Finally a VAT

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


AUG. 26, 2014 -- Leaving the U.S. Senate in 2005, I wrote a book "How to Make Government Work" and how I had been recommending a Value Added Tax since 1989. I've sent my colleagues recommending a VAT to every Republican and Democratic Senator for years but to no avail.

Finally, in an article headlined: "How to Fix the Corporate Tax? Repeal It" in the New York Times (8/24/14), N. Gregory Mankiw, the Professor of Economics at Harvard, writes: "Let's repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumptions tax could take the form of a value-added tax…"

I recommend replacing only the Corporate Tax with a VAT - leaving the personal income tax alone. This way we don't have to worry about regressivity. The VAT is rebated on exports; the Corporate Tax is not. Not having a VAT stultifies manufacture in the U.S. An entrepreneur in the U.S. could be producing profitably but has to pay the 35 percent Corporate Tax and, when his exports reach China, a 17 percent VAT. A competitor can produce the same product in China, import it tax free to the U.S. This 52 percent difference will put the entrepreneur out of business. 160 countries use a VAT to compete in globalization. Globalization is nothing more than a trade war with production looking for a country cheaper to produce. Corporate America moves from country to country to compete. The duty of the President and Congress is to move to protect and build the economy.

It took the country 200 years to incur a debt of $1 trillion in 1981. Bush and Obama have increased the debt $12 trillion in fourteen years. Corporate America knows taxes are going up and withhold $2 trillion in offshore profits, waiting on the President and Congress to act. China and Japan set the competition in globalization with their closed markets and predatory practices.

Today, David Ricardo's "Comparative Advantage" is the controlled capitalism of China and Japan. Competing with controlled capitalism isn't easy. The President and Congress must make an extra effort to build the U.S. economy. Replacing the 35 percent Corporate Tax with a 7 percent VAT releases $2 trillion in offshore profits for Corporate America to repatriate tax free, create millions of jobs and jumpstart the economy.

Last year's Corporate Tax produced $288 billion in revenues. A 2013 7 percent VAT would have produced $945 billion, permitting the Congress to balance the budget in two years rather than ten. The average VAT in Europe is 20 percent. We could adopt a 12 percent VAT and do away with the payroll tax. This would really make it attractive for Corporate America to invest and produce in the U.S. But, the President and Congress take the contributions from Wall Street, the Big Banks and Corporate America to keep the offshore profits flowing and do nothing.

Guess what? With 10,000 lobbyists in Washington, there is a lobbyist for each loophole in the Corporate Tax but there is no lobbyist for a VAT. The VAT has no loopholes. You either pass it on or pay it. Easily collectible, you can downsize the IRS. Everybody is for tax reform. Closing all loopholes gives instant tax reform.

Politicos like Chris Matthews, Rachel Maddow, Bill O'Reilly and Joe Scarborough know all this but never discuss it. The VAT is "top secret" to the politicos. We can send each politico this column so we can have a discussion on how to protect and build the economy. We've got to stop the continued borrowing and pay for government; the continued offshoring of the economy; the failure of the President and Congress to attract investment and production in the United States; to institute a competitive tax like the VAT and to have President Obama enforce the laws against closed markets and predatory practices.
The politicos know that the President and Congress are paid by Wall Street, the Big Banks and Corporate America to do nothing. They mention everything except the country competing in globalization.

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).

© 2014, Ernest F. Hollings. All rights reserved. Contact us for republication permission.

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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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