THE TTALK QUOTES
On Global Trade & Investment
Published Three Times a Week By:
The Global Business Dialogue, Inc.
Washington, DC   Tel: 202-463-5074
No. 17 of 2017
MONDAY, MARCH 20, 2017

Click here for last Wednesday's Lighthizer quote on China.

THE BORDER TAX PROBLEM

"I don't know what the right answer is, but it's a problem in my judgment, this disequilibrium between direct and indirect taxes. I don't view it as having any real or economic basis."

ROBERT LIGHTHIZER
March 14, 2017

CONTEXT
When it was Senator Ben Cardin's (D MD) turn to question the witness at last week's confirmation hearing for the nominee to become the next USTR, he led off with high praise for the candidate, Robert Lighthizer, and questions about specific issues. The importance of making compliance with anti-corruption agreements a key U.S. negotiating objective was one of those. Another was his concern that the U.S. do what it can to ensure that the European Union does not sponsor boycott, divestment, or sanctions initiatives against the state of Israel.

After gaining commitments from Mr. Lighthizer on those topics, Senator Cardin turned to border taxes. Three types of border adjustable taxes were clearly in his mind: 1) the value added tax systems used by members of the European Union and many other countries; 2) the border adjustable tax that has been proposed by the leadership of the House and is included in the Ways and Means Committee's blueprint for tax reform; and 3) a proposal offered by Senator Cardin himself at the end of last year -- the " Progressive Consumption Tax (S3529) -- a bill he will presumably reintroduce in this new, 115th Congress.

Here is our transcription of the full exchange between Senator Cardin and Robert Lighthizer on taxes:

SENATOR CARDIN:
There is now currently an effort to try to change our tax code so that we can get a border adjustment, which would be fairer to American manufacturers.

And we've always included in our trade promotional authority an effort by the USTR to get border adjustment comparable to what our trading partners have on products that enter [our] market [and] on our products entering their market. The difficulty of course is that we have not harmonized with the international community in the use of a consumption tax. I've introduced a progressive consumption tax that is patterned after what is accepted internationally as a border adjusted tax.

It's difficult to see us winning too many cases in the WTO with something that is an income tax that we call a consumption tax. So, I just urge you in your position to give a realistic assessment to those of us in Congress as to what is likely to be border adjusted, so that, at long last, we can try to set up a level playing field for American manufacturers and producers in the international marketplace as it relates to tax burdens.

MR. LIGHTHIZER
Thank you, Senator. I have spent a lot of time on this issue over the years. I was involved in DISC and FISC and all these things at various times. I don't know what the right answer is, but it is a problem in my judgment, this disequilibrium between direct and indirect taxes. I don't view it as having any real economic or legal basis. I think it's sort of serendipitous and unfortunate from the point of view of the United States. So I would look forward to working with you.

COMMENT
It would be unfair to say that Senator Cardin and Mr. Lighthizer were talking past one another. Clearly, they are on the same page in believing that the current system--that is the system that has been hammered out over the years in various GATT-WTO disputes--puts American producers at a disadvantage in most of the world's markets, including the American market.

The essence of that system, referenced briefly in Mr. Lighthizer's remarks above, lies in the distinction it draws between "direct" and "indirect" taxes. That is one of those many distinctions which is "not intuitively obvious to the untrained mind." We still haven't mastered it in our bones, but we get the basics. Here's how Wikipedia explains the difference:

An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax, which is collected directly by government from the persons (legal or natural) on whom it is imposed. Some commentators have argued that "a direct tax is one that cannot be changed [sic] by the taxpayer to someone else, whereas an indirect tax can be."]

Mr. Lighthizer may well be correct that the difference between direct and indirect taxes is a distinction without a difference, and that the great disparity in the treatment of the two in international commerce is unwarranted. That said, it is an argument that the U.S. has yet to win in the WTO. That is a point we believe Senator Cardin was trying to make with respect to the House blueprint.

***

We'll follow Mr. Lighthizer's very wise lead and let those issues ripen further before commenting either on what we think others will do or should do. In the meantime...
RELATED EVENT
March 29 is the date for GBD next event, which will focus on

BORDER TAXES: THE BACKROUND, A PROPOSAL, AND THE CHALLENGES

The title link will take you to the flyer for this program, including the list of speakers and registrations options. The event will be at the National Press Club from 9 a.m. to 10:30 a.m., with registration beginning at 8:30. Sign up today and join us on the 29th.
SOURCES & LINKS
At the Hearing is a link to the C-Span video of this event. The exchange with Senator Cardin on border taxes begins roughly at 1 hour, 20 minutes into the hearing.

Direct vs Indirect takes you to the Wikipedia entry on these two kinds of taxes.

The "Progressive Consumption Tax" takes you to the text of this bill introduced by Senator Cardin in December 2016.

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