[Pages S11634-S11638]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

USA TAX PLAN AND ITS PROVISIONS PROMOTING INTERNATIONAL COMPETITIVENESS

Mr. NUNN. Mr. President, today I would like to again discuss tax
reform and in particular an aspect of the unlimited savings allowance
[USA] tax plan which I believe is very important to our Nation's
future--the USA tax plan's tax treatment of exports.
Before discussing this specific issue, I would like to refresh the
memories of my colleagues about why the replacement of the current Tax
Code with a superior alternative is so necessary for the health of the
country and our economy. In my judgment, until we make this case to our
fellow citizens on the economic merits of fundamental change,
structural tax reform will not happen.
Central to this case is the urgent need to raise the level of
national savings. It is critical that we recognize the current bias in
our Tax Code against the saving and investment that are the key to
higher living standards, and take steps to correct that bias.
Higher savings lead to more investment. More investment will, in
turn, lead to increased productivity from American workers. The more
productivity we have from our workers, the more competitive we are in
the international arena. The more competitive we are in the
international arena, the better jobs we have. The better jobs we have,
the higher income we have as Americans.
Our current saving rate is low by our historical standards and it is
the lowest of all major industrialized nations.
In the 1980's, our savings rate dropped to an average of 3.6 percent,
half the level of the 1950's, 1960's, and into the early 1970's. In the
first 5 years of this decade, 1990 to 1994, the U.S. savings rate has
fallen almost 50 percent from the already low levels of the 1980,s, to
just 2.1 percent, and reports show that our savings rate is continuing
to erode. This is far below the comparable figures of 10 percent in
Germany, 18 percent in Japan, and the even higher savers along much of
the Pacific rim.
Without adequate savings, our level of investment will continue to be
correspondingly low. Low saving, in short, directly imperils our future
standard of living.
Behind the saving shortfall lurks a very serious abdication of our
economic responsibility to the next generation of Americans. We seem to
have forgotten the principle tenet of the American dream--that, like
our forefathers did for our generation, we must improve and better
prepare our country for the generations that follow.
Every day we are bombarded with messages equating spending with the
good life and a strong economy--in short, consumption as personal
privilege and patriotic duty. Proponents of thrift have been made to
appear self-punishing, antisocial, and scrooge like.
Nothing could be further from the truth. Saving is simply the
deferral of some consumption today so that we and our children can
consume more in the future. Because our current level of national
saving is so low, we cannot be assured of vigorous economic growth in
the future. Politically, the failure of Americans to save for their
future--one study estimates that the average American has about $7,000
in assets in retirement--means that entitlement programs such as Social
Security have become economic life rafts that can not indefinitely
support the load they are being asked to carry.
Polls have shown that a majority of today's younger generation
believe it is more likely that UFO's exist than believe the Social
Security program will exist--in its present form--when they reach
retirement age. As our former colleague Russell Long used to point out,
leadership if often determining which direction the people are going
and running like heck to get in front of them to lead them where they
already are going. The American people have a better understanding of
the problems we face as a Nation than our political leaders seem to
acknowledge and it is incumbent on our Nation's leaders--the President
and the Congress--to begin to exercise responsible leadership in
developing long-term policies to address these shortcomings.
As most of my colleagues acknowledge, the best thing we can do to
improve national saving is to balance the Federal budget. Chronic
budget deficits have in recent years siphoned away what meager private
and business saving we have managed to amass. It has driven up the
costs of acquiring this capital and it requires that we run massive
trade deficits to finance our country's need for capital.
But progress against the deficit isn't enough. We have an even more
difficult task before us: Helping our fellow citizens to understand
that thrift isn't counterproductive to the long-term health of the
economy.
This is a matter of leadership. But it is also a matter of policy.
And that is where fundamental tax reform comes in.
For it is inescapable that the current Tax Code, because of its bias
against saving relative to consumption, subsidizes the present at the
expense of the future.
That is the core, intrinsic, systemic problem that requires
fundamental correction. It is around this fact--that the government
extracts revenues from the economy in a way that hinders the ability of
people to provide for their futures and of companies to grow--that a
lasting movement for change can be built.

