Trade and Commerce at U.S. Ports of Entry

Committee on Finance, Subcommittee on International Trade, Customs, and Global Competitiveness, Trade and Commerce at U.S. Ports of Entry, July 18, 2018       

Chairman Cornyn and Ranking Member Casey, thank you for the opportunity to submit these comments for the record to the Committee on Finance, Subcommittee on International Trade, Customs, and Global Competitiveness. This combines elements from our comments from March to the full Committee and to the House Committee on Ways and Means from last year, with substantial new material regarding current Administration trade policy.

We suspect that port city witnesses will testify that most commerce passes through with minimal processing. Manufacturing for the American market may occur on the other side of the border or near the Chinese point of departure, but when goods arrive here they either keep driving to the point of sale or are loaded onto intermural transportation to it. As long as fuel prices remain relatively low, this will continue. The only danger is President Trump’s proposed deregulation of the Dodd-Frank reforms of the New York Mercantile Exchange Oil Futures market, which will cause oil prices to soar. Higher fuel prices and a trade war would bring manufacturing closer to consumers, but will do nothing for border cities. Creating more manufacturing opportunities at border cities going out requires tax reform.

Speaker Ryan’s proposed Destination-Based Cash Flow Tax is a compromise between those who hate the idea of a value-added tax and those who seek a better deal for workers in trade. It is not a very good idea because it does not meet World Trade Organization standards, though a VAT would. It ultimately failed, although much of its failure likely is due to opposition by Chairman Hatch. In the end, Congress simply lowered rates, which did little for exports or workers.

It would be simpler to adopt a VAT on the international level and it would allow an expansion of family support through an expanded child tax credit. Many in the majority party oppose a VAT for just that reason, yet call themselves pro-life, which is true hypocrisy. Indeed, a VAT with enhanced family support is the best solution anyone has found to grow the economy and increase jobs. Even then, a DBCFT is preferable to the current corporate income tax system, so what is said below about VAT is at least partially applicable to the DCBFT (with any increased subsidies for Children added to the personal income tax).

The main trade impact in our plan is the value added tax (VAT).  This is because (exported) products would shed the tax, i.e. the tax would be zero rated, at export.  Whatever VAT Congress sets is an export subsidy.  Seen another way, to not put as much taxation into VAT as possible is to enact an unconstitutional export tax.

Value added taxes act as instant economic growth, as they are spur to domestic industry and its workers, who will have more money to spend.  The Net Business Receipts Tax as we propose it includes a child tax credit to be paid with income of between $500 and $1000 per month.  Such money will undoubtedly be spent by the families who receive it on everything from food to housing to consumer electronics. 

Some oppose VATs because they see it as a money machine, however this depends on whether they are visible or not.  A receipt visible VAT is as susceptible to public pressure to reduce spending as the FairTax is designed to be, however unlike the FairTax, it is harder to game.  Avoiding lawful taxes by gaming the system should not be considered a conservative principle, unless conservatism is in defense of entrenched corporate interests who have the money to game the tax code.

Our 10%-13% VAT rate estimates are designed to fully fund non-entitlement domestic spending not otherwise offset with dedicated revenues.  This makes the burden of funding government very explicit to all taxpayers.  Nothing else will reduce the demand for such spending, save perceived demands from bondholders to do so – a demand that does not seem evident given their continued purchase of U.S. Treasury Notes.

Value Added Taxes can be seen as regressive because wealthier people consume less, however when used in concert with a high-income personal income tax and with some form of tax benefit to families, as we suggest as part of the NBRT, this is not the case.

The shift from an income tax based system to a primarily consumption based system will dramatically decrease participation in the personal income tax system to only the top 20% of households in terms of income.  Currently, only roughly half of households pay income taxes, which is by design, as the decision has been made to favor tax policy to redistribute income over the use of direct subsidies, which have the stink of welfare.  This is entirely appropriate as a way to make work pay for families, as living wage requirements without such a tax subsidy could not be sustained by small employers.

