The Solution

The administration now says it underestimated the severity of the economic downturn. But the truth is it overestimated the effect of stimulation. In the Bush eight-year term, we increased the debt or stimulated the economy $5 trillion. In the same period, household debt increased or stimulated the economy an additional $7 trillion, for a total of $12 trillion stimulation in eight years. This year's deficit has already added another $1.5 trillion additional stimulus and we are still losing jobs like gangbusters. Stimulation has spent its effect.

Now we must turn to globalization and the loss of jobs from offshoring. Globalization is nothing more than a trade war for market share with production looking for a country cheaper to produce. Japan started this trade war for market share after World War II by closing its market, subsidizing its production, and selling its export near cost, making up the profit in the closed market. It worked. Toyota is No. 1 while GM declares bankruptcy. Now China has the supermodel of a closed market, controlled labor, and protectionism for its production and trade as the United States blindly cries "protectionism" and remains AWOL in this trade war. Two years ago, the Princeton economist, Alan Blinder, estimated that the country is losing three to four million jobs a year to offshoring. The principal problem with the economy is that it is being offshored. The United States must come in from the cold and engage in the trade war. Fortunately, we can do this by solving the problems now facing Washington.

The Democrats' problem is to pay for health care. The Republicans' problem is to cut taxes and stop deficit spending. Replacing the corporate tax with a 5% VAT will cut taxes, pay for health care, and stop deficit spending.

Replacing the nation's corporate tax with just a 3% VAT is tax-neutral. In 2008, the corporate income tax was $304 billion. In 2008, U. S. GDP equaled $14.3 trillion. But a VAT is not applicable to the public sector GDP. State, local and federal governments accounted for $1.8 trillion of GDP, leaving a private sector GDP of $12.4 trillion. Three percent of $12.4 trillion is $372 billion. We had goods and services exports of $1.8 trillion in 2008, with a 3% rebate of $54 billion. In 2008, we had $2.5 trillion of imports, with a 3% VAT equaling $75 billion, for an actual net of $21 billion. The $21 billion added to the $372 billion approximates the $393 billion in corporate income tax revenues for last year for a better than revenue-neutral replacement.

At the current level of a private sector output, each 1% of that would raise approximately $131 billion. One percent more over ten years would raise the $1 trillion, 310 billion, needed for health care and, for good measure, another 1% would pay for the final cost of health care and stop deficit spending.

The average VAT of industrialized nations in globalization is 17%. Replacing the corporate tax in the U. S. with a 5% VAT will:

(1) cut taxes;
(2) pay for health care;
(3) remove Corporate America's incentive to offshore production, jobs, and the nation's economy;
(4) give every reason for the U. S. multi-nationals to bring home their foreign parked capital, investing in the United States and producing jobs;
(5) make the U. S. a magnet for foreign investment;
(6) promote exports and make U. S. production cheaper abroad, narrowing the deficit in the balance of trade;
(7) make imports more expensive -- with imports carrying their share of health costs and the replaced corporate income tax;
(8) the VAT would collect something from the 20 million underground illegals who now receive health care free in our emergency rooms;
(9) the VAT would collect from the underground economy (drug traffickers when they spend their illegal profits);
(10) with the highest corporate tax rate of 39% and an average of 27%, a 5% VAT would reduce the cost of domestic production 22% and reduce the cost of American made products to consumers.

It will take some time for business and the IRS to gear up for a VAT. That time is best used now by canceling the corporate tax and making the 5% VAT effective in 2011 - after the election in 2010. At present, trying to pay for health costs, we are turning off different groups with payroll taxes, health benefit taxes, soft drink taxes, Medicaid costs, small business taxes, sur-taxes, deficit spending, unfunded mandates, etc., organizing the defeat of health care. Instead, we should turn on these groups to support health care by replacing the corporate tax with a 5% VAT.

I understand that Larry Summers wants to withhold a VAT for tax reform. But the most difficult part of tax reform is instituting the VAT for mere reform. With a VAT in place, Summers will have solved half of his headache of reform. A 5% VAT now will solve the problems of tax cuts, deficit spending, the cost of health care and make Corporate America more competitive in international trade. Instead of offshoring the economy, we can repower our economy.

Comments

[Jim Welke]

Bravo, Sen. Hollings -- thanks for the gimlet-eyed assessment of our shriveling industrial sector and our crumbling economic prospects. Free trade is worse than a farce, it's a grift played on our formerly prosperous middle-class. Yeah, a bunch of bankers and corporate buyout vultures got rich off free-trade, but the other 99.999% of us doe-eyed victims got robbed. Free trade has never lived up to its promises. Not for the U.S. anyway. Let's give that VAT a try, folks. Call your representatives and demand it.

