Tuesday, February 17, 2009

Attack trade deficit by trashing income tax, implementing national sales tax

In a column detailing the moribund state of manufacturing in the US, Pat Buchanan wonders how we respond to the persistent trade deficits Paul Volcker recently identified as the underlying cause of the global recession:
How do we correct those “trade-related imbalances” of which Volcker spoke? We must export more and import less, save more and spend less, produce more and consume less. We need to emulate the ants and behave less like the grasshoppers of summer.

But how do you tell that to two generations of Americans who have been raised in an era of entitlement?
He suggests an "industrial policy". A simple way to start is by instituting a national sales tax to replace the federal income tax.

Export more and import less: The FairTax, the legislative incarnation of a national sales tax, levies a 23%* sales tax on all new goods and services purchased in the US, whether they be produced domestically or imported into the country from abroad. Make imported items more expensive and imports will be reduced.

By scrapping the corporate income tax, exporters will keep the third of their profits currently going into federal coffers. Make it less expensive to export items and exports will be increased.

Save more and spend less: The income tax punishes wealth accumulation and rewards wealth liquidation. Americans must currently fork over money to the government when they earn it, but not when they spend it. When it's relatively cheaper to spend money than it is to make money, people save less and spend more.

A national sales tax does the opposite. It rewards wealth accumulation and punishes wealth liquidation. Americans will fork over money to the government when they spend it, but not when they earn it. When it's relatively more expensive to spend money than it is to make money, people will save more and spend less.

Produce more and consume less: As has been pointed out, eradicating the corporate income tax will lead to an uptick in exports by increasing the profitability of exporters. We'll produce more than we do now.

The national sales tax applies only to new goods. Sales taxes are not collected on the sale of used items. So the new car you're considering purchasing suddenly looks 30% more expensive relative to the three year-old automobile you're currently riding around in than it did under the income tax system. Consequently, you stretch the life of your car (and all the other things you own) in lieu of purchasing a replacement for it (and them). Thus we'll consume less.

* As a percentage of the total price. In terms of how state and local sales tax rates are typically discussed, it is actually a 30% rate. For example, with the federal sales tax in place (excluding state and local taxes for simplicity), a $1 candy bar will cost a consumer $1.30. Thirty cents is 23% of $1.30, hence the 23% figure.

If this seems misleading, keep in mind that income taxes are discussed in the same way. If a guy earns $50,000 and is subject to a 23% income tax rate, he has to cough up $11,500 (50000*.23). We do not describe this $11,500 owed as constituting a 30% income tax rate, even though the $11,500 paid is 30% of the $38,500 the guy gets to keep. Stating the national sales tax figure as 23% instead of 30% allows for an apples-to-apples comparison with the current federal income tax system to be made.


Mark Presco said...

I am a boomer on the verge of retirement. Unlike my peers I have saved money to augment my social security income. A national sales tax means that this money will be taxed again when I spend it.

Mark Presco said...

In addition as a retiree I planned to be in a low to no income tax bracket. I will now be in a 23 to 30 percent tax bracket. Changing the rules at this time seems like a lose-lose situation to me.

Audacious Epigone said...


I know. Affluent baby boomers on the edge of retirement get the short end of the stick with the change. The planned monthly prebate is probably chump change to you. All I'm able to say in response is that the dependency ratio is going to grow markedly in the next couple of decades, and the productive portion of the population is going to need all the help it can get.

The Undiscovered Jew said...

1) Mechanization and technology have caused far more manufacturing job losses than trade has. We can produce more products using fewer workers these days thanks to technology. Tinkering with the taxcode will not increase the number of people employed in manufacturing because we don't need them.

Buchanan is also engaging in the Paleocon fallacy that US manufacturing sector is weak. In fact, our manufacturing output is as high as ever, we just don't need a large number of workers to create products anymore.

2) While I don't agree with you or Buchanan that we need more manufacturing jobs, I do agree with you, AE, that we need greater productivity and efficiency in all sectors of the economy. Here is where the tax code could be improved.

Income taxes at the federal level are fairly low for the middle class. The taxpayers who get hit hardest with income tax are aleady the top 10% highest IQ and highest productivity workers.

Cutting income taxes for the top 10% of the IQ spectrum will not increase their productivity much because they are already the most talented and the smartest.

