FairTax Overview
In the price you pay are all three costs (taxes/compliance/matching) for the company that
provides the glass bottles containing the wine. And the cork provider. And the label printer. And the
label ink supplier. And the label glue manufacturer. And the tires on the 737. And the fertilizer for the
wheat. And the paint on the dozer. And the Iphones and Ipads carried by your PricewaterhouseCoopers
consultants.
Whether these products and services are provided here in the U.S. or exported, the purchaser is
going to pay all of these costs, along with the actual cost of the product, its marketing, and delivery.
Why do American companies move offshore? Antipatriotism or to meet shareholder demand for
competitive returns in an ever-less-forgiving world?
Further exacerbating this crippling tax burden on American producers is the fact that U.S. corporate
taxes are the highest in the industrialized world, with a top corporate rate about nine percentage points
higher than the OECD25 average.26 These taxes also rank among the most complex and least stable or
predictable, thanks to the incessant work of an army of lobbyists. This drives huge and ever-increasing
compliance costs. To the extent that these corporate and payroll taxes and compliance costs imposed on
producers and workers have forward incidence (econospeak for “the consumer pays”) and remain
embedded in producer prices, relative prices of goods and services go up in the global marketplace. The
only alternative left to producers is to make dispassionate decisions about where to produce or invest.
That all too often means moving offshore.
Now let’s buy some French champagne.
Or an Airbus A300. Or some Argentinean wheat. Or a Komatsu D21A-7 dozer. Or some consulting
from France’s SOFRECO. While your invoice as a U.S. purchaser will not show it, these providers
incurred value-added taxation (VAT) all along the way, which was rebated upon export. Local users
pay these hidden taxes; as a U.S. recipient, you do not. When such products arrive here in the U.S., their
prices do not include any country-of-origin taxes. There are compliance costs. Sitting side by side, the
hidden hand of Uncle Sam raises the price of American goods worldwide, while goods imported into our
country bear no such burden from their governments.
It is estimated that border-adjustable tax regimes – virtually the entire world outside of the U.S. –
effectively grant their producers an 18-percent price advantage over U.S. produced goods, whether
competing here or abroad.27 Since effectively all of our trading partners have such border-adjusting
systems, our failure to follow suit results in the equivalent of a self-imposed handicap, stimulating
international outsourcing, encouraging plant relocations offshore, and lowering the wages of remaining
American workers. A recent report by MIT Professor of Economics Jerry Hausman states that the
25
Organisation for Economic Co-operation and Development (www.oecd.org)
Sullivan, Martin A., “On Corporate Tax Reform, Europe Surpasses the U.S.,” Tax Notes, May 29, 2006. If you compute
the EU average for each year, you will find that it has declined from 35 percent in 1996 to 26 percent in 2005.
27
Hartman, David A., “The Urgency of Border-Adjusted Federal Taxation,” Tax Notes, September 6, 2004. Conversely, in
U.S. markets foreign goods bear no U.S. tax and the foreign VAT is forgiven. Thus, among the most manifest violations of
neutrality in the U.S. tax system is that it places U.S. producers – including businesses and workers in manufacturing,
agriculture, mining, and forestry – at a large competitive disadvantage relative to their foreign competitors both in U.S.
markets and in foreign markets. If Professor James R. Hines, Jr. were to add one more neutrality dynamic to the CEN, CIN,
NN, CON, and NON, he might add the notion of Export Import Neutrality, which would integrate not only marginal rates of
production but whether or not a consumption tax system treats exports and imports alike in the marketplace. Only a
destination-based system can achieve such neutrality.
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