Certainly it was America's saving and investment crisis that
motivated Senator Domenici and me to develop the USA tax system. Our
proposal rests on a few central features designed to end the current
code's bias against saving and investment.
First, the USA individual tax treats all income alike regardless of
source and it taxes that income once and only once.
Second, the USA individual tax permits every taxpayer an up-front,
overt, and unlimited deferral on that part of their annual income they
use to add to their total saving.
Third, the USA business tax allows the expensing of all real business
investment.
These three points are at the revolutionary heart of the USA tax.
They constitute a revolution in the tax base--in what we tax and how we
tax. That is where the revolution is needed and where, given public
understanding, it can have its most lasting impact.
The USA tax plan has other important features. It is more efficient
then the current tax Code. According to the tax Foundation, the USA tax
plan would cut by 76 percent the compliance costs now imposed by the
individual and corporate income taxes.
In terms of fairness and understandability, the USA tax treats all
income alike. It treats all businesses, from corporations to
partnerships to farmers to sole proprietors, alike. It retains the
progressivity of the current code.
It is designed to be revenue neutral. It is internally inconsistent
to try to encourage private saving on the one hand and encourage public
dissaving on the other. The USA tax maintains the proportion of the
overall tax bill paid by individuals and businesses. There is no
intention like the 1986 tax Reform Act to shift the tax burden from
individuals to the corporate community.
The USA tax also grants to employees and to employers a dollar for
dollar tax credit for the deeply regressive FICA payroll taxes. I have
addressed this very important feature of our proposal in separate
remarks.
Today, I would like to highlight another key feature of the USA plan,
its treatment of imports and exports. With respect to competitiveness,
the USA business tax levels the international playing field for
American business by implementing a territorial and border adjustable
tax. All goods, whether produced here or abroad, sold in the United
States will bear the same US tax burden, while U.S. exports will not
carry the cost of U.S. taxes when sold abroad.

Mr. President, many times I have heard my colleagues say that we must
have a level international playing field on trade issues. I can recount
some of the numerous legislative initiatives, including the super
section 301 provision, the Market Promotion Program, and the Export
Enhancement Program, that have been enacted to provide this level
playing field. I have supported

[[Page S11635]]

many of these efforts. We recognize that we live and compete in a
global economy. This economy is intensely competitive and it is
increasingly important to our economy that the United States remain a
global economic leader in this area. If anyone questions how important
trade is to our economy, consider the following: Exports currently
comprise 8 percent of the american gross domestic product [GDP] and 11
million jobs. If you include imports and cross-border investment with
exports, trade-related components represent roughly one-third of the
American economy. So we can and should continue to encourage U.S.
exports.
To do so, we must address the single largest impediment currently
shackling U.S. industry in its efforts to compete in the global
economy--the current Tax Code.
As Salvatore Barone, the president of Harper Surface Finishing
Systems, Inc., of Meriden, CT, and the chair of the International Trade
Committee of the Association for Manufacturing Technology, pointed out
in his July 18, 1996, testimony before the House Ways and Means
Committee:

. . . the present federal income tax in the Internal
Revenue Code of 1986 is almost exactly opposite of what is
needed to serve the best interests of the United States. Had
one set out by design to create a tax system that works
against us (and, therefore, in favor of our foreign
competitors), it is hard to imagine a more successful job
than the present federal income tax. It discourages saving
and productive capital investment in the United States; it
favors imports over exports; it makes it hard for U.S.
companies to directly compete in foreign markets; and, if
they do, it discourages them from bringing the money home for
reinvestment in the United States.

I agree wholeheartedly with Mr. Barone. He has hit the nail on the
head. At this point, Mr. President, I ask unanimous consent that the
entire text of Mr. Barone's testimony be printed in the Record. I would
recommend to my colleagues this testimony's international
competitiveness index which grades various tax proposals in the
international trade arena.
There being no objection, the testimony was ordered to be printed in
the Record, as follows:

