Tax Reform and Tariffs
Many Americans have come to believe that the multitude of problems desecrating the economy and driving up the national debt are a hopelessly complicated mess. But there are actually some very basic solutions to the various obstacles we are currently facing.
The United States originally developed into a wealthy and productive nation by protecting its domestic industries and jobs. Americans bought American-made products, and foreign countries were taxed if they wanted to sell their goods here.
The U.S. is still the largest consumer nation in the world; we should not be giving away the rights to do business here for free. In order to generate funds and improve upon the trade deficit, we would do well to examine the successful trade and taxation practices of nations such as Japan, Germany and even China.
The most direct way to maximize profits through trade would be to initiate tariffs, like we used to have. Those supporting the disastrous “free trade” policies that have ravaged our economy spread fear by talking a looming a trade war. Yet the very trade war they fear has already begun, and the United States is losing.
The Chinese government does not sell out its economy with “free” trade. China gathers approximately 20 percent of its total revenue from a combination of import value-added taxes, import consumption taxes, tariffs, and customs duties.
By comparison, the U.S. has no import value-added tax, and derives only 1.38 percent of its revenue from tariffs and customs duties.
If the U.S. had imposed a similar rate of taxation it would have gathered $216 billion in customs revenue rather than the $29.1 billion it did gather; not an insignificant number given the current amount of debt the United States owes foreign nations.
China has set its own rules, and we are being naive and playing by rules that allow our country to be taken advantage of. As much as many people would like to, we cannot control what China does with its economy. We can, however, control what we do with our own.
We have a massive trade deficit, and a massive budget deficit, and the answers aren’t going to come from asking for changes abroad or only making cuts at home.
Taxes–and in particular a VAT that was instituted with other tax reforms–could be immensely beneficial for the economy. Yet serious discussion of taxes is often avoided by our politicians. If nations like China can generate new revenue by taxing American companies to innovate and grow, there is no reason we cannot do the same.
Every other nation in the world – including virtually every one of our trading partners – practices protectionism in some way, shape or form. Meanwhile, the U.S. is not fighting to protect itself at all, and these countries are not hesitating to take advantage.
We must engage in the same protective practices that are working elsewhere, or the United States will continue to have major a disadvantage in the world market.
A Better Tax System for the U.S.: Implement a Value-Added Tax (VAT)
Countries that are doing well in the global economy, nations like Canada, Japan and Germany, all have a VAT. Workers in both Japan and Germany earn higher wages than American workers, and their economies are faring much better in the global recession. Germany had a trade surplus of $210 billion in 2011, much of which can be attributed to their VAT. In comparison, the U.S. ran a trade deficit of $558 billion that same year.
Approximately 140 other countries are successfully using a VAT, and the playing field will never be level until we have one, too. Because these countries use a VAT and we don’t, our exports are more expensive and imports are cheaper than our domestically produced goods. This puts our factories out of business.
Germany, for example, uses a 19 percent VAT as a protective tariff against U.S. manufacturers trying to sell to the German market. When American cars are exported from the U.S. to Germany, that 19 percent VAT is added to the price of the vehicle. Additionally, American companies will pay an extra 19 percent in taxes in transportation costs, including docking, duties and insurance.
German products get rebated as they leave their home country and are not taxed to enter the United States. This means the price of German made products is lower in their home nation and higher here in America than American made goods. We must level the playing field if we want to be competitive.
A VAT protects domestic industries by making imported goods relatively more expensive – imports will decrease. American goods become more competitive abroad because exports are exempt from the VAT, lowering the cost for manufacturers – exports will increase dramatically and American manufacturing ability will increase. This means more domestic jobs and a resurgent middle class, and we will again produce more for ourselves (85% of products sold at WalMart alone are foreign made).
A VAT would raise much more revenue than the corporate tax does currently. 2010 corporate taxes brought in $156.7 billion. In comparison, an affordable 5 percent VAT would have brought in $600 billion by itself in 2010.
In 2011, the U.S. imported $399 billion from China alone. If a 5 percent VAT would have been in place, this could have earned $19.95 billion, money that could have been used to put Americans back to work and lessen the nation’s need to borrow money from China.
Income tax could be dramatically decreased to offset the cost to consumers while still raising the necessary revenue for the government. With a VAT, exemptions can be put in place for certain necessities such as food, some clothing, medical items, insurance etc. to prevent a regressive tax.
A value-added tax would be good for the United States on every level. It subsidizes our exports, but makes the cost of manufactured imports more expensive. This would create a void that our manufacturing could fill competitively.