Any move on tax reform should take into consideration what the European Union and various countries are doing with their tax systems, observed David Lifson, past president of the New York State Society of CPAs and a tax partner at Crowe Horwath.
Lifson, who is on the planning committee for the AICPA International Business Conference in June, said this is one of the issues to be explored.
“It’s all about global tax competition,” he said. “Because we had the biggest economy in the world, we may not have been reacting to global realities. But the other economies are growing as a percentage of the global economy, and we have to pay more attention to the rest of the world.”
“This is currently part of the national debate we’re having,” he added. “There’s a school of economic thought that says that taxing income of corporations is really a tax on the goods and services they produce. In a given economic model, if a corporation pays tax at a 50 percent rate, it has to charge more for any goods it sells or services it renders in order to make an appropriate after-tax profit to gain the support of its investors.”
“For example,” Lifson explained, “if two corporations sell to the same people and one has a zero tax rate while the other has a 50 percent rate, the one with a 50 percent rate has to charge more to give its investors the same return on their investment as the one with a zero percent rate.”
Last month, the European Union began an initiative to coordinate corporate tax policy among its members. The initiative, proposed by the European Commission on March 16, would install a common system for calculating the tax base of businesses operating in the EU.
“The higher the tax that the company pays, the more it has to charge consumers for the goods and services that the company sells,” said Lifson. “That’s what the EU is saying. They want lower taxes for corporations, so there will be a global advantage of being a European company over an American company. What they’re doing is trying to get all members to charge the same low tax rate—not as low as Ireland, but lower than the U.S., so no country has a competitive advantage over another.”
The value added tax, or VAT, is a key to the way the EU can implement this since it is border adjustable, according to Lifson..
“A tax that is border adjustable allows you to tax locals so they are in the same position they would be if the corporation had a high tax rate,” he said. “But when a company exports its goods and services, there is no tax on the goods and services it sells internationally, which makes the goods produced in your country more competitive.”
“Let’s say I reduce the corporate tax rate, but that the VAT makes the consumer pay a dollar more,” said Lifson. “If a product or service sells for $10 with no tax at the lower corporate rate, I can sell it in my country for $11, still at the lower corporate tax rate. The consumer, through VAT, is paying the same tax directly that they would pay indirectly if the corporation had a higher corporate tax rate. But if I’m a company in France, I can export that item to the U.S. for $10, not $11, because there is no VAT on the export sale.”
Naturally, the possibility of a VAT in the future has mobilized a number of groups in opposition. And fairly or not, VATs have traditionally been associated with large increases in the tax burden and the overall level of government spending, an effect sure to generate opposition. So any reform that includes a VAT may have to wait awhile.