Testimony of AMT--The Association for Manufacturing Technology

I. Introduction

I am Salvatore V. Barone, President of Harper Surface
Finishing Systems, Inc., Meriden, Connecticut, and I am
testifying today on behalf of AMT--The Association For
Manufacturing Technology, whose International Trade Committee
I am honored to chair. AMT is a trade association whose
membership includes over 350 machine tool building firms with
locations throughout the United States. America's machine
tool industry builds and provides to a wide range of
industries the tools of manufacturing technology including
cutting, grinding, forming and assembly machines, as well as
inspection and measuring machines, and automated
manufacturing systems. The majority of the association's
members are small businesses.
Today's topic--international competitiveness--embodies the
essence of your Committee's continuing series of hearings on
fundamental tax restructuring: the need to concentrate on
creating a new tax system that will serve the long-term
national interest in a global economy.
America urgently needs a tax system rebuilt from the ground
up around a new set of design principles to compete and win
in world markets. That is fact one. Fact two is also obvious:
the present federal income tax in the Internal Revenue Code
of 1986 is almost exactly the opposite of what is needed to
serve the best interests of the United States. Had one set
out by design to create a tax system that works against us
(and, therefore, in favor of our foreign competitors), it is
hard to imagine a more successful job than the present
federal income tax. It discourages saving and productive
capital investment in the United States; it favors imports
over exports; it makes it hard for U.S. companies to directly
compete in foreign markets; and, if they do, it discourages
them from bringing the money home for reinvestment in the
United States.
At the very time that successful competition in world trade
has become increasingly important to national well-being, we
are plagued by persistent trade deficits. We have become a
debtor nation, dependent on borrowing from abroad.
Productivity has lagged; real wage growth has been slow;
annual economic growth rates have been less than
satisfactory; and federal budget deficits have continued to
mount. Given the seemingly intractable nature of these
failings, some people have characterized the 1990s and beyond
as an ``age of diminished expectations'' for America. From an
international perspective, some pessimists may mistakenly
view world trade as exporting more U.S. jobs than American-
made products.
We at the AMT do not share this pessimistic view about the
future. We believe that American industry can compete and win
and that successful competition in world trade is the key to
the kind of enhanced economic growth on which a more secure
and prosperous America depends. We say this from the
perspective of the industry which produces the machinery and
new manufacturing technologies used by other businesses to
produce products sold here and around the world. We are at
the heart of the productive process--putting more and better
factory-floor technology in the hands of American workers. We
are also substantial exporters ourselves. About 35% of the
output of our industry is exported. In total, we employ
53,300 people and most of these jobs are good paying
manufacturing jobs using the best and newest technologies. My
own company is one of the smaller members of the industry,
but we employ approximately 50 people and, to date, more than
68,000 of our modern surface finishing systems have been
installed worldwide. In recent years, 15 to 20% of our sales
have been exports. Thus, we are strong believers in export
trade and in the benefits to America that derive from an ever
increasing flow of ``American-made'' goods into global
markets.
We also believe that American businesses and their
employees should be able to compete on a level playing field;
most particularly that the tax system of the United States
should not be biased against our own best interests in the
global marketplace. American-made machine tools comprise only
13% of the world supply. Worse, about 50% of the machine
tools used in the United States are of foreign origin. How
much greater would our share of domestic and foreign markets
be if the American tax system were not biased against us? It
is hard to say. The same is true of American industry in
general. Taxes are not the only factor as we all attempt to
compete at home and abroad against foreign competitors. But
we and our employees would like to have the opportunity to
compete on a level tax playing field and we believe it is a
matter of urgent national policy that we and they be given
the chance.
It would be one thing if the anti-investment, anti-export
biases in the Internal Revenue Code of 1986 were necessary--
if there were no alternative. But that is not the case. There
are alternative tax systems which are not only far more
congenial to successful international competition but also
more fair, efficient and consistent with the best interests
of the United States and the American people. We hear much
about ``tax fairness'', but there is certainly nothing fair
about a tax system, such as the present federal income tax,
which impedes economic growth, costs jobs and lower's living
standards.
For the most part, the pro-job, pro-growth alternative tax
systems are well-known and well-developed in substantial
detail. The principal ones are identified in the notice of
your Committee's hearings. We applaud the Chairman and the
Committee for putting the international focus on the leading
alternative tax systems and we welcome the opportunity
to comment on them. This Committee, this Congress, and the
next, have an historic opportunity to fundamentally
restructure the American tax system for the better. Just
as it is vital that we not lose that opportunity, it is
equally vital that we not lose sight of the world trade
aspects amidst the many other concerns that bear upon
taking such a monumental step.
Focusing on international trade necessarily puts a heavy
emphasis on taxes paid by businesses, but, in doing so, we do
not mean to diminish the importance of the way individuals
are taxed under any new alternative tax system. Successful
international competition depends on a higher level of
personal saving and investment in the United States.
Therefore, from every perspective, fundamental tax reform
must begin with removing the present strong bias against
saving. Individuals should either be allowed to deduct the
amount they save (and later pay tax when they withdraw their
deferred income from the national savings pool) or, if they
are allowed no deduction, the earnings on their savings
should be excluded from tax. So long as the present bias
against personal saving exists, no matter how good the new
international tax rules may be, the U.S. economy will not be
able to compete at its full potential in the global market.
Similarly, to the extent that corporations and other
businesses are taxed separately from individuals, businesses
should be allowed to expense capital equipment purchases.
Fortunately, the present law penalty on personal saving and
business capital investment is so indefensible that its
elimination is now almost synonymous with fundamental tax
restructuring. In one way or another, elimination of the bias
against saving and investment is embodied in all the leading
alternative tax proposals we have evaluated. In that respect,
AMT endorses them all.
Before going on to evaluate and compare the strictly
international tax rules of the leading alternatives--most
notably as related to exports, imports and taxation of
foreign-source income--AMT would like also to share with the
Committee a few overall perspectives which we believe are
highly relevant to choosing between the various alternatives.
First, any new tax system should be considered as a whole--
the individual portion and the business portion must be
considered together. In short, it must truly be a tax
``system'' that is internally consistent and that actually
works. Indiscriminate cherry-picking of particular aspects of
different proposals--no matter how appealing

