David A. Hartman’s “Why the U.S. Needs Border Adjusted Consumption Taxation.”
Mr. Hartman of the Lone Star Foundation proposes a radical solution to the US trade imbalance: the Business Transactions Tax (BTT), a 21% border adjusted VAT that would replace the US income tax. The BTT is levied upon imports and rebated on
exports, effectively border adjusted to offset foreign VATs. Hartman explains:
It will be seen that the Business Transactions Tax (BTT) has the broadest tax base which results in the lowest marginal tax rate, 21 percent, required for “tax neutral” replacement of the current IRS tax code, retaining only the personal FICA income taxes, while the employer’s share of FICA is debited against the BT1. The BTT is a consumption tax that is rebated to all taxpayers based upon poverty level incomes; it ends double taxation of saving for investment; it can be visible; it equitably includes all sectors, embracing goods, services, government and NFP’s. Most important, it is border adjusted, as was called for by the President’s Panel on Federal Tax Reform’s Growth and Investment alternative.
Q and A
From whom would the tax be collected? Businesses and employers.
What would be taxed? Return on capital, wages and salaries, and imports.
What would be exempt from taxation? Investment, exports, and untaxable imputations.
This is an exemplary alternative to the current system, but there are three caveats which ought to be addressed:
- Consumption taxes do not discourage consumption (nor do they encourage investment.)
- VAT tend to lead to bureaucracy, and it can be difficult to measure how much value has been added to a good.
- This is a regressive tax, which ultimately hits the working poor hardest. Like the FairTax, the BTT rebates its tax to every taxpayer, which could become problematic if the poor continually vote for higher rebates.
However, the VAT does allow the US to restore its competitiveness by offsetting foreign VATs which make US goods artificially more expensive and foreign goods artificially cheaper (see Hartman’s presentation linked at the top.) Presently the US is the only member of the OECD without a border adjusted VAT, and the OECD average is 17.7%.
The ideal solution might be to reduce spending, especially foreign; exit the WTO; and add a tariff or border adjusted VAT exclusively to imports while maintaining the progressive income tax unless and until federal spending is reduced to historic levels.