Taxing Our Way to Prosperity

November 10, 2011

Manufacturing has been particularly hard hit during this past decade.  In that time, the United States lost one-third of its manufacturing sector as American jobs were shipped overseas.  A central reason for the loss of our manufacturing base is a business tax system that is among the most onerous in the world, with its 35 percent income tax rate and its 6.2 percent employer portion of the payroll.  A value-added tax (VAT) of 8 percent could reform this system, reducing the tax burden on corporations and removing distortions within the market, says Thomas Pauken, former State Chairman of the Republican Party of Texas.

  • Currently, U.S. businesses average an 18 percent tax disadvantage to their trade competitors.
  • All Organization for Economic Cooperation and Development (OECD) countries, other than the United States, have adopted VATs or their equivalents, averaging 18 percent.
  • Whereas the United States once enjoyed a trade surplus, it now suffers from a deficit of over $500 billion each year.

A VAT would broaden the corporate tax base by closing loopholes, and would also eliminate negative incentives to save and produce that the current system enables.  Also, its flat rate would reduce market distortions and promote economic efficiency.  Despite these benefits, the VAT has garnered negative criticism from many sources, yet a review of these attacks show that they hold little water and therefore fail to outweigh the potential benefits of the VAT.

Two arguments put forth against the VAT fall into the same vein: that it is yet another tax that, regardless of benefits, will only increase the total tax burden, and also that it fails to address the real problem of out-of-control spending.  Both of these criticisms sidestep the issue.

  • The first assumes, without justification, that the VAT would be implemented in addition to taxes that are already on the books, yet it can just as easily replace the current corporate tax.
  • The second is specious -- while the VAT does not reduce spending, this is not a compelling reason to ignore its potential benefits.

One of the biggest arguments put forth against the VAT, however, is that because its taxes are relatively hidden from consumers, tax increases would be easy to obtain, politically.  However, not only are current taxes also hidden from consumers (such as the business half of the payroll tax), but also this argument precludes the development of watchdog groups and community oversight, both of which would operate as significant checks on this possibility.

Source: Thomas Pauken, "Taxing Our Way to Prosperity," First Principles Journal, Fall 2011.

For text:

http://www.firstprinciplesjournal.com/articles.aspx?article=1793

 

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