The Business Transfer Tax
for
Comprehensive Reform of the
Federal Tax Code
Presented by
David A. Hartman
The Lone Star Foundation
10711 Burnet Road, Suite 330
Austin, Texas 78758
Phone: 512.339.9771
Fax:
512.997.7826
Website: lonestarfoundation.org
Email: dahartman@hartman-llc.com
Recommendation For Comprehensive
Reform of the Federal Tax Code by Adoption
of the “Business Transfer Tax” (BTT):
•A Subtraction Method Value Added Tax (VAT)
•Consumption Based by Expensing Fixed Investment
•Border Adjusted by Taxation of Imports and Crediting
of Exports
•Replaces Three Quarters of Federal Taxes
•Supersedes all Income and Wealth Taxation
(other than Individual Social Insurance Taxes)
The BTT Base is Determined:
for Commercial Activities:
All Revenues
less: Export Sales
less: Purchase of Goods & Services
(Including Fixed Investment)
plus: All Imported Purchases
equals:
BTT BASE
for Governments & Not-For-Profits:
All Employment Expenses
plus: All Imported Purchases
equals:
BTT BASE
The BTT Supersedes the following
Federal Taxes:
• Individual Income Taxes
• Corporate Income Taxes
• Employer Social Insurance Taxes
• Estate and Gift Taxes
• Custom Duties
BTT SINGLE TAX RATES
Tax Revenue Neutral: 17.0% BTT
Tax Burden Neutral:
18.2% BTT
Note: Both Rates Provide “Found Money” From
Taxing Net Foreign Trade; 18.2 % provides funding
for transition or deficit reduction at the present tax
burden on U.S. Citizens.
The BTT Prevents
Regressivity
• Provides rebates to all citizens of the BTT tax on:
– Family based poverty level income
– Charitable giving
– Home mortgage interest
• Taxes income above poverty level proportionate to
consumption
• Terminates Capped Employer Social Insurance
(but Retains Federal Match of Individual Contributions)
MISCONCEPTIONS ABOUT THE BTT
• Border Adjusted Taxation via the BTT is
NOT Protectionism – It Only equalizes the
Competitive Hurdles for U.S. Producers.
• VAT Taxation was NOT the Cause of
Runaway Welfare Spending in Europe – It
was Due to Adopting VAT Taxes In
Addition to Rather Than Replacement of
Income Taxation As Proposed for the BTT.
• Border Adjusted Taxation is the Only
Realistic Basis for Equalizing Prices to
End the Trade Deficit Hemorrhage and the
Manufacturing Crisis.
ECONOMIC PROBLEMS
Addressed by
BTT REMEDIES
● The Manufacturing Crisis
● Border Adjusted Taxation
● Saving for Investment Deficit
● Consumption Taxation
● Outsourcing of Services
● Border Adjusted Taxation
● Relocation of Corporations
● End Corporate Income Tax
● Declining Labor Incomes Share
● Exempt Investment for Growth
● Increase Growth of all Incomes
● All BTT Remedies
●Terminate Complex and Inefficient
Income Taxes
●Simple, Broadest Base for Lowest
Rate BTT
(See Appendix for Details)
APPENDIX
APPENDIX A
The Manufacturing Crisis
•Foreign Producers are More Competitive than U.S.
Producers Due to the Price Advantage of Border Adjusted VAT
Taxes. (see EXHIBIT A-I & A-II)
•Manufacturing has declined more than 50% as % GDP from
the Mid-Sixties to present. (see EXHIBIT A-III)
•Since 1998 alone the Manufacturing Sector has terminated
20% of its employees – its worst layoff since the Great
Depression. (see EXHIBIT A-III)
•The U.S. now produces only $2 of every $3 of goods
consumed. (see EXHIBIT A-IV)
•NAM has cautioned that the decline of manufacturing “risks
loss of critical mass”.
