Home Commentary We Need Tax Reform, Not Tariffs

We Need Tax Reform, Not Tariffs

January 10, 2017 at 11:35 am 8 Commentary

If America’s competitors intentionally tried designing a tax system to destroy the American economy, they probably couldn’t come up with a better plan than the way the United States currently taxes its own businesses.

To fully appreciate the stupidity of the American corporate tax, consider this simple example: If you are an American company making cars in Michigan, you have to pay a 35 percent profits tax on the car made here. Then if the car is sold across the border to Mexico, the Mexican government slaps on a 16 percent value-added tax. So the car is taxed on both sides of the border. Almost all countries tax goods produced in the United States this way.

Now let us say that the auto factory is moved from Michigan to Mexico City. The car produced in the factory in Mexico is not taxed by the Mexican government if the car is sold in the United States.

Even more amazing: The U.S. imposes no tax on the imported car. To summarize, the car is taxed twice if it is built in America and then sold abroad and never taxed if it is built abroad and sold here in the U.S. And we wonder why companies are moving out in droves to China, India, Ireland, Mexico and the like.

Donald Trump is right. What we have in America is not free trade. It is stupid trade with the deck stacked against American producers and workers. Our federal tax is effectively a 35 percent tariff imposed on our own goods and services.

It doesn’t help matters that our 35 percent rate is the highest in the industrial world. Yet the corporate tax — despite being onerous and complex — raises very little revenue for the government. In 2015 the U.S. corporate tax raised $300 billion, or 2 percent of GDP. This was one of the lowest percentages among almost all industrial nations.

What is the point of a tax that extracts high costs from the economy for very little revenue reward?

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. Here are the reasons we need it:

1) It will end all talk of tariffs and trade wars. At various times, Trump has suggested between 5 and 35 percent tariffs on foreign goods imported here. But tariffs violate our trade agreements and often lead to retaliatory measures by other countries. A better solution is to impose the Trump 15 percent corporate income tax on goods when they are brought into the U.S. and to exempt goods produced in the United States that are sold outside the country. This tax does not violate trade laws and only mirrors the valued-added tax systems other countries use to gain advantage over us.

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, not what they put into the economy. Many Keynesian economists have long argued that consumption is what drives the economy, but American consumers can’t consume if they aren’t producing something.

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

Retailers such as Wal-Mart will complain that this tax will raise prices for imported products from China, Mexico and other low-wage nations. But domestically produced goods will be cheaper. And people can’t buy products at Wal-Mart if they don’t have a job in the first place. And not everyone in America can work at Wal-Mart.

We have to make things in America in order to make America great again. Tax reform is the key to making that happen.

Stephen Moore is an economic consultant with Freedom Works and an economic adviser to Donald Trump. To find out more about Stephen Moore and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate webpage at www.creators.com.



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  1. zeitgeist January 10, 2017 at 1:19 pm

    Thank heavens I am not an economic consultant. I am having some difficulty differentiating a tariff and the border-adjustable tax. Is this just semantics or is there a real difference? Also as a side note I have to agree with deceased former Senator Everett Dirksen’s comment: “A billion here, a billion there, pretty soon, you’re talking real money.” Meaning that the 300 billion revenue stream provided by the U.S. Corporate tax in not exactly “chump change” and will enter into the mix.
    That is not to say that the situation is not serious and must be changed to work in the favor of American based interests, particularly manufacturing, but the facts cannot be minimized.

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    • ltuser
      ltuser January 10, 2017 at 2:21 pm

      IMO the ‘legal difference’ is just the same as what’s between a fine and a tax for not doing something right. Some areas are legally PROHIBITED from fining you so in stead jack on a tax…

      Same here. By our trade agreements, we can’t impose any ‘tarrifs’, so have to do that border adjusted tax.. SAME THING different legally…

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    • DrGadget January 11, 2017 at 5:43 am

      If our trade agreements make it impossible to do the smart thing, then we need to back out of our trade agreements. NAFTA never helped us anyway. The only “trade agreement” worth keeping is the Interstate Commerce clause in the Constitution.

      We need to start at a rock-solid 20% import tariff. America still has the best market and it’s a privilege to sell goods here. This is the price of that privilege. No apologies for our success.

      The rest of the world has been screwing us for years and has yet to apologize. I really don’t want to hear them use the word “unfair”. America first. This isn’t protectionism. It’s common sense.

      Then add a 2x tariff on anything we bring in from another country. If China charges a 50% tariff on American goods, we add an automatic 100% to Chinese goods (120% total).

      Any country that wants to compete will lower its tariff against American goods to zero. If they want to destroy their economies, let them keep high tariffs on US goods. We’ll watch their markets collapse when they sign higher tariffs into law. The results should be near-instant.

      This is not a charity either. We don’t take pity on developing countries. Develop faster or go away.

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  2. historicalconstitutionalroger January 10, 2017 at 2:29 pm

    NO. We need Tariffs. When foreign countries can bring things here and sell them below what we can make them, This is the reason even Lincoln said we need tariffs. People Just do NOT get it. Let me make it simple. Let’s go back to a different time. IF everything we grow, farm, and make in our neighborhood is twice as much as what someone brings into our neighbor-hood to sell from a foreign country, AND this is the same ALL over the USA, What is going to happen???? Now, I know what you may say,,,, Oh, but there are other things we can do to sell to them”,,,,, who do not have the Money to buy an equitable amount!!! you fools. What will happen is that we will be dependent upon their food and stuff beCAsue we can not sell our stuff, OR, all we will do is eat our food and have no income!?!?! Surely simplified, But Do You get the Picture? If not, you are part of the problem.

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  3. historicalconstitutionalroger January 10, 2017 at 2:34 pm

    Taxation is way out of line, but the real problem is a moral one. If we correct that, then other things fall into line in our country,,,, but, there are still issues about what comes INto our country and how it effects us. Remember the days of Nationalism and Isolationism!?!?! We at LEAST acknowledged the complexity of outside trade. We just do NOT know how to deal with the problems, and we let them build!!! and kill us.

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  4. ConservativeJoe January 10, 2017 at 9:03 pm

    Stephen Moore has some good points, but why not go all of the way? I suggest that the United States eliminate ALL business taxes on American companies operating in America. Yup, zero business taxes.

    This is the thing, Companies don’t pay business taxes, never did, never will.
    They simply calculate their costs, add a reasonable profit margin onto that product or service, and then they add ADDITIONAL charges to the customer to pay their estimated quarterly business taxes! The customer pays the business taxes!

    Wait! I can guess what you are thinking. You want to know how the government will replace the missing business taxes, right? Simple, it would raise our personal income taxes. Oh the horror! Calm down, you already pay those taxes when you buy the services or products of the companies. Instead of paying them throughout the year, you would pay them at the end of the year. In plain terms, your actual taxes would not change by one dollar.

    Oh, did I mention that your weekly expenses would drop dramatically? The companies that you buy from would be forced to drop their prices in order to compete with their rivals, pretty neat, right?

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    • swan January 11, 2017 at 10:12 am

      I still think taxes should be based on consumption not production or income. It would give individuals more control over their finances. It would be a win/win situation for both businesses and individuals. Income taxes are an “unfair” tax.

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    • ltuser
      ltuser January 11, 2017 at 4:22 pm

      And well over a hundred years ago they were implemented as a TEMPORARY REvenue making method to help fight the war.. Which means since they have lasted this long, they are imo unconstitutional, sinc they have outlived what they were created for..

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