[Congressional Record Volume 142, Number 137 (Saturday, September 28, 1996)]
[Senate]
[Pages S11634-S11638]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




USA TAX PLAN AND ITS PROVISIONS PROMOTING INTERNATIONAL COMPETITIVENESS

  Mr. NUNN. Mr. President, today I would like to again discuss tax 
reform and in particular an aspect of the unlimited savings allowance 
[USA] tax plan which I believe is very important to our Nation's 
future--the USA tax plan's tax treatment of exports.
  Before discussing this specific issue, I would like to refresh the 
memories of my colleagues about why the replacement of the current Tax 
Code with a superior alternative is so necessary for the health of the 
country and our economy. In my judgment, until we make this case to our 
fellow citizens on the economic merits of fundamental change, 
structural tax reform will not happen.
  Central to this case is the urgent need to raise the level of 
national savings. It is critical that we recognize the current bias in 
our Tax Code against the saving and investment that are the key to 
higher living standards, and take steps to correct that bias.
  Higher savings lead to more investment. More investment will, in 
turn, lead to increased productivity from American workers. The more 
productivity we have from our workers, the more competitive we are in 
the international arena. The more competitive we are in the 
international arena, the better jobs we have. The better jobs we have, 
the higher income we have as Americans.
  Our current saving rate is low by our historical standards and it is 
the lowest of all major industrialized nations.
  In the 1980's, our savings rate dropped to an average of 3.6 percent, 
half the level of the 1950's, 1960's, and into the early 1970's. In the 
first 5 years of this decade, 1990 to 1994, the U.S. savings rate has 
fallen almost 50 percent from the already low levels of the 1980,s, to 
just 2.1 percent, and reports show that our savings rate is continuing 
to erode. This is far below the comparable figures of 10 percent in 
Germany, 18 percent in Japan, and the even higher savers along much of 
the Pacific rim.
  Without adequate savings, our level of investment will continue to be 
correspondingly low. Low saving, in short, directly imperils our future 
standard of living.
  Behind the saving shortfall lurks a very serious abdication of our 
economic responsibility to the next generation of Americans. We seem to 
have forgotten the principle tenet of the American dream--that, like 
our forefathers did for our generation, we must improve and better 
prepare our country for the generations that follow.
  Every day we are bombarded with messages equating spending with the 
good life and a strong economy--in short, consumption as personal 
privilege and patriotic duty. Proponents of thrift have been made to 
appear self-punishing, antisocial, and scrooge like.
  Nothing could be further from the truth. Saving is simply the 
deferral of some consumption today so that we and our children can 
consume more in the future. Because our current level of national 
saving is so low, we cannot be assured of vigorous economic growth in 
the future. Politically, the failure of Americans to save for their 
future--one study estimates that the average American has about $7,000 
in assets in retirement--means that entitlement programs such as Social 
Security have become economic life rafts that can not indefinitely 
support the load they are being asked to carry.
  Polls have shown that a majority of today's younger generation 
believe it is more likely that UFO's exist than believe the Social 
Security program will exist--in its present form--when they reach 
retirement age. As our former colleague Russell Long used to point out, 
leadership if often determining which direction the people are going 
and running like heck to get in front of them to lead them where they 
already are going. The American people have a better understanding of 
the problems we face as a Nation than our political leaders seem to 
acknowledge and it is incumbent on our Nation's leaders--the President 
and the Congress--to begin to exercise responsible leadership in 
developing long-term policies to address these shortcomings.
  As most of my colleagues acknowledge, the best thing we can do to 
improve national saving is to balance the Federal budget. Chronic 
budget deficits have in recent years siphoned away what meager private 
and business saving we have managed to amass. It has driven up the 
costs of acquiring this capital and it requires that we run massive 
trade deficits to finance our country's need for capital.
  But progress against the deficit isn't enough. We have an even more 
difficult task before us: Helping our fellow citizens to understand 
that thrift isn't counterproductive to the long-term health of the 
economy.
  This is a matter of leadership. But it is also a matter of policy. 
And that is where fundamental tax reform comes in.
  For it is inescapable that the current Tax Code, because of its bias 
against saving relative to consumption, subsidizes the present at the 
expense of the future.
  That is the core, intrinsic, systemic problem that requires 
fundamental correction. It is around this fact--that the government 
extracts revenues from the economy in a way that hinders the ability of 
people to provide for their futures and of companies to grow--that a 
lasting movement for change can be built.

  Certainly it was America's saving and investment crisis that 
motivated Senator Domenici and me to develop the USA tax system. Our 
proposal rests on a few central features designed to end the current 
code's bias against saving and investment.
  First, the USA individual tax treats all income alike regardless of 
source and it taxes that income once and only once.
  Second, the USA individual tax permits every taxpayer an up-front, 
overt, and unlimited deferral on that part of their annual income they 
use to add to their total saving.
  Third, the USA business tax allows the expensing of all real business 
investment.
  These three points are at the revolutionary heart of the USA tax. 
They constitute a revolution in the tax base--in what we tax and how we 
tax. That is where the revolution is needed and where, given public 
understanding, it can have its most lasting impact.
  The USA tax plan has other important features. It is more efficient 
then the current tax Code. According to the tax Foundation, the USA tax 
plan would cut by 76 percent the compliance costs now imposed by the 
individual and corporate income taxes.
  In terms of fairness and understandability, the USA tax treats all 
income alike. It treats all businesses, from corporations to 
partnerships to farmers to sole proprietors, alike. It retains the 
progressivity of the current code.
  It is designed to be revenue neutral. It is internally inconsistent 
to try to encourage private saving on the one hand and encourage public 
dissaving on the other. The USA tax maintains the proportion of the 
overall tax bill paid by individuals and businesses. There is no 
intention like the 1986 tax Reform Act to shift the tax burden from 
individuals to the corporate community.
  The USA tax also grants to employees and to employers a dollar for 
dollar tax credit for the deeply regressive FICA payroll taxes. I have 
addressed this very important feature of our proposal in separate 
remarks.
  Today, I would like to highlight another key feature of the USA plan, 
its treatment of imports and exports. With respect to competitiveness, 
the USA business tax levels the international playing field for 
American business by implementing a territorial and border adjustable 
tax. All goods, whether produced here or abroad, sold in the United 
States will bear the same US tax burden, while U.S. exports will not 
carry the cost of U.S. taxes when sold abroad.

