As I watched the fiscal cliff fiasco unfold, it became very clear to me we have a fragile economy. With a GDP running at $15.1 trillion and federal debt running at about 120% of that level (Greece's percentage is lower), we need to continue to grow to support that ever burgeoning number. Think of our government as a house with a mortgage being more than the value of the house. Simply put, we need a robust economy to produce to simply pay the bills.
With taxes needing to go up to pay for our government, we need to address how we keep the economic wheels rolling. Do we give breaks to business and billionaires to make sure they invest in our economy? Do we give breaks to the middle class to make sure they can continue to support our economy by just buying stuff? And, at what level do we need to look at how export could help us through this mess? That is the focus of this blog. Because, I truly don't believe the American consumer can drag our country out of this mess by themselves.
The fastest growing major economy in the world is China. Still small by our standards, China has been playing catch up to the world by producing cheap goods. While we are all led to believe cheap labor has everything to do with it; it is actually their tax policies which drive their businesses. China has something called VAT (Value Added Tax) for all transactions between businesses. For export, companies are rebated 13%. That is huge.
We, on the other hand, place equal taxes on all transactions, whether internal or external. This makes navigating the international playing field difficult. Instead of a simple policy allowing us to compete, like China, we look to local governments to make concessions on taxes, infrastructure, and education to make it feasible for these companies to compete. And then, we get into all of these battles pitting people against business.
As a result of our tax policies, it has been prudent for many companies to flee the U.S. in order to compete on a worldwide stage. If they stayed here, they would have no or little international business.
As we condemn them for doing what is necessary for their businesses, thinking it is about making a fatter bottom line; it is more about survival in an increasingly flat world.
So, why don't we look at a new model, some sort of a VAT used in most countries. For all products imported, we place a tariff (17% is common) on those goods. For all goods created for export, we offer a rebate, maybe 13% like the Chinese. And, for all goods produced and staying in the U.S., we place a standard tax. Based on our current trade deficits, this would put additional revenues to the bottom line (more imports producing VAT versus exports offering rebates). It would also be an incentive for companies on the edge of moving out of the country to reconsider.
Quite frankly, I don't understand why we don't hear conversations like this.