The United States of America, one of the largest economies in the world, has had enough of being ripped off by our “trading partners.” President Trump took the first action against the horrific deals, starting with the Trans-Pacific Partnership.
While finally removing the chains that have bound and relocated the US economy, there is a stark concern that what is good for America, could lead to a trade war and that would be bad for everyone.
A recent report was published by the Think Tank, The Peterson Institute For International Economics, stating the concern over the potential for a trade war, should Trump not tread carefully. After congress’s failure to approve a healthcare reform, it is evident that an opposition party, of sorts, has taken root on both sides of the isle.
Currently, within the US, Congress must pass a bill that would allow the US government to raise the debt ceiling or bite the bullet of the implications that follow, however, this is Trump’s first 100 days in office, and a lot of shifting is still taking place, not to mention resistance.
Part of that resistance are the special interest groups, who are benefiting from the current tax system within the US, one organization being literally the Satanic Temple.
Part of the concern over the possibility of a trade war comes from Paul Ryan’s agenda for tax reform, located in the ‘A Better Way to Tax’ policy, explicitly listed under Problem Four;
Our corporate income tax system imposes the highest rate in the developed world – 39 percent when the 35-percent Federal rate is combined with the average State corporate tax rate.11 Globally, only two of 173 countries have a higher corporate tax rate than the United States – Chad and the United Arab Emirates.12 The corporate tax rate represents the most important tax-related factor in a company’s decision to invest and locate jobs in the United States or overseas. In 1960, this country more than $46 billion annually, nearly $12,000 per company.7 Moreover, another significant compliance cost for family-owned businesses is the death tax. While the government collects only about $20 billion in revenues from estate and gift taxes, they represent a cost of $19.6 billion per year to individuals who must comply with these rules.8
Tax complexity feeds other problems as well, such as waste, fraud, and abuse. For example, according to the Treasury Inspector General for Tax Administration (TIGTA), over an 11-year period the IRS has sent out almost $150 billion in erroneous Earned Income Tax Credit (EITC) claims.9 In 2013 alone, the IRS estimated that 24 percent of EITC payments were made in error – nearly one quarter of all payments were erroneous.10
House Republicans made a down payment on reducing waste, fraud, and abuse when we included one dozen program integrity provisions in the Protecting Americans from Tax Hikes (PATH) Act of 2015. But we have more work to do. The best way to reduce tax fraud is to simplify the tax code by enacting major tax reform.
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Why does the US have to take into account the whole world when creating a tax reform for the USA? Because of the World Trade Organization. Hundreds of countries across the globe are a part of this monstrous system which maintains obligations put in place by countries across the world. If the US forsakes, it’s commitment to upholding its requirements historically established there could be a set of retaliations placed upon the US by other countries according to a recent publication by the PIIE, The Peterson Institute For International Economics.
According to the PIIE report;
Current US political rhetoric makes one set of issues worth clarifying. A border tax adjustment is not a trade policy, an import tariff, or an export subsidy. It does not reduce imports, promote exports, or affect national competitiveness. In a typical VAT regime, a border tax adjustment does not violate Article III provisions on national treatment. As Freund (2017) illustrates, a VAT has neutral economic effects; it cascades through the production chain, leaving imported products facing the same tax rate as domestically produced like goods. This equivalence for destination-based taxes holds regardless of how important imported intermediate inputs are in domestically produced goods (i.e., regard- less of how integrated a US producer is in global supply chains).
In principle, a border tax adjustment in a DBCFT scheme could be designed not to have discriminatory trade effects. But the Ryan-Brady plan contains a provision that allows companies that produce goods in the United States, but not abroad, to deduct wage costs from the DBCFT.5 This feature would have a discriminatory effect on trade flows, at least in the short run, before exchange rates and prices fully adjusted to the new tax. Freund (2017) identifies how the wage deduction component of the DBCFT creates differential tax rates across firms.6
The main economic issues are thus (1) what (discrimination) arises during this short-run period, in which there is a substantial disruption to real economic activity and trade flows, as tax reform–induced price adjustments work their way through the economy, and (2) how long the short-run period lasts.7 At one extreme is the rosy scenario arising in theoretical models: Exchange rates and prices adjust immediately, and real economic activity is not affected even in the short run.8 The analysis in this Policy Brief examines the alternative: the case in which adjustment is not immediate.
The anti-discrimination provisions of GATT Article III are the most important international legal-economic concern. However, legal scholars have noted other potential problems with a cash flow tax when viewed through the lens of GATT/ WTO law and jurisprudence.9 Although the GATT/WTO has permitted border adjustments for product-specific taxes, such as a VAT, it has taken issue with border adjustments for income taxes. It is therefore possible for the WTO to reject a DBCFT by finding that it is an income tax. That discussion is put to the side here. The emphasis is on whether other economic concerns would arise even if proponents could convince the WTO that the DBCFT is consistent with earlier jurisprudence—by, say, convincing it that the DBCFT is similar to a subtraction-method VAT.
There are three broad motivations for using economic considerations to focus on WTO implications of the Ryan- Brady plan. First, independent of whether the DBCFT is an income or product tax under prior GATT/WTO law, the deduction for domestic (but not foreign) wage costs could end up having discriminatory trade effects and interpreted as a violation of GATT Article III on national treatment.
Second, even if a general DBCFT is permissible, trading partners may still subject the Ryan-Brady plan to a viable WTO legal challenge under the option WTO members retain of filing a nonviolation nullification or impairment (NVNI) claim under GATT Article XXIII: 1(b).10 This provision allows countries to bring disputes forward even if no specific GATT Articles have been violated.11 While NVNI disputes are relatively rare and are certainly more difficult to win, trading partners may resort to such a complementary approach if all else fails, especially if they suffer large economic losses arising through trade channels.
Third, US policymakers need to understand the potential costs of the policy if a pure GATT/WTO legal construct were to strike down the DBCFT. The WTO typically utilizes estimates of trade distortions arising from a policy to establish the level of compensatory retaliation.
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Trump has aligned his agenda for tax reform with the Ryan-Brady plan of pro-growth.
The plan starts with pro-growth tax reform to help American workers and businesses keep more of their hard-earned dollars. The President’s plan will lower rates for Americans in every tax bracket, simplify the tax code, and reduce the U.S. corporate tax rate, which is one of the highest in the world. Fixing a tax code that is outdated, overly complex, and too onerous will unleash America’s economy, creating millions of new jobs and boosting economic growth. – Read More
Will the new agenda for tax reform lead to a trade war? What say you reader?