An explanation of why a VAT-based tax is needed in the US. This presentation was prepared in 2005-2007 using data from those years.

1. Border Tax Adjustments
The Key to US Competitiveness
Presented by David A. Hartman of The Lone Star 1
Foundation with the assistance of IAS Group

2. Overview
 I will be addressing 3  First – the serious state of our
main points. US manufacturing sector and
the similar prospects for
business services;
 Second – the ways the IRS
Code is at the root cause for
this state of affairs; and
 Third – what can be done to
remediate the tax code to
enable a return to growth and
prosperity of US manufacturing
and business services.
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3. Background
 Following WWII, the US led the movement
toward the end of protectionism and the
prevention of war.
 As a consequence, the GATT established
general rules of fair trade, which progressively
lowered industrial country tariffs from 40% to a
current average of 3-4%
 Other rules were created to establish a level
playing field for all members. The one which has
caused difficulty for the US tax system is the
subsidy rule on border tax adjustments
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4. Taxes - The #1 US Trade Problem
TYPE EXAMPLE BORDER
ADJUSTABLE?
 The WTO differentiates
between direct and indirect tax
 Rebate of direct taxes (such as DIRECT PAYROLL NO = SUBSIDY
on income) is deemed illegal (on income) PERSONAL INCOME
CORPORATE
export subsidy TAXES
DISC, FSC, ETI
(not border
 Indirect taxes levied on imports adjustable)
and rebated on exports (such
as value added taxes) are INDIRECT BUSINESS YES = NO SUBSIDY
(on TRANSFER TAX
deemed legal consumption) VALUE ADDED
RETAIL SALES TAX
(all border adjustable)
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5. How BTAs Work
 Exporter receives
rebate of the tax at
border
 Importer must pay
tax at border
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6. Impact on Relative Prices
UNITED STATES
Local Price: $100
Starting price of good in US – a non-BTA country
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7. US Export/Import to/from Germany
United States
Local Price: $100
Result: US exporters are penalized by a factor
of $16.00 when exporting to Germany
Germany
US producers are penalized by a factor of Local Price: $100
Standard VAT Rate:
$13.79 on imports from Germany 16%
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8. US Export/Import to/from Mexico
United States
Local Price: $100
Result: US exporters are penalized by a
factor of $15.00 when exporting to Mexico
Mexico
Local Price: $100 US producers are penalized by a factor of
Standard VAT Rate: $13.05 on imports from Mexico
15% 8

9. Export/Import to/from BTA Countries
HOWEVER, when trade occurs between two
countries with BTAs – some or ALL of the penalty
disappears
But as you can see, the country with the higher BTA
still provides a relative advantage for its domestic
producers
Mexico Germany
Local Price: $100 Local Price: $100
Standard VAT Rate: Standard VAT Rate:
15% 16%
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10. What this means . . .
 Currently, US exporters of goods/services
receive NO rebate of any US tax paid at the
border and are taxed when entering a foreign
market – thereby DOUBLE taxing the US export
 By choosing NOT to levy any tax on imports, the
US effectively subsidizes all imports
 When competing with foreign goods, whether in
the US or in international markets, US producers
are placed at a severe disadvantage by the US
tax code
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11. Surge of BTAs Worldwide
 Since WWII, over 125 140
countries have adopted some
form of legal Border Tax 120
Adjustment (BTA)
 All Organization for Economic 100
Co-operation and
Development (OECD) 80
countries EXCEPT the US
have BTAs 60
 The average OECD BTA is
40
17.7%
 The range of BTAs is 10-25% 20
0
1960 1968 1976 1984 1992 2000
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Number of countries with BTAs by year

