The value-added tax

By ERNEST F. HOLLINGS, former U. S. senator

JUNE 5, 2013 --The task of business is to make a profit. One of the principal tasks of the President and Congress is to develop and maintain a strong economy. Our Founding Fathers recognized this by enacting the Tariff Act of 1787 - two years before The Constitution. Not just research and development but the President and Congress must develop a favorable climate for Corporate America to invest and produce in the U.S. as outlined by The Economist, Special Report on Offshoring (1/25/13).


Hollings

Globalization is nothing more than a trade or economy war with production looking for a country cheaper to produce. 150 countries compete in globalization with a Value Added Tax that's rebated on exports. The Corporate Tax is not rebated. We need a VAT. An entrepreneur can be making a profit in the U.S. but has to pay the 35% Corporate Tax and another 17% VAT tax when his exports reach China. A competitor can produce the same product in China, import it tax free to the U.S. and put the entrepreneur out of business. Not having a VAT is killing manufacture in the U.S. This can be corrected by eliminating the 35% Corporate Tax (not the personal income tax) and replacing it with a 7% VAT.

CBO estimates that the 35% Corporate Tax produced revenues in 2012 of $242 billion. A 7% VAT in 2012 would have produced $922 billion. Eliminating the Corporate Tax frees $2 trillion in offshore profits for Corporate America to repatriate tax free, create millions of jobs, and start rebuilding our economy. If some are hesitant doing away with the Corporate Tax, just cut it to 5% with the 7% VAT and permit the repatriation of offshore profits tax free on condition that the repatriated sums are used exclusively for productivity. Since the average VAT is 15%, Congress can substitute the Corporate Tax with a 10% VAT - 6% for revenues and 4% to repeal the payroll tax. The VAT has no loopholes for "poor" corporations. Replacing the Corporate Tax with the VAT gives instant tax reform.

"The recession has been over for four years. The economists, the political pundits, the Congress won't acknowledge that that the problem is we are offshoring jobs as fast as we are creating them. The President and Congress refuse to make it attractive for Corporate America to invest in the United States. They won't mention a VAT or protect vital production."

-- Hollings

Trade laws must be enforced. We lost 1/3 of our manufacture in the ten year period 2001-2010. More than 42,000 U.S. factories have closed since 2001. If Presidents Bush and Obama had enforced the Defense Production Act of 1950, the Detroit bailout wouldn't have been necessary. If President Obama protected steel, motor vehicles, computers and machine tools like President Reagan in 1984; we would have a strong economy. Corporate America wants to invest in the United States but withholds $2 trillion in offshore profits because it gets no protection for its investment.

This should immediately happen. Why not? Contributions! Washington is uptight for contributions. Wall Street, the big banks, and Corporate America want to keep the China profits flowing and contribute to or pay the President and Congress not to even mention a VAT. The VAT has no loopholes and Corporate America doesn't want to increase the cost of their China imports 7%.

If you think this is scandalous, read the headline in the Wall Street Journal (6/3/13): "Deficit Deal Even Less Likely as Economic Signs Improve." Since Harry Truman, for 50 years the U.S. never ran an annual deficit in excess of $400 billion except in 1992 of $403.6 billion. Even Lyndon Johnson with his "Great Society" spending gave Richard Nixon a balance budget. Today the Congress relaxes because it only has to borrow $642 billion? I served on the Senate Budget Committee for 30 years and an annual deficit of $642 billion would panic us in the other direction. The economy has been stimulated $10 trillion in the past twelve years. Enough stimulation. And enough ten year plans. It's time we stop borrowing, adopt a VAT and pay for government.

Everybody attributes the careless attitude to the economy -- "The worst recession since The Depression." The recession has been over for four years. The economists, the political pundits, the Congress won't acknowledge that that the problem is we are offshoring jobs as fast as we are creating them. The President and Congress refuse to make it attractive for Corporate America to invest in the United States. They won't mention a VAT or protect vital production. Wall Street, the big banks and Corporate America continue to develop China's economy but oppose developing or protecting the economy of the United States. They contribute to the President and Congress to do nothing. So the President and Congress do nothing.

Senator Hollings of South Carolina served 38 years in the United States Senate, and for many years was Chairman of the Commerce, Space, Science & Transportation Committee. He is the author of Making Government Work (University of South Carolina Press, 2008).

© 2013, Ernest F. Hollings. All rights reserved. Contact us for republication permission.

About Fritz Hollings

Ernest F. Hollings served the public for 56 years -- 38 years in the United States Senate and as South Carolina's governor, lieutenant governor and a member of the S.C. House of Representatives.

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