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Producing and Selling Our Way Out of a Recession?

Posted on January 21, 2009 by Ernest S. Christian
Document originally published in Tax Notes
on January 19, 2009.

Now that we as a nation have borrowed and consumed our way into an economic crisis, perhaps it is time to produce and sell our way out of it. Exporting American-made products is a good place to start.

There is plenty of room for expansion in the U.S. export trade. The United States makes up 21 percent of the world economy, but our share of world exports is only 8 percent. Our imports typically exceed our exports by about a 30 percent to 40 percent margin. The United States last had a trade surplus in 1975.

Historically, exports provided large numbers of good-paying manufacturing jobs. That could be so again if regulations and taxes ceased to make manufacturing in the United States quite so difficult — and if the tax code were not so strongly biased against export of U.S.-made products and in favor of imports.

Governments in all other countries exempt exports and tax imports — but our government does just the opposite. It taxes U.S. exporters but imposes no tax on imported manufactured goods and services. Because the United States is the odd man out in an otherwise worldwide system, U.S. manufacturers pay U.S. tax on export sales that will also be taxed by other countries as imports when American-made goods reach their destination. Conversely, foreign manufacturers are able to compete in our markets free of any import tax here and free of any export tax in their home country.

The United States does not have to adopt a European-style VAT or any other additional tax in order to participate in the worldwide system of reciprocal taxes and exemptions for cross-border trade in manufactured goods and services. There are several American-style reforms to existing business taxes that are highly meritorious on their own and that also comply with WTO rules. The classic example is the corporate tax reform proposed during the Clinton administration by Sen. Sam Nunn. A recent adaptation was also the centerpiece of a tax reform proposal by Treasury Secretary Henry Paulson last year.

A U.S. tax on imported manufactured goods and services would not increase prices to U.S. consumers or business purchasers to any material extent. That is because competition from domestically produced goods and services would force foreign companies to ‘‘eat’’ the import tax in order to maintain market share in the huge U.S. economy.

An implicit tax was imposed on dollar-denominated imports when — between the second quarter of 2002 and the second quarter of 2008 — the international purchasing power of the dollar declined 36 percent. Nevertheless, the data show the prices of imported autos, consumer services, and capital goods, for example, all on average tracked almost exactly with the prices of comparable goods and services produced domestically. Instead of charging more ‘‘cheaper’’ dollars for their products, foreign manufacturers selling into the United States absorbed the implicit import tax resulting from the reduced value of the dollars they received from their U.S. customers — in exactly the same way they would absorb an explicit import tax.

On the export side, when the dollar was declining against other currencies, thereby making American-made goods cheaper for foreigners to buy, U.S. exports increased by 95 percent between second-quarter 2002 and 2008’s third quarter, exactly as they would had the price been reduced by exempting exports from tax. Conversely, after September 2008, when the dollar began to increase in value, the increase in U.S. exports began to disappear, exactly as if a tax on exports had been reinstated.

Joining the worldwide system of border tax adjustments would pay for an annual net tax cut of major proportions for the U.S. economy. For example, a 15 percent tax on the importation of foreign-origin durable goods would — after paying for the tax exemption for exported durables — yield about $140 billion per year in additional Treasury revenue, the economic burden of which would be almost entirely borne by foreigners who do business in U.S. markets. Their contribution would pay for a 3 percentage point reduction in marginal tax rates across all individual income brackets for U.S. taxpayers.

Taxing smarter, removing an impediment to free trade, and enhancing economic growth has a lot to recommend it.

Ernest S. Christian, a lawyer, was Treasury deputy assistant secretary in the Ford administration. This article was previously published in The WashingtonTimes.