BILL CLINTON IS WRONG ABOUT THE VAT


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Former President Bill Clinton Endorses Regressive US National Sales Tax at Billionaire’s Conference, Recites Bogus Claim about Sales Tax Helping US Trade

Former President Bill Clinton recently endorsed enactment of a regressive U.S. national sales tax — a.k.a. a value-added tax or VAT. In doing so, he parroted a long-discredited argument that a sales tax would curb imports into the United State and encourage exports.

Clinton made his remarks in an interview at an April 28, 2010 conference sponsored by the Peterson Institute for International Economics, one of many organizations founded by Peter G. Peterson, a billionaire investment banker who has long advocated big cuts in Social Security and lower taxes on capital gains (i.e., on himself).

According to Clinton, “the one thing that blue collar America should like about [a sales tax] is it’s good for exports and it in effect, it doesn’t allow quite so much subsidy of imports — when other countries subsidize their production for export at least they get slapped with a value-added tax when it comes in here.”

Clinton seems to have failed to notice a critical flaw in his argument.

It’s true, as Clinton says, that American consumers would pay a U.S. national sales tax when they buy imported products. But that’s no help to U.S. manufacturers. After all, Americans would have to pay the same sales tax when they buy products made in the USA. How does that give an advantage to U.S.-made goods?

As for exports from the U.S., well, obviously Americans wouldn’t pay a U.S. sales tax on products sold abroad (i.e., Americans won’t be taxed on products they don’t buy). But that doesn’t help U.S. exports. How could it? (Meanwhile, foreign customers pay whatever sales taxes their own governments impose, whether the products are American-made, made in their own countries, or elsewhere.)

The bottom line is that a national sales tax would have no effect, positive or negative, on U.S. exports or imports.

As the congressional Joint Committee on Taxation put it in a report back in 1991, “even though imports are subject to tax, U.S. buyers’ choice between imported and domestically produced [goods] is not altered. Similarly, foreign consumers’ choice between goods produced in the U.S. and goods produced in their own country is not altered even though U.S.-produced goods [aren’t subject to U.S. sales tax] when exported.”

Think of it this way: Chinese companies export hundreds of billions of dollars a year in products to the United States. If the products are sold in California, customers will pay a sales tax of as much as 10 percent. Of course, they’ll pay the same sales tax if they buy products made in the United States. Conversely, Delaware has no sales tax, so Delaware customers pay no sales tax on either Chinese or American products. Is California at a competitive advantage versus Delaware because it has a steep sales tax? Of course not.

Everyone agrees that a national sales tax, like state and local sales taxes, would be hugely regressive, hitting the poor and the middle class hard, and the rich very lightly. Clinton knows this, and he does vaguely suggest implausible “adjustments in the other tax bills to make it — to keep the progressivity of our tax system.” But ultimately, his message to middle- and low-income Americans is simple and harsh: suck it up. “It’s a big leap,” Clinton said. “But if you look at it, people in Europe — just like any other sales tax — they just get used to payin’ it.”

By the way, in the same report cited above, the Joint Committee on Taxation noted that “providing a realistic number of employees to administer a U.S. VAT could mean a near-doubling of the size of the IRS.” That’s an extraordinary amount of added paperwork, complexity and bureaucracy. For what? A more regressive tax system?

We don’t need and shouldn’t tolerate a new and grossly unfair sales tax, whose alleged benefits to U.S. trade are nonexistent. Instead, we should attack the budget deficit by making our tax system fairer, in particular by closing unwarranted and hugely costly income tax loopholes that unjustly favor big corporations and the wealthy. Bill Clinton ought to know better.

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