Creating American Jobs — A Better Way To Do It

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Our current corporate income tax system inspires large-scale tax evasion while generating surprisingly little revenue. The U.S. stands almost alone with one of the highest corporate income tax rates in the world, which provides an incentive for companies to move production out of the United States and play games with shell corporations. In the process, both the American economy and American workers are losing.

A value-added tax is a consumption tax, like a sales tax. But because a VAT is collected at each stage of the production of a product, it avoids the problem of ‘cascading’ sales taxes on top of sales taxes – it’s also a lot harder to “game” or evade than an income tax. However, its greatest appeal is how it would significantly benefit American manufacturing by counter-balancing, so to speak, the benefits which now flow only to overseas manufacturers.

Specifically, the way a VAT tax system works is that exports from VAT countries of goods that are also sold domestically get full rebates of any VAT taxes while imports into VAT countries are subjected to VAT taxes at the border. As the only major trading partner currently without a VAT, however, our manufacturers are being penalized at the same time that foreign exporters into the U.S. are being advantaged. In effect, a VAT tax system functions as trade subsidies for exporters and trade tariffs for importers.

Most of the six to ten million jobs we’ve lost to other nations in just the last decade are gone for good. Even so, if we used a VAT to replace a large part or all of the corporate income tax – with the very positive result that both the cost of doing business in the U.S. and the incentive for offshoring production would shrink – it should at a minimum be easier to hold on to the jobs we still have and to create new ones. A narrow-based VAT could also serve to substantially reduce the employer portion of the payroll tax, which would stimulate businesses to start hiring again.

A modest VAT on the order of 5%, with thoughtful exemptions and offsets for all but the wealthiest of individual consumers, could materially reduce both corporate income (from, say, 35% to 25.6%) and payroll taxes (from, say, 6.2% to 4.5%). In doing so, it would materially spur investments, help America grow its way back to good economic health, and significantly reduce the deficit.

As we make our tax system more globally competitive, we also need to address the other area where every other G-20 nation has a big edge, which is government procurement.

The American public clearly wants to buy goods specifically manufactured in America — and I don’t mean goods sold by American companies that are manufactured elsewhere or assembled from foreign-made parts. Unfortunately, they are not joined in this conviction by our own federal government, even though U.S. government purchases comprise a staggering 20% of our nation’s GDP, making it the biggest consumer in the world.

The Obama administration seems unwilling to flex our government’s bulging purchasing muscle to help create American jobs, while comfortably acquiescing to the interests of the multinational corporations and foreign manufacturers which every day cram their products into our government warehouses. The exception, which is only thanks to the persistent demands of the Department of Defense over many years, is that goods and services deemed to be “militarily critical technology” (or MCT) are mostly required to be domestically sourced. If we have a strategic security interest in domestically sourcing vital military goods, why don’t we have an equally strong strategic economic interest in all-of-government domestic sourcing?

To their credit, concerned Members of Congress are now considering legislation to promote American-made materials. House Democrats, notably, are working on an agenda designed to promote American manufacturing called the “Make It in America” agenda to help close the trade deficit and boost clean energy exports. They contend, with ample evidence supporting them, that the United States needs to do more to level the playing field with foreign countries that have strong export numbers.

This is a good start, but it needs to go much further.

“Buy American” provisions of one form or another have been around since the 1930s, and it is not opportunistic, unfair or inappropriate, as some have said, for us to have strong ones now, especially now. Given that government procurement represents such a large part of our GDP, these requirements would be very stimulative to the overall national economy, while having little or no impact on the cost of goods that are sold to families and individual consumers.

In sharpest possible contrast to America’s almost complete lack of any buy-domestic requirements is China’s recently promulgated “Indigenous Innovation Production Accreditation Program” which limits all Chinese central and provincial government procurement to companies that have “indigenous” — or Chinese — “innovation”. And if this isn’t blatant enough, embedded in the IIPA Program are China’s two so-called ‘trade advantages’, namely, (1) regulations to block non-Chinese firms from selling their products to Chinese government agencies and (2) rules that force Western companies to give up technological secrets in exchange for access to China’s markets. With these highly discriminatory restrictions and demands working against us, it is little wonder that China alone is now responsible for fully 80% of the entire U.S. trade deficit in manufactured goods,

I am not proposing that the U.S. copy the extreme procurement practices of China or, for that matter, the unfair buy-domestic practices of any nation. However, we should demand that:

  • Congress immediately establish buy-domestic and other domestic investment requirements for federal procurement and for grants to states and local governments to the fullest extent allowed under our various trade agreements and the WTO;
  • Until China makes WTO-compliant its IIPA Program, the U.S. government not enter into the bilateral investment treaty with China which China is seeking; and
  • The administration, through a joint effort among Treasury, Commerce and Defense in conjunction with Congress, assess and then limit the risks to the United States of planned investments by China and any other nation in our militarily and otherwise critical technologies and companies.

Creating jobs is of vital importance to our country’s well-being, and it calls for the same intense focus and political commitment in the next two years that over the past eighteen months we saw devoted to health care and financial regulatory reform. And it’s long past time for our government to stop equating a job in a sub shop selling sandwiches to a job in a manufacturing plant making real products for domestic consumption and export.

Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.

The following originally appeared on The Huffington Post.

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