[[Page S11636]]

they may seem in isolation--could produce a monstrosity
similar to present law. Second, the new tax system for
America's future must be enacted as a whole. Not only must it
be fair, it must be perceived as fair by the American people.
Further, we believe that the new tax system should truly be
an ``American'' tax system. International comparisons are
often relevant, particularly when illustrating the relative
disadvantages presently imposed by the Internal Revenue Code
of 1986, but the basic elements of the new tax system should
be chosen on their own merits, without regard to what other
countries may or may not do. For example, there is an
independent rationale, well-grounded in tax policy and
economics, for allowing a deduction for personal saving and
business capital investment. Cross-border adjustments for
exports and imports in combination with a territorial rule
that excludes foreign-source income provide a logical and
meritorious framework that stands on its own. The presence or
absence of similar rules, in varying degrees, in other
countries' tax systems is not the reason for their adoption
here. Similarly, the fact that a new American tax system may
have some elements in common with a foreign tax system does
not mean that we are adopting that foreign tax system per se.
Quite to the contrary. For example, appropriate border tax
adjustments for exports and imports are not the exclusive
province of the European ``VAT''. They can directly or
indirectly be incorporated into some tax structures which are
more consistent with our American experience.\1\
---------------------------------------------------------------------------
\1\ See Gary C. Hufbauer, Fundamental Tax Reform and Border
Tax Adjustments (Washington, D.C.: Institute For
International Economics, 1996).
---------------------------------------------------------------------------
There is no reason why the United States should be limited
by the tax experiences of other countries. There is no reason
why we should not have a better tax system than anyone else--
one that is fairer, simpler, more efficient and, above all,
in the long-term best interests of the United States in a
global economy. You on this Committee have an historic
opportunity and you should take advantage of it.

II. international competitiveness index

AMT has evaluated three leading alternative tax systems
against a common set of criteria directly and indirectly
related to international competitiveness. The criteria
include all of those specified by the Chairman of this
Committee in a public announcement in 1995, as well as
several others. We fully endorse the Chairman's list of
criteria for fundamental tax reform and agree with its
emphasis on simplification and on international
competitiveness. The alternative tax systems we have
evaluated are: the business-level USA Tax (the Unlimited
Savings Allowance System in S. 722 by Senators Pete V.
Domenici and Sam Nunn); the business-level Flat Tax (in
general, H.R. 2060 by House Majority Leader Armey); and the
general idea of a retail sales tax.
In the cases of the USA Tax and the Flat Tax, the results
of AMT's Competitiveness Index evaluations are set forth
below in comparison to the present corporate income tax.
Because the retail sales tax does not fit readily in this
index format without further explanation, the retail sales
tax is evaluated separately in connection with a later
general discussion of that subject.

