Time To Fix the Trade Deficit
Peter Morici writes in an article “Time To Fix The Trade Deficit“:
Trade deficits and shoddy banking practices pushed the economy into recession, and until both trade and the banks are fixed, sustained economic growth cannot be accomplished. The trade deficit will rise again as the effects of the stimulus package are felt, but if its underlying causes are not addressed, the trade deficit will drag the economy back down into a double dip recession.
Pushed up by the surge in oil prices and the ballooning trade gap with China, the trade deficit is reducing U.S. GDP by $400 billion, annually, and significantly adding to the pain imposed by the unfolding recession. The negative effects of the trade deficit on GDP and employment overwhelm the potential positive effects of President Obama’s proposed stimulus spending.
The United States is the only one of 30 OECD countries with no border adjustment element in its tax system. FairTax.org states that because the FairTax would automatically be border adjustable, the 17% competitive advantage, on average, of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home. Leo Linbeck, chairman of FairTax.org, has stated that U.S. manufacturers and sellers can not compete successfully with foreign producers because of U.S. tax policy.
The Ways and Means Committee is tasked with writing the taxation laws that raise revenues for the nation but the fact that foreign nations routinely tax U.S. products upon entry and that these nations forgo national taxes on exports to the United States is a Ways and Means blind spot that has all but killed the ‘Made in America’ label.
Under the FairTax, American companies doing business internationally would be able to sell their goods at lower prices but at similar margins, and this would bring jobs to America. In addition, U.S. companies with investments or plants abroad would bring home overseas profits without the penalty of paying income taxes, thus resulting in more U.S. capital investment. This would result in imports and domestic production competing on a level playing field.
Let me be the first to state that trade deficits themselves aren’t bad things. In fact, a big reason for these deficits is the fact that we are such a wealthy nation. (And, on a side note, the potential positive effects of President Obama’s proposed stimulus spending only exist in the political world).
But our current trade deficit is probably unnaturally high due to the embedded taxes in our products. I definitely agree that the fairtax would level the playing field in domestic markets (by making our import prices higher) and foreign markets (by making our export prices lower). That doesn’t mean that all of a sudden we’ll be able to produce shoes cheaper than China, but the removal of a 20% price disadvantage we currently face is going to definitely increase the current demand on our products.
Andrew,
Well, I see that you are still flogging your minority position regarding gross versus net pay. Most of the members of this blog seem to disagree, as well as the primary AFFT spokesman who laid out their position in a recent entry on the FairtaxNation blog.
I would sign up for a 10% reduction in producer costs which might make a difference on our exports. However, I don’t understand your discussion about import prices. What makes you believe that imports will cost more? Foreign exporters will still be able to leave their VAT at their border, and as I understand it, the 23% sales tax will simply be collected by customs at our port along with any other tariffs or duties. The retail price relationship between domestic and imported goods won’t change, it seems to me.
What am I missing?
We are “fixing” the trade deficit. We’re having a recession.
Hank,
So you still prefer the $200K job with a 50% tax over the $150K job with a 0% tax. You are within your rights. Are you claiming that’s what the majority of bloggers here think? You may be right, but I don’t remember the poll. So those those of you that would take the first job over the second, or vice versa, please stand and be heard. Feel free to pass my inquiry on to the primary AFFT spokesman as well and we’ll see what they say.
What I believe you are missing in regards to imports, is that they do not currently have any of our federal taxation (that will be removed by the fairtax) as part of their price (the foreign price, I’m talking about any retailing or transportation or any other component that is produced/served by a US entity). They will have a 23% inclusive tax levied on them under the fairtax. So if an imported hammer had a base cost of $77 pre-fairtax, the retailer selling that item will really have a base cost of $100. That is actually one way that it will be possible for all taxpayers, rich and poor, to benefit under the fairtax. Foreign producers will have a huge advantage removed. Not that I’m claiming everyone does benefit, but it is technically possible (for a reason other than economic growth).
Andrew,
I agree with you. The point we are trying to make is removing the hidden tax of domestic goods and services and apply the Fair Tax equally to home grown and imported products. Once the playing field is leveled, let the best producer win.
Say you want about “hidden taxes” and any other cause for price increase, but the fact of the matter is that too many foriegn countries can make superior products cheaper. Just ask Ford and GM. People but Toyotas because there more reliable, there just a better car!! We’ll never get out ot this recession until we’re able to keep our cash and jobs here in America
Morphh,
Help! This subject may not belong here, but I wonder if you could create a new issue called “Offshore Wealth” or something like that? Here is my input.
Even though this claim about $13 trillion parked offshore is one of Congressman Linder’s most frequent public claims, he has never identified his source. I have been after this issue for a couple of years and here is what I have found.
(1) The claim surfaced when Linder and Boortz went to press with their first Fairtax book. On page 97, the source is identified as the year 2000 World Wealth Report which showed there was about $35 trillion in wealth owned by High Net Worth Individuals (HNWI) worldwide. Although I can’t find the quote, the Report supposedly went on to claim that one third of that wealth was held offshore, amounting to around $11 trillion. On page 104, the book muddies the water by stating that there is $11 trillion in American wealth held offshore. How that world wealth suddenly became American wealth is beyond my comprehension. So much for the book claims.
(2) As for the Merrill Lynch World Wealth Report, it deals with HNWI wealth. The 2007 version shows that there were 3 million American millionaires with an average wealth of $4 million not counting primary residences. American wealth can therefore be seen to amount to $12 trillion (4million x 3 million = 12T) of which the report says that one third or $4 trillion is parked offshore. $4 trillion is a long way from $11 trillion. And, much of the wealth consists of assets that are not easily transferred such as real estate.
(3) There is an international organization that tries to track wealth held in offshore accounts specifically to avoid taxes. The 2005 Tax Justice Network report entitled “The Price of Offshore†shows that there is $11.5 trillion in such wealth, but only $1.6 trillion is owned by wealthy individuals from North America. And there are 23 sovereign nations in North America. Best estimate for American wealth parked offshore for tax avoidance is less than $1 trillion. Even if all the North American wealth returned to America, the net benefit to the Treasury would be only $36 billion assuming a 7.5% profit on investment and a 30% business income tax.
(4) Recently, Senator Carl Levin cited a GAO report that claimed that the US is losing $100 billion in tax revenue due to secret offshore banking. Working backwards using the same assumptions as in (3) above, then the total offshore wealth would be $4.4 trillion.
(5) Finally, in June 2008, Dr. Martin Regalia wrote in the US Chamber Magazine that there were $13.8 trillion in US assets abroad, compared to $16.3 trillion in foreign owned assets located in the US. According to Regalia, this data is a measure of the investment position of a country and gives an indication of indebtedness. It doesn’t appear that any of this has to to with tax avoidance.
As can be seen, there isn’t any support for claiming that there is $11 trillion in American wealth parked offshore to avoid taxes. And, according to Fred, in 2004, an amnesty program was floated to try and get US assets back in the US. I think anyone who wanted to return their wealth probably did so at that time. However, I can’t find any such amnesty proposal in the Fairtax legislation and do not believe there would be a huge influx of offshore capital should the Fairtax ever be implemented.
Any additional thoughts or references would be appreciated!
A push for trade surplus would insinuate a trade war with Mexico, Canada, China and our major economic partners. That’s just what we need in the path to recovery.