[IMGCAP(1)][IMGCAP(2)]The United States is now facing two deficits—a government budget deficit and a balance of trade deficit. These two deficits, together, will ultimately put the future of the United States in peril unless the government and its citizens take strong action.
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
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.
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