Trade Modernization

WM Trade: American Trade Enforcement Priorities, February 25, 2025

This Subcommittee will have more impact than any other in the tax reform process, given that the President has essentially proposed dismantling the income tax system and replacing it with much higher tariffs.  The difference between high tariffs and reliance on a credit invoice value added tax is that a tariff is more onerous for the majority of families. A subsidy to such families to soften the blow would be necessary. Absent comprehensive tax reform, such a subsidy would put the government in the position of universal paymaster. This was tried during the pandemic recovery period and is the reason why enhanced child tax credits were allowed to die. The Fair Tax proposal has the same flaw.

Tariffs are also used as a form of industrial policy. This is hardly conservative unless one equates conservatism with crony capitalism. The current campaign finance system already reeks of pay to play arrangements. Reliance on tariffs would magnify this - as would a VAT which exempted certain industries. Again, this is industrial policy. 

The Center for Fiscal Equity proposal for tax reform includes both a broad based VAT (which would not invite retaliation - which is a concept that the President should be briefed on) and a subtraction VAT (also known as a net business receipts tax) that can be used to distribute social benefits, such as paid leave, childcare and an expanded child tax credit. 

When workers are paid on a longer-term basis as either employees or contractors, they cannot be considered individual entrepreneurs. What was a condition of service becomes a rule to be followed - and unless a worker is free to refuse work and sell the same services elsewhere - the worker’s family is dependent on the employer. Expanding wages and the child tax credit gives employees a freer hand in negotiating the terms of work and compensation. Anything less is a polite form of bondage.

Health care spending by employers could also be an offset to a subtraction VAT, but unless it is a universal right of employment and retirement that must be satisfied by employers, some portion of a public option under healthcare reform, a single payer system and/or Medicaid and Medicare would be funded by a credit invoice VAT (or the general tariff President Trump seems to favor).

To keep rates low, absent huge cuts in defense spending, some form of progressive income taxation is needed. This can be collected on an individual basis (with most employers writing the check - with the government overseeing the reconciliation process) or a tax collected by employers (a surtax on the subtraction VAT) for income, interest and dividends paid to workers and investors at various distribution levels - but without these individuals having to file tax forms. 

Such a surtax could take the form of a tax prepayment bond - which would create a tradable asset that the employer could use to shed debt to the United States in bankruptcy - or trade to raise cash without damaging the Treasury. Adjustments would be made by the employer at individual tax year payments, if necessary.

This surtax would exempt capital gains taxation. This could be individually filed (which defeats the purpose of reform), filed by employers (which raises privacy concerns) or collected at the transaction level at a single rate, but as an asset value added tax. The purchaser would pay the statutory rate as part of the sales price, with the seller (or their broker) remitting the tax absent tax paid when buying the property. To prevent international stock exchange shopping, the rate should be negotiated on a multi-national basis.

For purposes of budget deficit reduction, this tax is the portion of the balloon which gets bigger - as the current shortfalls in revenue were caused by rate cuts in this area going back to the second Bush Administration - although the health care tax currently paid by high income individuals should be eliminated and transferred to either the subtraction VAT, credit invoice VAT or tariff revenue. Doing so allows for a higher rate - as well as reducing the rate of short term capital gains to the long term rate.

Collection at the transaction level stops the rewarding of failure, which is how the current system works where losses are claimed or created to offset profit. A transaction based tax also cuts any attempt to enact a wealth tax off at its knees. 

Attachment: Trade Policy Video

Attachment: Tax Reform Videos included