INTERNATIONAL COMPETITIVENESS INDEX
------------------------------------------------------------------------
Present
USA tax Flat tax corporate
income tax
------------------------------------------------------------------------
Expenses capital equipment cost Yes (+1) Yes (+1) No (-1)
in U.S.
Excludes from tax all exports of Yes (+1) No (-1) No (-1)
American-made products.
Taxes imports of foreign-made Yes (+1) No (-1) No (-1)
products.
Is territorial (i.e., applies Yes (+1) Yes (+1) No (-1)
only in U.S.).
Foreign royalty income is Yes (+1) No (-1) No (-1)
excluded export receipt.
Is neutral as between labor and Yes (+1) No (-1) \2\ No (-1)
capital.
Allows credit for employer-paid Yes (+1) No (-1) No (-1)
payroll tax.
Solves transfer-pricing problem. Yes (+1) No (-1) No (-1)
Is revenue-neutral (No overall Yes (+1) No (-1) Yes (+1)
increase/decrease in business
taxes).
Is simple and efficient......... Yes (+1) Yes (+1) No (-1)
---------------------------------------
Net score (Max. 10)....... +10 -4 -8
------------------------------------------------------------------------
\2\ At the business level, it is not neutral, but tends to be neutral
when combined with the individual tax, except for the absence of a
payroll tax credit. In this latter respect, returns to labor are taxed
more heavily than returns to capital.

