VAT -- Top secret

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


OCT. 27, 2014 -- We keep dancing around the fire on the economy. Economists blame the Great Recession; the failure to stimulate enough; and lack of consumer confidence in the economy. The Great Recession has been over five years, and the Federal Reserve has been stimulating for five years.

The trouble is that we've been offshoring or exporting our economy for fourteen years - offshoring our research, innovation, technology, production, and jobs. It's not lack of confidence by consumers; it's lack of money - offshoring payrolls.

Senators keep talking about jobs, closing loopholes, and tax reform, but we know tax reform doesn't work. Senators on the Finance Committee tell Chairman Wyden: "I'm all for tax reform, but I can't vote for it until this little thing is fixed." They say: "It's a local problem," when they know it's for some lobbyist. Every time we have tax reform, it costs revenues. Senators always sneak in another loophole. It took us six years to find the Ethanol loophole, which everybody voted to repeal.

Now Matt Miller in The Washington Post (10/22/14) suggests that rather than the Federal Reserve printing dollars and giving it to the banks, instead give it to the people. We go to every extreme to avoid the obvious. When President Clinton gave China "most favored nation" trade status in 2000, Corporate America abandoned attempts for the President to protect vital production. Offshoring started in earnest. Between 2001 and 2010, the United States lost a third of its manufacture. Every Governor makes every effort to attract industry and jobs to his or her state; but President Obama fails to protect vital production in the U.S., and Congress does little to make it profitable for Corporate America to produce in America.

160 countries compete in globalization with a Value Added Tax (VAT) that's rebatable on export. The Corporate Tax is not rebatable. An entrepreneur in the U.S. pays 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 into the U.S. tax-free, and put the entrepreneur out of business. Not having a VAT stultifies manufacture in the U.S.

160 countries don't find the VAT complicated or an addition to the states' sales tax. "Value added" is the cost of doing business: staff salaries, gasoline, light bill, etc. Corporate America includes in its sales price the cost of doing business, or "value added." When business replaces the Corporate Tax with a VAT, it includes the cost of doing business in its sales price. When you replace the 35 percent Corporate Tax with a 7 percent VAT, you cut taxes. The VAT is self-enforcing - you either pass it on or pay it. The VAT cuts the size of government (IRS). The VAT tax cut closes all loopholes, giving instant tax reform. We keep talking about tax cuts, tax reform, and cutting the size of government, when all you need to do is replace the 35 percent Corporate Tax with a 7 percent VAT.

The 2013 35 percent Corporate Tax produced $288 billion in revenues, whereas a 2013 7 percent VAT would have produced $945 billion - enough to balance the budget in two years rather than ten. Replacing the 35 percent Corporate Tax with a 7 percent VAT releases $2 trillion in offshore profits for Corporate America to repatriate tax-free; invest and produce in the U.S.; create millions of jobs; and jumpstart the economy. But President Obama refuses to protect the vital production of Corporate America in the U.S. by enforcing laws against closed markets and predatory practices. Congress fails to make it profitable for Corporate America to produce in America. Worst of all, the U.S., the most productive nation, is not competing in globalization. The President and Congress stand idly by as Corporate America builds China's economy and tears down ours.

Wall Street, the big banks, and Corporate America want to keep the offshore profits flowing; want to keep the market up. So they contribute to the President not to enforce trade laws; to Congress not to make it profitable to produce in America; to do nothing. The President and Congress do nothing.

I've suggested the Corporate Tax replacement to every Democrat and Republican Senator, but the President and Congress treat the VAT "Top Secret." They won't even mention a VAT.

Senator Fritz 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.

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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