January 10, 2017


The case for a border adjustable tax system (Stephen Moore, 1/07/16, Washington Times)

To create a level playing field, the U.S. has to reconstitute our tax system. This can be accomplished by lowering the tax rate and then turning the tax on its head so we are taxing our imports, but not our exports. In other words, we should tax activities based on where they are consumed, not where they are produced.

This is called a border adjustable tax system, and here are the reasons we need to do it:

1) A border adjustable tax will end all talk of tariffs and trade wars. At various times Donald Trump has suggested tariffs of anywhere between 5 and 35 percent on foreign goods imported into the United States. But tariffs violate our trade agreements and often lead to retaliatory measures by other countries. The free traders will rightly object loudly to these trade barriers.

A better solution is to impose the Trump 15 percent corporate income tax on goods when they are brought into the U.S. and exempt from tax goods produced in the U.S. but sold outside the U.S. In other words, our corporate tax would be based on where goods are consumed, not on where they are produced. This tax does not violate trade laws and only mirrors the valued added tax systems foreigners use to gain advantage.

2) A border adjustable tax has a broader tax base, and thus the rate can be lower.

The best tax system has a broad tax base and a low tax rate. To get the Trump tax rate down to 15 percent and still raise enough money to fund the government, we need the broadest tax base possible. Since America imports about $750 billion more per year than we export to other countries, the border adjustable tax collects about $100 billion more revenue every year. So the rate can be about 5 percentage points lower.

3) A border adjustable system taxes consumption not production.

Most economists agree that a good tax system taxes what people take out of the economy -- their consumption, not what they put into the economy, their work, investment and risk taking. Many Keyensian economists have long argued that consumption is what drives the economy, but American consumers can't consume if they aren't producing something.

4) A border adjustable tax will help rejuvenate American manufacturing -- especially in the Midwest. If Donald Trump wants to deliver on economic development in states like Michigan, Ohio, Pennsylvania and Wisconsin, the border adjustable tax will bring factories back to this region of the country. Overnight it will make American steel, cars, tractors, oil, and manufactured items 15 percent cheaper, while raising the cost of imported products by an equal amount. This means millions of jobs for the Midwest.

In exchange for a border adjustable tax, the U.S. should eliminate all existing tariffs and duties which can now range from 2 percent on shoes to 25 percent on toys. This eliminates all special interest favoritism, which is the worst feature of trade protectionism.

Tax what you don't want (consumption) not what you do (profits).

Posted by at January 10, 2017 5:30 AM