One way the US is losing on trade

When the discussion of corporate income tax rates and VAT or a national sales tax comes up, the conversation almost immediately becomes one of comparing a tax on profits or work vs. a consumption tax.  It quickly turns into a political football of whether the rich corporations or poor consumers are being taxed.  The reality is all corporate taxes are included in the price of the good sold, so the consumer pays all taxes, all the time.  The discussion really needs to be about how, why and how much we are losing on trade with foreign countries.  This subject is made to seem complicated, but it isn't. just follow the lead of countries like Ireland that lowered their corporate rates.  Why reinvent the wheel?  But to be clear I'm NOT proposing an extreme 23% VAT like Ireland has, but a VAT rate that is net neutral in terms of tax burden on US sales with about a 10-12.5% corporate income tax rate.

I chose to use Ireland in this example because companies inverting or moving from the US to Ireland is in the news a lot these days.  Also as free trade agreements came into being and duties and tariffs were reduced Ireland dropped their corporate income tax rate from 50% in the 1980s to 12.5% today.

One of the ways the US is losing on trade is the high corporate income tax along with the lack of VAT or nation sales tax.  One of the main functions of the VAT in countries with low corporate income tax rates is to replace lost income tax revenue.  VAT also insures imports experience a heavy tax.  Lets look at a hypothetical example

Sales in the US
	US Company	Irish Company
Sales Price	$10,000,000	$10,000,000
Before Tax Profit	$1,000,000	$1,000,000
US Fed. Tax	$350,000	$0
Irish Tax		$125,000
After Tax Profit	$650,000	$875,000
Tax Savings		$225,000

Using an example where a US company and an Irish company make the same sale in the US with the same before tax profit and no duties, the Irish company saves $225k on a $1 million before tax profit, making $875k compared to the $650k profit for the US competitor.  This is a difference of 22.5% of the pretax profit.

In the real world that $225k savings goes to pay for shipping and other related costs to making the sale in the US rather than Ireland.  And some is used to undercut the price of the US company.  But with such a large savings, 2.25% of the total sale, some likely also stays in the pocket of the Irish manufacturer.  Almost certainly this leaves $150k-$200k for the Irish company to use to undercut the US competitor on price if needed.

Now you ask how does the Irish gov't get along with all the lost corporate income tax.  Easy they replace it with revenue from a national VAT or sales tax.  The Irish rate is 23% of the total sale.

Sales in Ireland
	US Company	Irish Company
Sales Price	$10,000,000	$10,000,000
Before Tax Profit	$1,000,000	$1,000,000
US Fed. Tax	$350,000	$0
Irish Income Tax		$125,000
Irish VAT	$2,300,000	$2,300,000
Irish total Tax		$2,425,000
After Tax Profit	$650,000	$875,000

If the same sale occurs in Ireland, the Irish gov't receives $2.3 to $2.43 millions in tax depending on whether the sale was from a US or Irish company.  In this scenario the Irish company still has the $225k advantage over the US competitor.  But now this time the US competitor has the added overhead of overseas shipping and other costs associated with making a sale in a foreign country.

Many of our trading partners have similar tax structures with low corporate rates and high VAT or national sales taxes.  This example clearly shows how and why the US is losing on trade.

Here is what happens to the sale if the US tax code is restructured to lower the corporate rate and add a VAT or national sales tax.

Sales in the US
	US Company	Irish Company
Sales Price	$9,742,857	$9,742,857
Before Tax Profit	$742,857	$742,857
US Fed. Inc. Tax	$92,857	$0
US VAT	$257,143	$257,143
Irish Tax		$92,857
After Tax Profit	$650,000	$650,000
Tax Savings		$0

Notice the corporate income tax savings leads the manufacturer to reduce the selling price while maintaining the same after tax profit.  The US gov't gets the same tax revenue because the VAT is also added to the sale.  In the end the consumer gets the same product or service for exactly the same price.  While we get the added benefit of taxing the sale made by the foreign company as well without violating any free trade agreements.  Now with no tax savings the Irish company has no advantage over the US company.  In fact they are handicapped by distance and the associated shipping and delivery costs.  This example uses a 2.6% VAT.  This leads one to believe that the corporate income tax rate could be lowered and replaced by a 2-4% national sales tax or VAT.

It is plain to see this is a win win scenario to lower corporate rates and initiate a VAT or national sales tax.  There are other benefits as well.  Our companies would thrive leading to more hiring at higher wages.  This is good for our people, but would also increase federal revenues through increased individual income taxes.  Total federal individual income taxes are 5 times more than corporate income taxes.  This leads one to the conclusion that raising employment and raising wages for everyone will have a far greater affect on federal revenues than focusing on corporate rates.