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 Richmans' Trade and Taxes Blog

Household Consumption Falls and the Market Plunges
Howard Richman, 5/31/2013

On Friday morning, the Bureau of Economic Analysis reported that household disposable income (personal income after taxes) fell 0.1% in April after rising in March. The fall in household consumption was even larger (0.2%), again after rising in March. The response of the U.S. stock market was immediate. Both the Dow Jones Industrial Average and the S&P 500 closed down 1.4% with the Dow falling 209 points.

Some economists have been hoping that consumer spending will drive an economic recovery, perhaps due to rising stock prices and rising home values. They were brought back to reality by these statistics. Households can only increase consumer spending over the long-term if their incomes are rising, and those incomes are not rising. It is becoming evident that economic stagnation will continue with real GDP growth staying at about the 1.8% rate that the U.S. economy experienced from the first quarter of 2012 to the first quarter of 2013.

A real recovery is going to require an increase in the rate of business investment spending and/or a reduction in the trade deficit. And neither of them are likely to improve much so long as the United States retains the highest corporate income tax rate in the world and continues to let trade cheaters keep our trade out of balance.

Former Reagan speechwriter Pat Buchanan has a solution: abolish the U.S. corporate income tax and replace it with a 10% tariff. In his May 31 column (Abolish the Corporate Income Tax!), he points out that corporate income tax revenue has declined to 10% of tax revenues, despite the U.S. having, by far, the highest corporate income tax rate in the world. He points to all of the following benefits of eliminating that tax altogether:

First, every U.S. corporation that had moved abroad in search of lower taxes in recent years would start thinking about coming home and bringing its production and its jobs back to America.

Second, that $2 trillion in income U.S. companies have stashed abroad would come roaring back into U.S. institutions.

Third, foreign companies would begin to relocate and produce here in America, both to get around the tariff and pay no taxes.

Fourth, U.S. producers would see sales soar inside the $17 trillion U.S. market, at the expense of foreigners who would pay a 10-percent admission fee to get into this market, a fraction of what they used to pay in the 19th century.

While this would cause a surge in unemployment among IRS agents and accountants, hundreds of millions of man hours could be redirected away from filling out tax forms and into productive work.

While Buchanan’s solution would work, it is not optimum. There are two alternatives for replacing the corporate income tax that would be better.

  1. Replace the Corporate Income Tax with a Value Added Tax on Goods. Such a tax would apply to imports as well as goods produced in the United States, but it would be rebated to U.S. exporters. The main advantage over a 10% tariff is that it would be perfectly legal under WTO rules.  Almost every other country in the world has a value-added tax.

  2. Replace the Corporate Income Tax with a Scaled Tariff. The scaled tariff is a WTO-legal tariff system available to countries with chronic trade deficits. Its rate would be individually scaled to our trade deficit with each country so as to take in, as revenue, half of that deficit as revenue. The rate would go up when our bilateral trade deficit with that country goes up, down when our bilateral trade deficit goes down and disappear when trade approaches balance. It would only reduce our imports from the trade cheaters (including China, Japan, Russia and Venezuela), which manipulate exchange rates in order to run trade surpluses. It would continue our free trade with countries like Canada and Brazil that buy more from us when we buy more from them.

Three changes should be made to the personal income tax if the corporate income tax is eliminated: (1) the tax rate on dividends must be raised to the same level at which normal income is taxed; (2) capital gains must be taxed at the normal rate, with taxation deferred whenever the proceeds of one sale are rolled-over into a new investment; and (3) the foreign government exemption from paying tax on dividends must be eliminated.

Buchanan is on the right track, but there are better ways than an across-the-board tariff to replace the revenue lost by eliminating the corporate income tax. Both the value-added tax and the scaled tariff would increase American exports at the same time that they reduced American imports. Also, they would both be WTO-legal.

The scaled tariff would be the ideal way to replace the revenue that would be lost from eliminating the corporate income tax. It would force the trade cheaters to choose between buying more of our products or losing market share in our markets. As a result, it would produce a huge increase in business investment. The new U.S. factories, built by both U.S. and foreign companies, would cause a real economic recovery; increased personal income tax revenue would replace lost corporate income tax revenue.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]