12. The Bottom Line
 Since the late 1960s, US Manufacturing share of GDP
has declined by 50%
 The US currently has a trade deficit with almost EVERY
trade competitor in almost EVERY CLASS of goods.
The US only produces $2 of every $3 of goods it
consumes, and only $1 of every $3 of information
technology goods (EDP and telecommunications)
 US Manufacturing has lost over 3.5 million jobs since
1998
 Growth of outsourcing threatens loss of service-based
jobs as well
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13. The Answer
To restore American competitiveness, any
tax reform must (a) incorporate a border
adjustable tax; and (b) shift all or most of
the tax burden from income and to
consumption
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14. BTAs in America –
How would they help?
 BTAs are the SINGLE largest  BTAs are WTO compliant
measure to correct the  BTAs are free trade consistent
unsustainable trade deficit –  BTAs will reduce American
ensuring reciprocal tax dependence on foreign
treatment for US imports and financing and promote
exports domestic saving for investment
 BTAs are levied on all imports
and rebated on all exports
 Rebates on exports are not
reserved solely for large
exporters, but are a right for all
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15. What we propose
REPLACE (not add onto) current federal
income taxes, with a consumption based
BTA
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16. Types of Border Adjustable
Consumption Taxes
 Retail Sales Tax Proponents argue for a 23% rate to
replace all other taxes. As
exemptions are made, the tax
must rise, therefore realists advise
a 30% rate.
 Credit Invoice Value Added Collected on every transaction –
Tax (similar to European VAT) requires extensive record keeping.
Complex and burdensome.
 Subtraction Method Business Simplified form of VAT. Requires
standard corporate financial
Transfer Tax (BTT) ** records. All businesses would pay,
evasion difficult and ALL capital
investment could be expensed
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17. Possible Options for Adoption of
Consumption BTT
 Option 1: 17.5% BTT which
 Sunsets IRS Code
 Replaces ALL federal income, capital and
personal taxes (except for employees’ share of
Social Insurance and Medicare)
 Pays transition costs
OR 17

18. Option 2 – Phase in
 Step 1: 5.25% BTT
which
 Replaces corporate
income tax, corporate
welfare expenditures,
employer social insurance
taxes and inheritance and
gift taxes
 But keeps other taxes
same
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19. Option 2 (continued)
 Step 2
 Raise BTT to 11%
 Drop personal income tax to FLAT 11%, keeping
current deductions allowed by Code
 Step 3
 Raise BTT to 17.5% which
 Sunsets IRS Code
 Replaces ALL federal income, capital and
personal taxes (except for employees’ share of Social
Insurance and Medicare)
 Pays transition costs
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20. BTT – A Fair Solution
 Corporations will be assured the benefit of unused
depreciation and lost carryovers
 A consumption tax ends double taxation of dividends
and promotes saving for investment
 The individual taxpayer chooses how much and when he
pays tax – i.e. only pay tax on what taxpayer consumes
 To address regressivity, individual taxpayers could be
reimbursed the BTT on necessities, etc.
 “Hybrids” have been suggested which would be better
than the current code (e.g. a reduced BTT with a retail
sales tax, etc.)
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21. Summary
 A border adjustable consumption tax MUST BE a
component of any reform of the US tax system
 BTAs would substantially reduce the trade deficit and
provide a powerful incentive for Americans to save,
invest, produce, and export
 The border adjustable tax should replace and not be
added to existing income and capital taxes
 The tax changes should also ensure that low income
persons are not disadvantaged
 ANY BTA would be an improvement, but the BTT is the
best alternative
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22. Appendix
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23. Failed US Response
 Three times in the last 30 years the
US has amended the tax code to
provide a tax subsidy to selected
exports – the DISC, FSC and ETI
 ALL were found to be ILLEGAL
rebates (subsidies) of direct taxes
under the WTO and had to be
repealed
 Even when in effect, NONE of them
could be applied to imports
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24. Failed US Response
 Any income tax rebate will face same legal
problems at the WTO
 In the WTO Doha round, the US is
seeking to obtain equal treatment for
direct/indirect taxation. In effect, the US
aims to convince 125 other nations to
abandon their beneficial BTAs – this is
hopeless.
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