What are the objections?

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

FEB. 27, 2013 -- What are the objections to a Value Added Tax? 150 countries use the VAT to compete in globalization with an average tax of 15 percent. The VAT is rebated on exports and added to imports.


The Corporate Income Tax is not rebated. If we replace the 35 percent Corporate tax with a 7 percent VAT, immediately my friends say "…like a sales tax you've increased the price of everything 7 percent." False. The 35 percent Corporate tax is phased in on every transaction as the VAT is phased in. Replacing the 35 percent Corporate tax with a 7 percent VAT is a tax cut. Then friends say: "The VAT is complicated". It used to be. Today with computers the VAT is easily implemented and administered. In fact, the VAT is self-enforcing - you either absorb it or pass it on. You can cut the size of big government - Internal Revenue Service.

The 2012 Corporate tax produces revenues, according to the CBO estimate, of $236.8 billion. A 7 percent VAT for 2012, if it were applied to everything, including food, housing and medicine like the current 35 percent corporate tax, produces $922.5 billion. This VAT tax cut increases production by reducing the trade deficit and produces billions to stop deficit spending and pay down the debt. With this added production and spending cuts, the budget can be balanced in two or three years rather than ten.

The VAT tax cut ends arguments about rates and which loopholes to close. All loopholes are closed and exemptions eliminated giving you instant tax reform. The multinationals have so many loopholes in the Corporate tax that they pay very little - many years GE paid none. But the Main Street Merchant or small business pays the full 35 percent. I asked several Main Street Merchants would they take the 7 percent VAT over the 35 percent Corporate tax and their answer was: "In a New York minute".

Not having a VAT is killing manufacture in the United States. An entrepreneur can start a business in the U.S., develop the market, and be making a profit, but he has to pay the 35 percent Corporate tax and when his exports reach China a 17 percent VAT. Soon, a competitor will produce in China, export tax free to the United States and the 52 percent difference will put the entrepreneur out of business.

"Corporate America has to compete in this trade war to survive. But so does the United States. The President and Congress must make it attractive for Corporate America to invest and produce in the United States to maintain a strong economy. "

-- Hollings

Cancelling the Corporate tax releases almost $2 trillion in offshore profits for Corporate America to repatriate tax free and create millions of jobs. The President and Congress all say they are for jobs, tax cuts, tax reform, helping small business and getting rid of big government. They never pay for government year to year like a Mayor or Governor. They run around Washington with ten year plans for later Congresses to pay.

What's their objection to this VAT tax cut? I've been sending this to every Senator, Republican and Democrat, in the United States Senate. Some Senators say that they've read it and it is a good idea but "mums the word". Everybody fusses about the Sequester and spending cuts, but no Senator mentions the VAT. I've emailed the VAT tax cut to the political pundits but "mums the word". No political show has talked about replacing or cutting the Corporate tax with a VAT.

Globalization is nothing more than a trade war with production looking for a country cheaper to produce. China with its controlled production, controlled market, and controlled trade is the superpower in this war. China sets the competition and all developed economies have to protect their economies or else their research, technology, production - their economies will be drained.

Corporate America has to compete in this trade war to survive. But so does the United States. The President and Congress must make it attractive for Corporate America to invest and produce in the United States to maintain a strong economy. Wall Street, the big banks and Corporate America, for fear of challenging China, don't want the United States to compete in the trade war. They want to keep the China profits flowing so they contribute to the President and Congress to do nothing. The President and Congress do nothing. It's easy to do something - the VAT tax cut or some variation. Cut the Corporate tax 30 percent, leaving a 5 percent Corporate tax. It still produces billions to pay down the debt. Or put in a 12 percent VAT, which is less than the average VAT, and repeal the payroll tax.

Give a tax holiday on offshore profits conditioned upon the tax free profits being used for research and production, not bonuses. The VAT can be used in various ways. What's the objection?

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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