Shifting the balance to more exports will require more labor, considering the fact that economists call this a full employment economy. Any boost in either manufacturing or technology will require more immigration. Some business owners want employees to stay in the shadows and be abused, others want legal employees (though non-union – repealing right to work laws would end illegal immigration because no one would hire an undocumented worker with union representation) and still others in the conservative camp simply hate the illegality or the ethnicity of the immigrants (speaking of the White House).

How would these development impact border cities? The trend will be to shift international manufacturing to the border, especially if imported components are used.

Increased manufacturing should mean stronger unions and real enforcement of union rights to organize. Attacking unions for the past 30 years has taken its toll on the American worker in both immigration and trade.  That has been facilitated by decreasing the top marginal income tax rates so that when savings are made to labor costs, the CEOs and stockholders actually benefit.  When tax rates are high, the government gets the cash so wages are not kept low nor unions busted.  It is a bit late in the day for the Majority to show real concern for the American worker rather than the American capitalist or consumer.

Reversing the plight of the American worker will involve more than trade, but I doubt that the Majority has the will to break from the last 30 years of tax policy to make worker wages safe again from their bosses. Sorry for being such a scold, but the times require it.

The best protection for American workers and American consumer are higher marginal tax rates for the wealthy.  This will also end the possibility of a future crisis where the U.S. Treasury cannot continue to roll over its debt into new borrowing.  Japan sells its debt to its rich and under-taxes them.  They have a huge Debt to GDP ratio; however they are a smaller nation. 

We cannot expect the same treatment from our world-wide network of creditors, an issue which is also very important for trade.  Currently, we trade the security of our debt for consumer products.  Theoretically, some of these funds should make workers who lose their jobs whole – so far it has not.  This is another way that higher tax rates and collection (and we are nowhere near the top of the semi-fictitious Laffer Curve) hurt the American workforce.  Raising taxes solves both problems, even though it is the last thing I would expect of the Majority.

We make these comments because majorities change – either by deciding to do the right thing or losing to those who will, so we will keep providing comments, at least until invited to testify.

Our proposed NBRT/Subtraction VAT could be made either border adjustable, like the VAT, or be included in the price.  This tax is designed to benefit the families of workers, either through government services or services provided by employers in lieu of tax.  As such, it is really part of compensation.  While we could run all compensation through the public sector and make it all border adjustable, that would be a mockery of the concept.  The tax is designed to pay for needed services.  Not including the tax at the border means that services provided to employees, such as a much-needed expanded child tax credit – would be forgone.  To this we respond, absolutely not – Heaven forbid – over our dead bodies.  Just no.

The NBRT could have a huge impact on trade policy, probably much more than trade treaties, if one of the deductions from the tax is purchase of employer voting stock (in equal dollar amounts for each worker).  Over a fairly short period of time, much of American industry, if not employee-owned outright  (and there are other policies to accelerate this, like ESOP conversion) will give workers enough of a share to greatly impact wages, management hiring and compensation and dealing with overseas subsidiaries and the supply chain – as well as impacting certain legal provisions that limit the fiduciary impact of management decision to improving short-term profitability (at least that is the excuse managers give for not privileging job retention). 

Employee-owners will find it in their own interest to give their overseas subsidiaries and their supply chain’s employees the same deal that they get as far as employee-ownership plus an equivalent standard of living.  The same pay is not necessary, currency markets will adjust once worker standards of living rise. 

Over time, this will change the economies of the nations we trade with, as working in employee-owned companies will become the market preference and force other firms to adopt similar policies (in much the same way that, even without a tax benefit for purchasing stock, employee-owned companies that become more democratic or even more socialistic, will force all other employers to adopt similar measures to compete for the best workers and professionals).

In the long run, trade will no longer be an issue.  Internal company dynamics will replace the need for trade agreements as capitalists lose the ability to pit the interest of one nation’s workers against the other’s.  This approach is also the most effective way to deal with the advance of robotics.  If the workers own the robots, wages are swapped for profits with the profits going where they will enhance consumption without such devices as a guaranteed income.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.