Cheers!

(more: http://cyclopsvue.blogspot.com/2009/05/im-astonished-that-otherwise-reputable.html)

[microsrfr]

The real facts are that the VAT would only add another way to draw financial blood from the working classes whose falling real income is at the heart of our great recession. Goods produced domestically would see the same tax increase as imports and thus not gain competitive advantage. Does Senator Hollings also recommend that corporations increase the pay of workers so that they can afford to pay this tax? If so, the corporations and the government coffers would be right back where they were before the VAT was imposed and corporate income taxes eliminated.

If we want to regain our competitive position, we need the government to take over legacy costs of our strategic industries and to maximize the after-healthcare incomes of our workers. This is why gaining control of our healthcare expenses is critical to our ability to compete with Europe and Japan. Korea and China will require us to get much tougher to open up their markets to our goods.

[dadw5boys]

OBAMA WAS FORCED TO LIVE UP TO COMMITMENTS MADE BY BUSH TO BANKS !!!!!!!

IT TOOK 5 MONTHS JUST TO GET HONEST NUMBERS FROM GOVERNMENT AGENCYS WHERE BUSH PEOPLE LIED CONSTANTLY !!!!!!

Try and work with false numbers and see what you can do.

Lay the blame where it belongs Bush, Cox and Paulson !!!!!!

[Geoark]

A Value Added Tax is a very bad idea. Why? It taxes production. If you want less production, then tax production. What is better? First, stop taxing production - both labor and capital. Gradually remove all taxes on income, sales, and human created property.
So what should we tax? Nothing! Instead charge a user fee for the use of our commons. This would be for things like our Sky (who owns the sky - corporations or you?), broadcast spectrum (auction it off and give everyone their share), and unimproved nature.
We should create Commons Trusts - like the Alaska Permanent Fund -- that would charge user fees (not a tax) on extracted minerals (California doesn't charge a thing for it's oil unlike Alaska and is bankrupt!), for the dumping of waste on our commons (land, air, and water), and for the exclusive use of space (Land Value Use Fees).
I suggest the good Senator pick of a copy of Peter Barnes book Capitalism 3.0 and study it like he was in Economics 101. We need a new operating system for Capitalism because the one we have is broken.

[billw8017]

Taxes are taxes. All taxes come out of the economy while government spending then puts the money back in. Taxes are how we pay for government services: our military defense, our courts, our highways and prisons. We will pay for all the government services little though we care to do so. If the federal government uses its privilege to print money to take the place of taxation, the money will flood out into the economy and lose nominal value as it competes in its exchange for real goods. This is inflation as our tax.

The most money is bank made or adds up as it is recirculated, but the money still tends to react to government demand. Whatever the source of the money, increasing demand in one sector will decrease what is available to other sectors. The Clinton administration demonstrated how full employment even with rising wages was actually anti inflationary. There is a lot of push-pull in these things while cause and effect would not be clear where one is necessarily the accompaniment of the other.

[lightningbolt]

Debt and stimulation are not always the same thing. The stimulus that Obama passed needs time to take effect. Don't judge it yet.

[paixa3]

Senator Hollings; The truth is that the WRONG solution was tried.

After 30 years or so, you would think the people in office would be smart enough to NOT give trillions to the rich and expect ""trickle down"".

How dumb.

[Gaboune]

Finally, someone dared to pronounce the word VAT . It is the only fair tax that exist. Income tax and Corporate tax is a killer for the economy. Tax Payers feel they are working to support those who don't pay any taxes. The best tax existing is the Value added tax. If you made money and spend it you are taxed, if you save and buy back the US debt you get interest and don't pay taxes. Double Bonus.

The Senator never calculated the costs of collecting Corporate Tax and Income Tax. Add that to the equation and just think of all the loopholes and exemptions that would be instantly closed. The total amount of money recuperated is staggering.

I believe all Americans should start pushing their representatives to pursue that avenue and the quicker the better.

[texastrixie]

The VAT would be a killer alright - a killer of people. If I read this article right, Hollings wants to tax everything, including health care. Most people cannot afford to go see the doctor now. Unless there is blood, immense pain, etc., most people don't go to the doctor. Putting a nice big tax on this will only make it worse.

Are we ever going to ask rich people to pay their fair share in this country? There aren't any rich firemen, policemen, and few soldiers (rich by inheritance). Every dangerous and necessary job in this country is performed by someone who lives paycheck-t­o-paycheck­. The rich coast along, living peacefully on the deaths of those who must protect them, and complain about the cost to boot. Who needs police more - someone living on the poverty line with no possessions of any real value, or the millionaire with expensive cars, jewelry, and high-end electronics?