Where we can get the most bang for the buck is by increasing the productivity of the middle class.

A better plan to increase productivity is to cut payroll tax by 50% and pay for the cut with a simple national sales tax.

The middle class is paying the bulk of their taxes via payroll.

If you want to improve middle class productivity we should tax work (payroll) less and tax consumption more.

Taxing work less encourages more and better work habits because it will pay more from the perspective of the middle class.

Payroll cuts might also help the birth rate increase (somewhat) because it will make it more affordable for mothers with newborns to work parttime or stay at home fulltime because they will be able to rely more on their husband's now fatter, single, paycheck and reduce the need for a second female income provider.

Audacious Epigone said...


We've run a trade deficit in manufactured goods that has increased for almost three decades now. About 85% of our total trade deficit is a consequence of this. So unless you're arguing that deficits don't matter, I do not see how this does not concern you.

Anonymous said...

"I am a boomer on the verge of retirement."

Get back to work, millions on welfare are depending on you! But seriously, won't your SS be taxed when you get the check each month?

Anonymous said...

So unless you're arguing that deficits don't matter,

*Trade* deficits don't matter:


In summary, under the prevailing flexible exchange rate regime, the US trade deficit should not be viewed as a worrisome economic "imbalance" that will inevitably have to be corrected. So far, the US trade deficit seems to be a reflection of the US economy's strength vis-à-vis its trading partners. [9] And it might well be that the US trade deficit will continue to widen in the coming years — which would be the case if the United States' trading partners prove to be unsuccessful in making their economies more conducive to investment and growth compared with the status quo.

So the essential issue about the future of the US trade deficit is whether and how the current relative growth performance constellation in the world trading system will be changing in the coming years. As long as the United States keeps its preference for a free market regime, it might well retain, or even increase, its competitive advantage in allocating scare resources more efficiently than currency areas where relatively wide-spread government interventions have become a characteristic of societal organization. In today's world of flexible exchange rates, the United States' competitive edge is reflected by a capital surplus, i.e., a trade deficit.

The Undiscovered Jew said...

The above was from me.

Audacious Epigone said...


I don't buy it. To call the US trade deficit a capital surplus is like equating my remaining credit line with personal wealth, even though I'm already up to my eyeballs in debt. The credit issuers presumably think I'll be able to pay it back, but as that presumption turns out to be wrong (and the economic 'readjustment' is strongly suggesting to us that it is), if I'm leasing or have already sold all my means of earning an income, I'm SOL when the credit line disappears.

Anonymous said...

In the tax code, there has to be a distinction made between what Friedrich von Blowhard of 2Blowhards calls low risk-high reward jobs (finance, esp hedge funds, BIGLAW, medicine, accounting) and high risk-high reward jobs (entrepreneurship?).

I disagree that people in the top 1% of the income bracket are necessarily the most productive people in America. Some are, of course, but others are just hedge fund managers.

Anonymous said...

This has no chance until Boomers start dying off because they are way too selfish. Unless, we give them a seniors waiver for the national sales tax with a cap on it so the grandkids don't abuse tax-free Papi. Has anyone done the math on 23% of our consumption?

The Undiscovered Jew said...

I don't buy it. To call the US trade deficit a capital surplus is like equating my remaining credit line with personal wealth, even though I'm already up to my eyeballs in debt.

Federal deficits do matter but the trade deficit is more of a measure of investment capital coming into the United States.

But it looks we'll have to agree to disagree.

I disagree that people in the top 1% of the income bracket are necessarily the most productive people in America. Some are, of course, but others are just hedge fund managers.


While conceding individual exceptions, on average the top 1% are the most productive because they are on average the highest IQ and the most ambitious.

I don't think we can get much more output from the top 10% because compared to other industrialized nations the top highest income workers in the US are taxed fairly little.

We should look to improving the output and productivity of the more average whites.

The Mormons have shown how good lifestyle choices can make white Mormons outperform other American whites of similar IQ levels.

With good payroll tax incentives we could get more productivity out of more average whites.

Audacious Epigone said...


The only conceivable way to do that, given the selling point that a consumption tax will be free of special exceptions, is to give them a large prebate upfront. Senior discounts or something similar would be a mess.