A. Discussion of Competitiveness Criteria in the Context of the USA Tax

Because it satisfies all the criteria within a simple and
understandable framework, the USA business-level tax provides
an excellent illustration of how a low-rate business tax
which allows expensing of capital equipment in the U.S. can
be combined with border-tax adjustments and
``territoriality'' to produce an essentially ideal result: a
neutral, evenhanded tax that treats all businesses alike
(whether corporate or noncorporate, capital intensive or
labor intensive, financed by equity or by debt, large or
small) and which is neither tilted for or against us when we
compete in foreign markets nor for or against foreign
companies when they compete in our markets.
The USA business tax is ultimate simplicity. To calculate
its fax for the year, a business (l) adds up the amount of
its revenues for the year from sales of products and services
in the United States, (2) subtracts the amount of its
deductible input costs for the year, (3) multiplies the
resulting ``gross profit'' by the 11% tax rate, and (4) takes
a credit for the 7.65% employer-paid FICA tax imposed by
present law on its payroll. The payroll tax credit is a
unique feature of the USA Tax and is in lieu of any deduction
for wages paid to employees. Like the Treasury's
Comprehensive Business Income Tax proposal in 1992, and like
other proposals designed to eliminate the bias against equity
financing, no deduction is allowed for interest.
From a world trade perspective, the highly salutary and
complementary relationships between border tax adjustments
and territoriality can best be illustrated by applying the
USA Tax in a series of fairly typical situations.
(1) TexCorp wishes to compete in the widget market in
foreign Country A either by manufacturing widgets in Country
A for sale in Country A or by manufacturing widgets in the
U.S. and exporting them to Country A. Because the USA Tax is
``territorial'', it does not apply to TexCorp's direct
manufacturing and sales operations outside the U.S.
Therefore, like the local widget manufacturers in Country A,
TexCorp only pays the Country A tax and can compete with
these foreign companies on a level tax playing field.
Similarly, because exports are excluded from U.S. tax,
TexCorp would only pay the Country A tax if it manufactured
widgets in the U.S. and exported them into the Country A
market. The U.S. tax effect is the same in both cases. What
actually happens, as is fairly typical, is that TexCorp
starts off by manufacturing directly in Country A in order to
penetrate the market and then follows up with exports of
American-made components and related product lines. In other
cases, also not unusual, TexCorp might start off-with exports
to Country A and then follow up with some additional direct
investments and operations in Country A in order to expand
its export sales of American-made products in Country A.
Thus, there is a complementary relationship between the
export rule and the territorial rule. (If the tax were
territorial, but exports were not excluded from tax, TexCorp
would be tax-advantaged by manufacturing abroad to sell
abroad.) It is also important to note that because the tax is
territorial, TexCorp can bring home its profits from Country
A and reinvest them in the U.S. tax-free; the same as it can
reinvest its export profits in the U.S. tax-free.
(2) TexCorp also has a new technology related to widgets
which, after developing a foreign market for widgets, it
wishes to license to others for use in Countries B and C. In
other words, TexCorp wants to export the fruits of some
American ingenuity which is also a valuable product. Because
of the export rule, the foreign royalty income under the
license agreement is correctly excluded from tax.
(3) NewCorp wishes to sell widgets in the U.S. market. It
can either manufacture the widgets abroad in Country X and
ship them back into the U.S. or it can build a new plant in
New England near its headquarters and manufacture the widgets
there. Because of the 11% import tax under the USA Tax, there
is no tax advantage for NewCorp if it manufactures abroad
instead of in New England. If NewCorp manufactures a $100
widget abroad and sells it back into the U.S., an $11 import
tax is paid. This is the same rate of tax NewCorp would pay
if it manufactured the widget in New England. (Under a
territorial rule without a complementary import tax, there
might be ``runaway'' plants, but with the import tax there
will be none. Thus, the synergistic combination of
territoriality, an export exclusion, and an import tax
provides the U.S. with all the advantages of territoriality
without the disadvantages.)
(4) ForCorp, a foreign corporation headquartered in Country
Y, wishes to sell widgets in the U.S. market. It could remain
offshore, manufacture the widgets in Country Y and distribute
them in the U.S. through a sales subsidiary or it could build
a plant in Kentucky and both manufacture and sell in the U.S.
Because of the 11% import tax, there is no tax advantage to
ForCorp in remaining offshore.
(5) In a variation of Situation (4), ForCorp wishes to sell
widgets all around the world; not just in the U.S. market.
Because the USA Tax rate is only 11% and because U.S.
production costs such as capital investment in the U.S. for
new plants are deductible, and because of the export
exclusion, the U.S. would be a very attractive place for
ForCorp to locate its plant.
Not only does the combination of territoriality, an export
exclusion, and an import tax produce consistent procedural or
mechanical results in the tax calculation, the combination
also produces important results as a matter of economic
substance: income and job creation.
A good example is the combination of territoriality and the
export exclusion. A recent study by Edward Graham at the
Institute for International Economics will soon be published
by the Oxford University Press.\3\ It shows an
extraordinarily high degree of

[[Page S11637]]

statistical correlation between the amount of direct
investment by U.S. companies in a foreign country (as in
Situation (1) above) and the amount of U.S. exports to that
foreign country. In other words, the more U.S. companies
penetrate foreign markets and gain market share by direct
``on-the-ground'' operations in a foreign country, the
greater the amount of exports of American-made products to
that country. Thus, U.S. foreign direct investment abroad is
good for U.S. exports and good for U.S. jobs. The combination
of territoriality, an export exclusion, and an import tax
facilitiates this synergistic result.
---------------------------------------------------------------------------
\3\ Edward M. Graham, On the Relationships Among Direct
Investment and International Trade in the Manufacturing
Sector: Empirical Results for the United States and Japan.
Institute for International Economics, 1996. To appear in
Dennis Encarnation, editor, Does Ownership Matter: Japanese
Multinationals in East Asia (London: Oxford University Press,
forthcoming).
---------------------------------------------------------------------------

B. The Flat Tax and the Competitiveness Index

The business portion of the classic Flat Tax (H.R. 2060)
does allow expensing and is territorial, and both of these
characteristics are positives. But, overall, the Flat Tax
does not score well under AMT's International Competitiveness
Index. There are may reasons for this deficiency, as
indicated in the brief presentation of the Index itself, but
the most significant reasons appear to be the absence of an
import tax and the absence of an export exclusion.
Without belaboring the point, a few examples may suffice.
In prior Situation (1) where TexCorp had the choice to
manufacture in the U.S. for export abroad or to manufacture
abroad for sale abroad, under the Flat Tax it would be to
TexCorp's advantage to manufacture abroad insofar as U.S.
taxes are concerned. This is because the Flat Tax taxes U.S.
exports. Similarly, in prior Situation (2), because the Flat
Tax taxes U.S. exports, foreign royalties from licensing U.S.
know-how and technology would be taxed. TexCorp might be
better advised to develop the technology abroad instead of
developing it here and licensing the use abroad. In
Situations (3), (4) and (5), because the Flat Tax does not
tax foreign imports, it would have been to the advantage of
NewCorp or ForCorp to manufacture abroad for sale into the
U.S.