Corporations already don't pay their fair share. They pollute the environment, pay their workers as close to a minimum wage as they can, would do away with vacations, sickleave and health if they could.

The VAT tax hits the poor and middle class the hardest. If you only make $20k a year, you are going ot spend every penny of it. If they tell you a tax is "fair," that just means that the rich don't pay much.

[DamaskinosWasRight]

=

Perhaps we could eliminate the advantage that other countries get through lower wages and lower ecological standards by implementing Levelist policies - which use tariffs to eliminate the advantage. This is not protectionism because it does not apply to high wage high ecological standard countries.

http://corporate-statesmen.com/images/LEVELISM.pdf

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[StoicRep]

I have always admired the public service of Sen. Hollings. An American VAT is a good idea, but not necessarily THE solution. The VAT should apply only to some products, and not all. The reduction or elimination of corporate tax will not necessarily foster domestic employment. I totally agree, however, that we have not responded to foreign incursions into our markets, and this is an error in our judgement.

There is a reluctance to impose a VAT for various reasons, one being our reliance on foreign sources for our goods. A comprehensive understanding of trade is complicated by lots of propaganda, some of it foreign based; and also much ignorance and intentional lack of information about foreign trade policies.

[gevan]

An import value equilization tariff where the cost of products produced overseas would be adjusted to reflect what the cost of labor in America would be could produce both revenue and jobs for American workers.

[vagabondvet]

Or it would be an inefficient waste of resources and cause prices on everything from asparagus to trucks to be way more expensive for American citizens and businesses. The government would in effect be taking money away that could have been used to actually employ people to do productive work.

[billw8017]

This is the general argument against taxes. Never the less, we will pay our taxes either straightly or by inflation and higher prices. Straightly is better, it keeps an anchor to existing prices that supports planning and contracts.

What kind of person truly expects to get vital services all for free? Stuff costs, that's how it get rationed without further accounting or expensive enforcement.

[themodernleader]

VAT is a unfair regressive tax. It would be better than no tax. But we need to break up plutocracy and aristocracy through graduated taxation rather than fail and offer a demigogue, turned tyrant, to exterminate the upper echelons of society and redistribute their wealth. The latter method has been ruthlessly carried out a number of times in history to strengthen dictatorships and dynastic rule.

[Kaelieh]

All governments ever want to do is raise taxes. Here's a clue, let's CUT SPENDING! Do we really need to be spending over 700 billion taxpayer dollars EVERY year on military spending?

[tnduffin]

I agree. I'm curious as to how things would have gone if the stimulus money went to the people instead of the corporations. I know we would have bought houses, paid off debt, invested, and been able to afford health care. Instead we have major corporations getting money and not using it wisely. We need to cut military spending, end the two wasteful wars, pull our soldiers home, close our European bases and those in Saudi Arabia and take care of ourselves. Bring the businesses back into our country instead of out sourcing. I can go on and on but until "we the people" wake up and realize that nobody in power really cares about us, we will continue to suffer.

[Rule Of Law]

Considering that something like 2/3 of American Corporations have paid NO TAX for the last five years, I wonder what how that would affect Fritz's 304 Billion number, and what would happen if we just enforced them paying what they should.

[budanatr]

As a European I am used to a VAT. The concept is good. Replace an income tax with a VAT. Unfortunately, goverments will still find ways to spend this windfall and will still require income taxes and all the other taxes. Then we will be paying all the previous taxes along with the VAT like in Europe. Even if the government passes laws to prevent these taxes being reinstated, those laws will be repealed by the time your kids are adults.
On the other hand, the quality of life and health care in most countries with VAT in Europe is far superior that in the US. So these taxes do not seem to make life more difficult.

[vippy]

I agree and we in the USA finally need a higher wages. This penny anny stuff just don't cut it and the benefits that you receive as well. Why Americans are against things that is good for them and yet never say PEEP when the government spends on useless things like the Defense Budget, which could easily be cut in half and we still would be the most aggressive country on this globe.

[vagabondvet]

"I agree and we in the USA finally need a higher wages."

Wages are a function of productivity. Paying people based on their marginal productivity is the only logical way to hire. If higher wages would really help Americans, why not just make the minimum wage $100/hour?

[billw8017]

Raising wages during a recession can be difficult. Some people take unreported jobs, perhaps, from the charity of the employer and there is little legal formality. Still, we know Americans (excepting the top 1%) are underpaid because even with heroic efforts we have been unable to perform our function as consumers. Neither has the associated plunge into debt been all for vanity: the most bankruptcies are due to medical costs, much of it among people who started in with insurance.