Friday, December 03, 2004

Hold on to that Mexican condo

Via Small Dead Animals (which should be your choice here for best Canadian Blog), we find this world-rocking proposal for tax reform in the USA.
Proponents have spent millions on research and have concluded that a national sales tax can replace the income tax, payroll tax, estate tax and corporate tax. Advocates say the new tax would lower the cost of manufacturing and job creation and attract foreign investments, among other things.

"If we were to get rid of the sales or the income tax and the payroll tax and all compliance costs, we would be so ferociously competitive in a world economy that corporate America would not be competed with unless foreign corporations started building their plants in America," Linder said.

Proponents seek a 23-cent national sales tax on all retail goods, everything from groceries to clothes, cars to electronics. Everyone would pay the same rate, which critics argue is part of the problem.

I've been thinking this over for 15 minutes or so, and I think the lack of progressivity in such a tax is probably a minor hurdle compared to some of the other issues that would need to be addressed.

First of all, full credit to a politician who is actually spending his time thinking about how to make his economy more competitive, instead of dreaming up new ways to prevent citizens from hurting themselves. (Side note: I sent a one-line email to my MP on the topic of the trans-fat ban: "Stay out of my kitchen." I got a prompt response; it began with "We agree with you" and morphed into an explanation of how unhealthy some "school lunch-sized" snacks are. I'm so disappointed in the Conservative Party these days, I nearly can't talk about it.)

Anyway, such a tax reform would be absolutely the greatest experiment ever with the Law of Unintended Consequences. What happens when you turn your economy into a fantastic system for accumulating wealth, and a terrible system for actually having it?

  • I assume the tax will be applied to all imported goods, unless they intend on making reimportation the largest industry in America. Trade war, anyone?
  • Perhaps this is actually a cleverly disguised plan to make up the Social Security liability. You would certainly expect retirees with any significant savings to emigrate, thereby increasing their net worth by roughly 23%.
  • Many industries, certainly manufacturing would indeed become much more competitive. Business providing personal services, though, especially anywhere near a border, would be decimated. Would you like to have your plastic surgery here in Buffalo, or go up to Hamilton and avoid a 23% tax? There doesn't seem like much point in paying your accountant an extra 23% to do your books locally, does there? (Oh, right, there is no more accounting. The CPAs should be fine with that.) How about getting a freaking trim with some highlights? "Where should we go to dinner tonight, honey? Whether or not we pay 23% extra in tax certainly won't enter into my decision!"

Obviously it's not quite that straightforward: if US business aren't paying corporate tax or payroll tax, and their employees aren't paying income tax, you might expect pre-tax prices to be lower. But by how much? Does anyone - can anyone - have the foggiest clue?

Of course none of this really matters, because it will never, ever happen. The unpredictability alone is no doubt reason enough, not to mention the zero-ish likelihood of the U.S. government reducing their own relevance by an order or two of magnitude by eliminating their ability to influence anything at all via tax policy.

But the biggest reason is in the last paragraph of the story. There is presently a segment of the population to whom governments provide everything from monthly cheques to free medicine to discounts on $2 bus fares. They scream bloody murder if anyone so much as broaches the subject of even tinkering with any of these entitlements, and they all vote - every time.

Maybe there is a scenario in which the U.S. government announces to these people that the price of everything is going up 23%, in order to benefit everyone but them. This scenario, such as it is, begins with Satan performing a triple lutz.


At 12:51 p.m., Blogger Laurent said...

"I assume the tax will be applied to all imported goods, unless they intend on making reimportation the largest industry in America. Trade war, anyone?"

Um, no. What free trade agreements and international trade organizations like the WTO seek to eliminate are discriminatory treatments between domestic and foreign goods. As long as imported goods are not subject to higher taxes than domestic goods are, there is no ground to start a trade war nor to complain about a breach of international free trade.

Indeed, one of the reason the Mulroney government instated the GST was to adapt to the realities of a free trade environment. Before that, there was a manufacturer's tax that was applied on goods manufactured in Canada. Of course, except by import tariffs, this tax could not be applied to foreign goods. The only way to put domestic and foreign products back on an equal footing was to eliminate this manufacturer's tax and instate the GST.

At 3:23 p.m., Blogger Matt said...

I understand your argument, Laurent, but I think there would be major trade disputes. The sales tax on domestic and foreign goods is the same, but would traders view this as having their goods treated the same? I doubt it.

As Rep. Linder notes, this is an incredible way to promote manufacturing because the government takes nothing in the process. There are dozens of countries that would line up to argue that U.S. production is being "subsidized" by U.S. consumers, which, relative to the way every other country does it, they are.

I'm not an expert on the softwood lumber dispute, but isn't there an analogy here (with the U.S. being on the other side)? The U.S. argues that Canadian lumber is dumped/subsidized, because Canada doesn't charge what the U.S. considers market value for trees on Crown land. That is, the U.S. considers it a "subsidy" when Canada avoids input costs that cannot be avoided in the U.S. - and this argument would be turned around on them under this new tax regime.

Again, maybe the analogy is crappy, but there would be disputes galore. Even just look at it politically: if the U.S. institutes a tax regime which, as a stated purpose, encourages mass movement of manufacturing to the U.S. from other jurisdictions, do you think the other jurisdictions are going to take it lying down? The first reaction, I am confident, will not be to mimic the U.S. tax regime.

At 10:42 a.m., Blogger Laurent said...

Well, there was no foreign outcry when the Mulroney government instated the GST. Most (and perhaps all) European countries have national value-added taxes (similar to the proposed US sales taxes) and France's VAT is almost as high (around 20%) as the proposed US sales taxes would be. I don't see why a US sales taxes would be a breach of international free trade while all of the above-mentioned taxes have never been considered as such.

I see your point about how this plan could cause outcry from outside the United States, but it has nothing to do with the instatement of a sales tax; it has everything to do with the abolition of the income tax. The 'international community' would accuse the US of setting up a 'fiscal paradise', which is a codeword for saying it is breaking up the fiscal cartel of the national governments.


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