The Constitution provides, in Article I, Section 8, Clause 1: “The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”
Note that is says taxes “shall be uniform throughout the United States,” it does not say they “shall be uniform throughout the world.”
I am in favor of changing the way American exports are taxed – what Way and Means Committee Chairman Kevin Brady (R-TX) calls ending the “Made in America tax” – to bring America’s tax laws in line with most of the rest of the world. Recently Bloomberg columnists Stuart Leblang and Amy S. Elliott pointed out “Border adjustments are a feature of virtually all of the tax systems employed by our trading partners.”
According to the Tax Foundation, “under current law, corporations are taxed on their profits, which are roughly defined as revenues minus costs, at a marginal rate of 35 percent.” The Tax Foundation explains: if a business purchases $100 in goods from a supplier overseas, the cost of those goods would not be deductible against the corporate income tax. Likewise, if a business exports $100 in goods, the revenues attributed to that sale would not be added to taxable income.
Another way to look at it is this: goods manufactured overseas – the EU, China, South Korea, and Mexico for example – and are shipped to America, they arrive without paying any import tax. But, when U.S. manufacturers export goods overseas, not only are they taxed on the profits they make here, but they are also taxed again by the receiving country.
In addition to changing the accounting for imports and exports, it is expected there would be changes in the tax law that would lower the U.S. marginal tax rate for businesses from its current 35 percent to a more developed world near equivalent of 20 percent. It would also allow for full expensing of capital purchases, rather than depreciating them over years or even decades.
Changing the way exports are taxed, as part of more broadly based tax reforms, is expected to have a significant, positive impact on American manufacturing. If goods being exported to the rest of the world are cheaper for overseas consumers – because they were not subject to U.S. corporate income taxes – the expectation is the value of the U.S. dollar would increase as more dollars would be required to pay for those cheaper goods. That will help neutralize any costs due to tax changes.
Another benefit to Chairman Brady’s plan is that it “eliminates all tax incentives for U.S. companies to move their manufacturing, technology and headquarters jobs overseas.” If what you are selling overseas can be manufactured more cheaply overseas, it makes good business sense to move the whole operation out of the United States. If that advantage is removed then not only will it slow manufacturers’ inclination to move operations off-shore, but it will provide a magnet to move jobs back to U.S. soil.
Putting in place this destination-based cash flow tax system would also have the effect of diminishing, if not eliminating what is known as profit-shifting. This process occurs when a manufacturer manipulates the price it is charged by an off-shore subsidiary or does the same thing it charges that subsidiary depending upon the dictates of different tax levels.
As someone once said, “Every line in the tax code has a father.” A change in the tax law that so fundamentally changes the way U.S. manufacturers have structured their operations will not come quickly and is not without its detractors.
But, if we are serious about maintaining or even repatriating American jobs, ending the “Made In America tax” and treating exports and imports equally is an excellent place to start. Conservatives in Congress who care about generating robust economic growth and creating jobs – and by the Tax Foundation’s estimates, the House blueprint overall would boost GDP growth by over 9 percent and lead to 1.7 million new jobs – should all rally behind this innovative concept of border adjustability. Our rare opportunity to pass critical tax reform could otherwise be lost.
Rich Galen is a former spokesman for Dan Quayle and Newt Gingrich. He is a Republican commentator who writes at www.Mullings.com.