C. General Discussion of Sales Tax Option

Setting aside all other considerations and assuming that a
retail sales tax replaced the federal income tax, the
resulting tax system would score very high on AMT's
International Competitiveness Index--in the area of 90 to
100%.
A retail sales tax is implicitly border adjustable for
imports and exports and is implicitly territorial. These
implicit or indirect characteristics arise because a tax is
paid only to the extent that a retail sale occurs in the
United States.
Even if, as some economic analysis suggests, the economic
burden, of the retail sales tax is in significant part borne
by businesses (and, ultimately, their owners and employees),
there is an implicit export exclusion because no tax is ever
paid with respect to a sale to a non-U.S. purchaser and no
tax ever enters the system potentially to be passed back to
the seller. Similarly, if a U.S. company is operating and
selling abroad, there is never any U.S. retail sale and no
U.S. tax ever enters the chain of price-tax-volume
relationships between seller and purchaser. Thus, a retail
sales tax is implicitly territorial.
On the import side, if either a U.S. company or a foreign
company manufactures a product abroad which directly or
indirectly finally shows up as a retail sale in the U.S., a
tax liability arises. Thus, in this indirect sense, there is
an implicit import tax, i.e., the retail sales tax is the
same whether the product sold in the U.S. is of domestic or
foreign origin.

iii. conclusion and recommendations

AMT believes that any new tax system for America's future
should be terroritial, should include complementary export
and import adjustments, and should relieve the bias against
personal saving and business capital investment. The new tax
system should also be simple.
Based on our analysis using the International
Competitiveness Index, it appears that there are two
fundamentally different ways of doing this. One is the USA
Tax (which resembles a very simplified version of a corporate
income tax with expensing and appropriate international
adjustments engrafted on to it). The other is the general
idea of replacing the entire federal income tax with a retail
sales tax.
While the USA Tax and the retail sales tax are far apart
and greatly different in many other respects, either one
would have a beneficial impact on international
competitiveness.
Mr. NUNN. Mr. President, Senator Domenici and I believe we have a
solution to the export problems created by our current Tax Code. The
solution is the U.S.A. tax plan. We believe our proposal will make
America much more competitive.
The first thing the U.S.A. tax plan does to level the playing field
is to make America's business tax--which replaces the corporate income
tax--border-adjustable. We exclude from our domestic tax base any items
made by American manufacturers for export, just as our major
competitors do by rebating their value-added taxes when their goods are
exported for sale here.
Conversely, when a company, foreign or U.S. owned, manufactures
abroad and sells in the U.S. market, the company is, through the
operation of a new import tax, taxed essentially the same as if the
factory were located in the United States. Again, we are trying to give
imports and exports the same treatment our competitors do, rather than
perpetuate the present system which favors companies that are located
abroad selling to this country. Imports would be subject to an import
tax that would equal the overall business tax levied in this country.
The border adjustability feature of the U.S.A. plan is intended to
favor and encourage production and employment here in the United States
and to make American goods, services and know-how more competitive in
foreign markets. Our current Tax Code does exactly the opposite.
For example, in Georgia, Ford Motor Co. operates a very large
manufacturing facility which produces thousands of Ford Tauruses and
Mercury Sables every year. These vehicles are mid-sized, moderately
priced automobiles. Many of these vehicles are exported. When a $20,000
Taurus is exported to Great Britain, it carries with it the burden of
today's U.S. Tax Code--a 34-percent rate on corporate profits, the
alternative minimum tax, and numerous other business levies. In
addition when this Taurus is sold in Great Britain, a 17 percent Value
Added Tax [VAT] is also imposed on it. This adds $3,400 to the price of
the car. In essence, doubling the tax burden on this single car.
Under this same scenario with the U.S.A. tax plan, when this Taurus
is exported, no U.S. business income tax would be imposed. The car
would still be subject to a VAT when it reaches Great Britain, but it
would not be burdened with the cost of the U.S. Tax Code.
Conversely, under today's Tax Code, when Rover--a British automobile
manufacturer--exports a vehicle to the United States, the VAT it
carries in Great Britain is rebated to Rover before it leaves British
soil. When this Rover vehicle is sold in the United States, it carries
no U.S. corporate income tax burden nor does it carry a VAT. With the
U.S.A. tax system, an U.S. import tax would be levied on the Rover
vehicle. This levy would be the equivalent of the U.S. corporate tax
carried on the Taurus built and sold in the United States. In other
words the playing field would be level on goods manufactured abroad and
sold in the U.S. market compared to goods both manufactured and sold in
the United States.

