A big fight is looming in Washington over how to reform the tax system, and one of the biggest bones of contention is whether America should adopt a so-called “border-adjustable” tax.
The following example helps explain why changing to a system that taxes our imports brought into the country rather than our exports that are made here at home makes economic sense.
Let us say you are a Florida-based company that makes computers. Under the current tax code you have to pay a 35 percent profits tax on the computer made here, and then, if it is sold across the border to Mexico, the Mexicans slap a 16 percent value-added tax on the computer, so it 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 computer assembly is moved from Florida to Mexico City. Now the computer produced in the factory in Mexico is not taxed by the Mexicans if it is sold in the United States.
Even more amazing: The U.S. imposes no tax on the imported computer. To summarize, the computer 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 for 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, complex, and despite depressing employment, investment and wages here are at home — raises very little revenue for the government. In 2016 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 the border-adjustable tax system. Here are some of the advantages.
First, a border-adjustable tax will end all talk of tariffs and trade wars. At various times Trump has suggested tariffs of anywhere between 5 percent 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 over the U.S.
Second, 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.
Third, 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.
Floridians of all people understand the advantage of taxing consumption, not income and production. Florida has no income tax and pays for government through sales taxes mostly. That’s smart and has paid big dividends. Other than Texas, another no-income-tax state, no state has seen more job growth than Florida. And Florida is importing residents from the rest of the country — especially from high-income-tax states like New York and New Jersey.
Why don’t we have a federal tax system that taxes like Florida does and not like the loser states of Illlinois, New Jersey and New York? That would mean more jobs and growth for all.
Stephen Moore is a senior fellow at Freedom Works and is a Fox News economic contributor.
