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 Richmans' Trade and Taxes Blog

The Border Tax and the Value-Added Tax Are Bad Proposals
Raymond Richman, 2/17/2017

All kinds of foolish tax ideas are being promoted since Trump proposed corporate and individual tax reforms. One is converting the corporate income tax to a tax on revenues from production and sales in the U.S. plus a 20% tax on imported inputs.  This in effect amounts to a border tax of 20% on imports with exports free of tax. Our analysis of this proposal indicates that the border tax will have no lasting effect on the trade deficits. Indeed our State sales taxes are a border tax;  exports are exempt from sales taxes. Another proposal is adding a value-added tax, equivalent to a retail sales tax at the federal government level. The value-added will add to the bloated federal bureaucracy. Its justification is to compensate for the loss of revenue resulting from the proposed reduction in the rate of the corporate income tax. A third proposal is to repeal the estate tax, the only measure we have that reduces wealth inequality. Wealth inequality has been increasing for decades; there is no justification for making it more unequal. None of these proposals is necessary or called for. All that we need is the Scaled Tariff, a single-country-variable-tariff which rises and falls with trade deficits, which will bring in lots of revenue until economic growth escalates as a result of trade being balanced. We do not need trade agreements or jaw-boning.

Case against the border tax

The real purpose of the proposed border taxes is to avoid dealing with the chronic trade deficits that have destroyed so much American manufacturing, caused the loss of millions of good-paying manufacturing jobs, and slowed U.S. growth by one-half or more. The border tax is not a value-added tax, which is considered a sales tax. Exporters under existing  international  law could be exempted from the value-added tax, which is considered internationally to be a sales tax. It is also considered to be a proportional income tax when it has no sectors exempted from its payment. The Ryan-Brady border tax cannot be rebated because it is not considered a retail sales tax. 

We already have a border tax. Exporters are exempt from the Retail Sales Taxes imposed by nearly all the States while imports are subject to retail sales taxes.

The proposers of the border tax want to use it to finance Trump’s proposed reduction in the corporate income tax. In our view, there is no reason for a corporate income tax. Economists are not even sure who bears the burden of the corporate income tax. Some of it is passed on, many economists believe, to consumers in the form of the higher prices that corporations must charge to compete with partnerships and proprietorships that do not bear the burden of the corporate income tax. In reality, corporations are partnerships, the difference being that shareholders of corporations are not liable for the debts of the corporation. Even this difference no longer exists in most States which have enabled partnerships and even individual proprietorships to become limited liability companies. Many unincorporated businesses and firms of professionals have their limited liability status indicated by the abbreviation LL.C.

But they also claim that it will balance trade, a notion that is completely wrong. Trade imbalances have an infinity of causes, ranging from undervalued foreign exchange rates, to differences in wage levels, to the imposition of formal barriers to imports such as tariffs and subsidies, and informal or hidden barriers, to different domestic economic policies of government, differences in the rate of savings, as well as border taxes. We have a proposal to balance trade that does not depend at all on what policies a sovereign government pursues. It is the Scaled Tariff, which varies as chronic trade deficits rise and fall and are reduced to zero. Meanwhile, the Scaled Tariff yields substantial revenues to compensate for higher import prices it may cause.

Another problem with the border tax and it is a serious one is that it injures countries with which we have favorable trade balances, which ought to be enough to condemn border taxes. Why would we want to do that?

Case against the value-added tax.

The value-added tax is a retail sales tax collected in a way so that the buyer is unaware of how much tax he is paying. Perhaps that is the reason the IMF has been so successful in promoting it. The writer was a consultant for the IMF but was never hired again after he supported reform of the income tax in a Central American country rather than its replacement by the value-added tax. The value-added tax is a costly and complicated tax to administer since it requires each producer to file a return to be analyzed by a sizeable bureaucracy. By contrast, a sales tax requires a much smaller bureaucracy because of the smaller number of firms who sell the final products compared with the huge number of producers.

Another defect of the value-added tax is that once it is enacted there are demands to exempt  certain industries so it ceases to be a tax on all products. Many value-added taxes exclude agricultural producers even though agricultural production gets more concentrated and fewer and fewer people are employed in agricultural production.  A simple exemption of foods in a retail sales tax, as exists in most States, helps consumers and benefits all farmers, not only the wealthiest ones.

The Case for the Scaled Tariff

Probably the most important single cause of the U.S. malaise that resulted in Pres. Trump’s election is the huge trade deficit the U.S. is experiencing with its trading partners. It has halved our economic growth and caused the loss of millions of good-paying manufacturing jobs. Millions of Republicans and Democrats are campaigning to prevent Trump from ending the deficits by claiming benefits for the policy of free trade that do not exist. Free trade is an appropriate policy only when all our major trading partners subscribe to the conditions that our Constitution imposes on every one of our States, namely,  no tariffs or other barriers to the free movement of goods and services and a common currency.  These conditions do not exist internationally.

The U.S. embarked in the 1940s on seeking a General Agreement on Tariffs and Trade. Every international agreement results in some loss of sovereignty for its partners. Under the latest agreement, a super-government was created to enforce the obligations the agreement imposed on its parties, the World Trade Organization. Among its foolish provisions was the WTO’s authority to order the U.S. to repeal a law that required imported meat products to include a label indicating the source of origin. The U.S. Congress dutifully complied, a trivial loss of sovereignty in this case perhaps.


Trade agreements


The inherent nature of every trade agreement is that all parties make concessions to the others, for example, each country has to reduce tariffs on one or more of its products. But this is crony capitalism. An export industry in each country is favored while some import industry in each country suffers a loss of protection. Nothing in the agreements calls for balanced trade. Countries that gain a trade surplus as a result of the agreement experience increased demand for labor in its favored export industries while the trade deficit country experiences reduced demand for its labor in the industries experiencing more foreign competition. Since GATT was initiated, the U.S. lost nearly all of one industry after another, shoes, computers, ad cell phones for example, which was not compensated by gains, certainly not in employment. The U.S. trade deficits escalated and the U.S. went from being the world’s leading creditor to world’s leading debtor.


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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]