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| Visions and Revisions |
Finding Fortune’s Favor
Jan Alexander
04/01/2004
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What globalization does demand is that education and other
social programs to narrow this gap be funded not with payroll taxes or corporate
income taxes but with a value added tax (VAT). Since VATs are applied to imports
as well as local production, they do not raise the costs of local production
relative to that of imports. They can be legally rebated on exports under the
rules of international trade, so they do not raise the costs of exports relative
to that of foreign-made products.
While VAT is regressive (in that as a
proportion of their income middle-income consumers pay more than high-income
consumers with higher savings rates), it is more progressive than a payroll
tax, which is not applied to capital income at all, and often not to all
earnings. By using VAT, the entire tax system becomes more progressive. Those
countries that are first to replace corporate income taxes and payroll taxes
with VATs are going to get an edge.
Cutting corporate taxes will create more employment and lead to a full
economic recovery in the United States.
The reason countries need to cut corporate taxes has nothing to do with
economic recovery; they need to do it to avoid seeing their companies domicile
themselves in tax havens such as Bermuda. Any government that tries to exert the
old controls simply finds corporations moving offshore and outside its
jurisdiction. Because countries need corporations more than vice versa, the
relative bargaining power is shifting in favor of the corporations.
There
are only seven components to Gross Domestic Product (GDP)—seven sources of
demand that can spur a vigorous American economic recovery—and only one of these
is currently viable. Personal consumption is out because of the record levels of
credit card debt relative to disposable income and low savings rates. Nor will
business investment help because there is still excess capacity. Residential
investment represents only 4 percent of GDP; in any case we cannot add a boom to
a boom. Changes in inventories adjust to sales expectations rather than driving
sales forward. A boost in net exports would require the rest of the world to be
booming. State and local government spending are not viable when tax revenues
are down. That leaves only one option: federal government spending.
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