Put THIS in Context: Why the U.S. Must Consider a Federal Consumption-Based Tax
November 3rd, 2009 by admin | Tags: Budget Deficit, Canada, Congress, Consumption Tax, Federal tax, G20, Intercompany, Ireland, IRS, tax, Tax legislation, Tax Reform, transfer pricing, Treasury Department, VAT | Posted in Congress, IRS, OECD |At a recent presentation in Texas, Stephen E. Shay, Deputy Assistant Secretary for International Tax Affairs in the U.S. Treasury Department, was asked about the likelihood of the U.S. adopting a Federal consumption tax.
In response, Mr. Shay avoided the question completely stating that the policy must be carefully evaluated in context. His point: The U.S. relies more heavily on corporate tax receipts as compared with the other G20 nations; thus, it is unlikely the U.S. would adopt a consumption-based system at the Federal level. In other words, since we are already so good at pillaging corporate taxpayers, why do we need to branch out and further pillage individuals?
If only it were so simple.
The Congressional Budget Office forecasts a continued decline in U.S. corporate tax receipts – due to, among other things, the U.S. having the second-highest corporate tax rate in the developed world, lack of available capital and general economic malaise.
So, if 1) corporate tax receipts are declining and 2) a Federal consumption tax is not on the menu, what’s left? Perhaps Mr. Shay’s position presages the Administration’s likely next move – despite statements to the contrary – to seek repeal of deferral of non-U.S. earnings, so that there would be current taxation and a likely residual U.S. tax, since many of those earnings are subject to rates of taxation below the U.S.’ current confiscatory 35% rate?
In the immortal words of Han Solo, “I’ve got a bad feeling about this.”
The U.S. government is inefficient and overrun with bureaucracy. The current direction of U.S. tax policy – a confiscatory corporate tax-rate – will continue to stifle job growth and constrain Foreign Direct Investment. The U.S. needs to follow the lead of Canada, Ireland, the UK, and other trading partners who have reduced corporate taxes as a means of stimulating employment and GDP growth. Every 1% point drop in the corporate tax rate translates into a 0.1% increase in GDP.
Given the wealth of empirical and anecdotal evidence, and despite Mr. Shay’s statement to the contrary, we believe the Federal consumption tax option must remain in play.
