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 Richmans' Trade and Taxes Blog

Congress passes foolish tax change that will increase US trade deficits
Howard Richman, 4/21/2010

As part of the Hiring Incentives to Restore Employment (HIRE) Act (HR 2847) signed by President Obama in March, Congress passed one of the most foolish tax changes possible, one that was designed to raise revenue, but whose unintended consequence will be higher trade deficits and fewer American manufacturing jobs.

The revenue measure (see Title V of the bill) will tax Americans who put their savings abroad in order to avoid paying American income taxes. It requires foreign banks to report the income earned by Americans. If they don't, then any income owned by the foreign banks in the United States will be subject to a 30% withholding tax. The intended consequence will be that foreign banks will report income earned by American savers abroad. The unintended consequence will be to reduce the amount of American savings that goes abroad.

The net flow of savings into a country causes trade deficits. As a result of this provision, net savings will flow into the United States, which will raise the currency exchange rate of the dollar, which will reduce American exports and increase American imports, which will reduce American manufacturing jobs and manufacturing investment.

Congress could have raised increased revenue in ways that would have reduced our trade deficits:

1. They could have restored the 35% withholding tax on foreign interest earned in the United States (a tax which was withdrawn in 1984).

2. They could have started to tax all foreign interest and dividend income earned by foreign governments in the United States.

3. They could have placed a tariff on China and any other countries that manipulate the dollar exchange rate in order to steal market share from American producers.

Number 1 and 2 above would have required changes in some of our tax treaties to be effective, but tax treaties all contain provisions that allow them to be quickly renegotiated.

Incidentally, other countries would retaliate to 1 or 2 by instituting withholding taxes on income earned by Americans. The retaliation of number 1 would produce a worldwide reduction in tax cheating. The retaliation of number 2 would be totally ineffective since our government has almost no foreign income abroad.

Instead of raising revenue in a way that would have helped American manufacturing workers and manufacturing investment, Congress passed a foolish measure whose consequence will be the further destruction of American manufacturing.