The United States Government is once again playing the patsy when it comes to international trade and tax issues. A recent study by Garrett Vaughn and financed by the Manufacturers Alliance/MAPI, highlights significant tax disadvantages under which U.S. manufacturers operate in the international marketplace.
Ernest Christian, a former Treasury Department official who is now a consultant to AMT, explains that U.S. international-tax disadvantages originated during the 1960s when the French Government wanted to subsidize exports by rebating the value-added tax (VAT) to each business in proportion to its exports. The French convinced U.S. negotiators to join them in the pretense that a VAT, unlike a tax on net income, always becomes part of product prices and, therefore, ought to be eligible for rebate when a product is exported.
On political, rather than economic grounds, the U.S. Government accepted this argument, and we have been living with the consequences ever since — through Europe's economic recovery and the European Union (EU) becoming a fierce competitor. Indeed, as if to prove the adage that there is no such thing as gratitude in international relations, the EU recently obtained a ruling from the World Trade Organization (WTO) that the Foreign Sales Corporation (FSC) — designed by the U.S. to offset the advantages of the VAT rebate — is an illegal export subsidy.
The Vaughn/MAPI study demonstrates that the combination of the VAT rebate plus the low corporate taxes in many EU countries amounts to aggressive use of "tax competition." This helps the Europeans divert productive capital resources and the better-paying jobs those resources create from the United States.
Vaughn points out that during the past decade, Western Europe has used aggressive tax competition and nearly doubled its exports to the rest of the world — far faster than U.S.-export growth — and built a substantial trade surplus with the U.S. as well.
When the 108th Congress repealed the FSC, the corporate income-tax rate dropped by three percentage points. But our nation's corporate income tax still exceeds that of our European competitors, and only Japan's rate remains higher.
Obviously, U.S.-trade negotiators should make eliminating the VAT advantage a high priority. But the EU negotiators know they have a good thing going and have the WTO on their side. The only apparent option is revising our own tax code to redress the imbalance.
The President's Advisory Panel on Federal Tax Reform needs to recognize the competitive disadvantages under which U.S. manufacturers operate. Either we need to institute border-adjustability in our own tax code (which is a lowprobability during the current Congress), or we need a further cut in the corporate-tax rate.
Interestingly, the Vaughn/MAPI study points out that workers ultimately lose when tax competition lures investment capital into countries with a low cost of production. When it happens, as inevitably it does in an era with unfettered capital mobility, workers must either make wage concessions to stay competitive or watch their jobs migrate to a country providing a higher after-tax rate of return.
The Advisory Panel and ultimately the President and the Congress need to address these issues if we want to avoid losing still more high-paying industrial jobs to our trade competitors.
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