EXHIBIT A-I
FOREIGN VAT TAXATION
Standard VAT RATE*
EU-15 Countries, Average:
19%
China:
17%
Canada:
15%
Mexico:
15%
30 OECD Countries:
18%
*Or border adjusted tax equivalent
(Source: EU-15 and OECD Data, Misc. Websites)
EXHIBIT A-II
COMPARISON OF U.S. VS. FOREIGN VAT ADJUSTED
PRICES FOR COMPARABLE COST PRODUCERS
(Assumes Average OECD VAT Rate)
SOLD IN U.S. MARKET
U.S. PRODUCTION
SOLD IN FOREIGN MARKETS
F.O.B. PRICE
(Incl. U.S. Taxes)
$1.00
F.O.B. PRICE
plus: VAT ADDED
$1.00
0.18
SELLING PRICE
$1.00
SELLING PRICE
$1.18
F.O.B. PRICE
less: VAT REBATE
$1.00
(0.18)
SELLING PRICE
$0.82
F.O.B. PRICE
less: VAT REBATE
plus: VAT ADDED
SELLING PRICE
$1.00
(0.18)
0.18
$1.00
FOREIGN PRODUCTION
DAH/LSF/5-05
EXHIBIT A-III
DAH/LSF/5-05
EXHIBIT A-IV
30
25
The Manufacturing Production Gap
(The Trade Deficit in Goods as % GDP)
U.S. Consumption of Goods
Percent GDP
20
Production Gap
15
U.S. Production of Goods
10
5
Sources: 1. U.S. Department of Commerce,
Bureau of Economic Analysis International Transactions
2. Statistics for All Manufacturing Establishments: 2001 & Earlier,
U.S. Department of Commerce, Census Bureau
1970
1975
1980
1985
1990
1995
2000
2005
DAH/LSF/5-05
APPENDIX B
EFFECT OF THE MANUFACTURING
CRISIS ON U.S. EMPLOYMENT
• The Average Hourly Real Wage of Production Workers,
has Declined 13% since 1978.
(Source: 2001Statistices for All Manufacturing, Census Bureau)
• The Displacement of Manufacturing Employees to
Highly Price Elastic Employment in Services has
Contributed to Stagnation of Income for 90% of U.S.
Employees. (see EXHIBIT B-D)
• This Income Stagnation Coincides with both the
Production Gap and the Preceding Adoption of Foreign
VATs that are a Principal Cause. (see EXHIBIT A-IV)
• Progressive Taxation as Measured by the Income Tax
Share Top 10% of Incomes Appears to Negatively Effect
Incomes of the Other 90% due to Real Incidence of
Capital Taxation on Labor. (see EXHIBIT B-I)
EXHIBIT B-I
DAH/LSF for
APPENDIX C
OUTSOURCING OF SERVICES
The surplus in Services is
Declining due to flight of
Corporations to Foreign Tax
Havens with Territorial Corporate
Taxation, and Outsourcing of
White Collar Services Abroad
(See EXHIBIT C-I)
EXHIBIT C-I
200
100
Services
-100
Goods
Billion $
-200
-300
-400
Balance in Trade of
Goods & Services
-500
-600
-700
-800
-900
1970
Source: U.S. Department of Commerce,
Bureau of Economic Analysis International Transactions
1975
1980
1985
1990
1995
2000
2005
est
DAH/LSF/5-05
BTT ADVANTAGES OVER ALTERNATIVES
Consumption Border Marginal
Income
Economic Simplicity
Based
Adjusted Rates
Distribution
Growth
Current Tax
Code
No
No
Highest
Worst
Lowest
Worst
Flat Tax
Yes
No
Lowest
Improved
Better
Good
Consumed
Income Tax
Yes
No
Lowest
Improved
Better
Good
Retail Sales
Tax
Yes
Yes
Higher
Better
Higher
Best
Credit Invoice
VAT
Yes
Yes
Higher
Better
Higher
Good
BTT & Retail
(50/50)
Yes
Yes
Lower
Good
Higher
Good
Business
Transfer Tax
Yes
Yes
Lowest
Best
Highest
Good