah from hundreds of quarters always fail to get to the solution that would work. Every fix has an unexpected consequence. here is a simple solution that several economists spent 20 million dollars researching and came up with a bill that has been introduced every year since 1999 and the Ways and Means Committee, under several Chairmen keep ignoring the 800 pound Gorilla in the corner. You simply cannot fix the Marxists Income Tax as long as it is used for Social Engineering, so we should scrap it and do the following: !. Repeal the 16 nth amendment to the constitution that allowed the income tax in the first place. 2.Repeal all Federal Tax Laws. 3. Disband the IRS. 4. Pass the FairTax HB25. 5. Get out of Capitalism's way and watch prosperity happen.
Posted by: wjeretidwell | March 22, 2013 12:50 PM
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Personally, I think we have a great deal going with China. We send them green pieces of paper, they send us TVs! It is like a real life letter to Santa Claus. Might I suggest some better reasoning at LearnLiberty --> http://www.youtube.com/watch?v=y0gGyeA-8C4
Posted by: Unknown | March 22, 2013 10:51 AM
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I have an easier solution to the "trade deficit," since the authors seem to think: exports good, imports bad.
Let's sink all the ships at sea. That way, countries will only export, and there will be no imports. All countries will be awash in prosperity!
There's so much economic illiteracy in this short article it's hard to know where to start. Trade deficits are nothing but an accounting fiction. Governments don't trade, people do. And my wealth is increased tremendously by having goods and services available to me from around the world.
If China invented a cure for cancer, should we tax it out of fear of increasing our trade deficit?
I suggest the authors read Thomas Sowell's book, Basic Economics. He destroys the trade deficit argument, with empirical evidence and sound economic logic--both of which are missing from this article.
Regards, Ron Baker, Founder VeraSage Institute
Posted by: verasage | March 22, 2013 10:30 AM
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The authors are totally correct that the last US trade surplus, which was also the largest in our history, was in 1975. Our cumulative trade deficit since then now exceeds $9.1 trillion. That year ended 100 years of balanced trade during which the US recorded trade surpluses for 95 of those years with very small deficits during 5 years.
But what they have totally missed is what it was that transformed the US from the largest exporter which dominated the export market into what we are today, a "has run" nation with 60% of the world's total trade deficits. The cause was the Tax Reform Act of 1976 which so massively increased the taxation of US citizens living and working abroad that had always insured this trade surplus. They could not survive and came home by the thousands, abandoning foreign markets to our foreign trade competitors not one of which subjects its citizens abroad to homeland taxation. I was one that came home. When President Ford signed that legislation my cumulative tax obligation to Brazil and the US became 181% higher than any other person (non-American) in Brazil with my exact same income and family status. I could not survive so closed down my business there selling US exports and came home. The French company that came in hired most of our former employees and 8 years later was responsible for $1 billion in French exports to Brazil while the US share of that market segment dropped to near zero. It takes American feet on the ground to sell American exports. The US is the only industrialized nation that subjects its citizens domiciled abroad where they are already taxed once by their host country to double taxation on that same income. Just 740 cases like mine, and there were many more, explain why the US today has a $740 billion trade deficit while most of our industrialized trade competitor nations, all of which export far more per-capita that we do, are racking up record trade surpluses. Germany's 2012 trade surplus was $242 billion and its unemployment rate the lowest in 21 years. And while the US had a $315 billion trade deficit with China Germany, which exports 7.9 times more per-capita to China as the US, had balanced trade with China in spite of the increase in the value of the Euro with respect to the US dollar which makes German goods far more costly in China than our own.
It takes feet on the ground to sell exports. In 1976, 95% of the 1000 student body at the American School in Rio de Janeiro was US citizens. Today only 15% are US citizens and 1/3 of those hold dual US-Brazilian citizenship. The remaining 85% are from Brazil and the 43 countries that have taken over the Brazilian market for imported goods which our tax laws forced US exporters to abandon. Our citizenship based taxation makes a mockery of our Free Trade Agreements. Citizens of our partner companies come to the US and pay taxes only the IRS. They are never taxed back home. But while our trade negotiators work hard to insure that foreign barriers against US products are removed, they totally ignore the Berlin Wall of Citizenship-based taxation which makes it far too costly for the deployment of US citizens abroad, so American exporters are dependent on foreign mercenaries to sell our products. And we always end up with trade deficits. US unions are enemies of free trade agreements, but in Switzerland the labor unions are among their strongest supporters. It is the Swiss who go abroad and export 9.3 times more per-capita than the US create jobs, prosperity and a 3.1% Swiss unemployment rate.
Does anybody in Washington really care? It appears not.
Posted by: RogerC | March 22, 2013 8:24 AM
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