The second, related feature of our business tax on imports and
exports is that the U.S.A. tax is territorial. If a company located a
plant in a foreign country in order to sell in that country's local
markets, then under the U.S.A. tax plan we do not allow a deduction for
those foreign costs, but neither do we include the proceeds of these
foreign sales as part of our domestic tax base. Overseas sales would
not be part of that company's U.S. corporate income tax calculations.
This is what we mean by saying the U.S.A. tax is territorial.
Businesses would not have to include overseas sales in their profits
when computing their business taxes, nor would they deduct costs they
incur purchasing goods and services overseas. I might add that this
will have another huge benefit--it will greatly simplify the
computation of U.S. tax liabilities for our international corporations.
When I have highlighted this aspect of the U.S.A. tax plan to groups
here in Washington and throughout the country, one of the first
questions asked about this element of the U.S.A. tax plan is--is it
GATT complaint? According to the many tax and trade experts, including
officials at the Department of the Treasury, we have consulted, the
weight of the legal argument is with the U.S.A. tax plan.
Should the U.S.A. plan be enacted, we can expect a GATT challenge. In
fact, a number of our allies' Ambassadors have raised this question
with me. When I explain the essence of the U.S.A. tax plan to them and
point out that their country's value added taxes [VAT's] do the same
thing to U.S. products exported to their nations as the U.S.A. tax
proposes to do to their exports, the answer I usually receive is a
blank stare. It seems to me that what is good for the goose is good for
the gander.
Another question I receive is the question about the U.S.A. tax
plan's omission of the deductibility of wages at the business level.
Wages under the

[[Page S11638]]

U.S.A. tax plan would not be deductible. The principle reasons why this
deductibility is denied are twofold: first under GATT rules, our Nation
can not provide wage deductions while also providing, in essence, an
excise tax on imports and second to provide wage deductibility and
still maintain revenue neutrality the business rates would have to be
raised significantly from the 11 percent flat rate we propose.
While this conclusion seems necessary, the wage nondeductibility
issue is going to have to be thought through very carefully. Attaining
a level playing field in international trade is a very important goal
and to achieve it would be a sea change in U.S. tax policy. The same
would be true to deny wage deductions to businesses. However, on this
latter point, businesses need to keep in mind that the business rates
proposed in the U.S.A. tax plan are much, much lower than today's
business tax rates. In fact, they would be less than one-third of
today's rates, yet these rates raise the same amount of revenue for the
Federal Government as is raised today. It is also important to keep in
mind that under our proposal, businesses would receive a credit for the
employer share of Social Security taxes paid. So the effective business
tax rate on wages paid up to the $62,000 Social Security tax wage limit
would be 11 percent less 7.65 percent paid in FICA taxes, or just 3.35
percent.

Mr. President, in conclusion, the U.S.A. tax plan would promote U.S.
competitiveness and level the international playing field for American
business by implementing a territorial and border adjustable business
tax. All goods, whether produced here or abroad, sold in the United
States will bear the same U.S. tax burden. And U.S. exports, which are
generally subject to a value-added tax when they are sold in foreign
markets, would no longer be subject to a U.S. corporate income tax on
top of that. It's time we had a Tax Code that works for us, not against
us, and the U.S.A. plan, for this and many other reasons, provides the
answers.

____________________