  Mr. President, many times I have heard my colleagues say that we must 
have a level international playing field on trade issues. I can recount 
some of the numerous legislative initiatives, including the super 
section 301 provision, the Market Promotion Program, and the Export 
Enhancement Program, that have been enacted to provide this level 
playing field. I have supported

[[Page S11635]]

many of these efforts. We recognize that we live and compete in a 
global economy. This economy is intensely competitive and it is 
increasingly important to our economy that the United States remain a 
global economic leader in this area. If anyone questions how important 
trade is to our economy, consider the following: Exports currently 
comprise 8 percent of the american gross domestic product [GDP] and 11 
million jobs. If you include imports and cross-border investment with 
exports, trade-related components represent roughly one-third of the 
American economy. So we can and should continue to encourage U.S. 
exports.
  To do so, we must address the single largest impediment currently 
shackling U.S. industry in its efforts to compete in the global 
economy--the current Tax Code.
  As Salvatore Barone, the president of Harper Surface Finishing 
Systems, Inc., of Meriden, CT, and the chair of the International Trade 
Committee of the Association for Manufacturing Technology, pointed out 
in his July 18, 1996, testimony before the House Ways and Means 
Committee:

       . . . the present federal income tax in the Internal 
     Revenue Code of 1986 is almost exactly opposite of what is 
     needed to serve the best interests of the United States. Had 
     one set out by design to create a tax system that works 
     against us (and, therefore, in favor of our foreign 
     competitors), it is hard to imagine a more successful job 
     than the present federal income tax. It discourages saving 
     and productive capital investment in the United States; it 
     favors imports over exports; it makes it hard for U.S. 
     companies to directly compete in foreign markets; and, if 
     they do, it discourages them from bringing the money home for 
     reinvestment in the United States.

  I agree wholeheartedly with Mr. Barone. He has hit the nail on the 
head. At this point, Mr. President, I ask unanimous consent that the 
entire text of Mr. Barone's testimony be printed in the Record. I would 
recommend to my colleagues this testimony's international 
competitiveness index which grades various tax proposals in the 
international trade arena.
  There being no objection, the testimony was ordered to be printed in 
the Record, as follows:

     Testimony of AMT--The Association for Manufacturing Technology


                            I. Introduction

       I am Salvatore V. Barone, President of Harper Surface 
     Finishing Systems, Inc., Meriden, Connecticut, and I am 
     testifying today on behalf of AMT--The Association For 
     Manufacturing Technology, whose International Trade Committee 
     I am honored to chair. AMT is a trade association whose 
     membership includes over 350 machine tool building firms with 
     locations throughout the United States. America's machine 
     tool industry builds and provides to a wide range of 
     industries the tools of manufacturing technology including 
     cutting, grinding, forming and assembly machines, as well as 
     inspection and measuring machines, and automated 
     manufacturing systems. The majority of the association's 
     members are small businesses.
       Today's topic--international competitiveness--embodies the 
     essence of your Committee's continuing series of hearings on 
     fundamental tax restructuring: the need to concentrate on 
     creating a new tax system that will serve the long-term 
     national interest in a global economy.
       America urgently needs a tax system rebuilt from the ground 
     up around a new set of design principles to compete and win 
     in world markets. That is fact one. Fact two is also obvious: 
     the present federal income tax in the Internal Revenue Code 
     of 1986 is almost exactly the opposite of what is needed to 
     serve the best interests of the United States. Had one set 
     out by design to create a tax system that works against us 
     (and, therefore, in favor of our foreign competitors), it is 
     hard to imagine a more successful job than the present 
     federal income tax. It discourages saving and productive 
     capital investment in the United States; it favors imports 
     over exports; it makes it hard for U.S. companies to directly 
     compete in foreign markets; and, if they do, it discourages 
     them from bringing the money home for reinvestment in the 
     United States.
       At the very time that successful competition in world trade 
     has become increasingly important to national well-being, we 
     are plagued by persistent trade deficits. We have become a 
     debtor nation, dependent on borrowing from abroad. 
     Productivity has lagged; real wage growth has been slow; 
     annual economic growth rates have been less than 
     satisfactory; and federal budget deficits have continued to 
     mount. Given the seemingly intractable nature of these 
     failings, some people have characterized the 1990s and beyond 
     as an ``age of diminished expectations'' for America. From an 
     international perspective, some pessimists may mistakenly 
     view world trade as exporting more U.S. jobs than American-
     made products.
       We at the AMT do not share this pessimistic view about the 
     future. We believe that American industry can compete and win 
     and that successful competition in world trade is the key to 
     the kind of enhanced economic growth on which a more secure 
     and prosperous America depends. We say this from the 
     perspective of the industry which produces the machinery and 
     new manufacturing technologies used by other businesses to 
     produce products sold here and around the world. We are at 
     the heart of the productive process--putting more and better 
     factory-floor technology in the hands of American workers. We 
     are also substantial exporters ourselves. About 35% of the 
     output of our industry is exported. In total, we employ 
     53,300 people and most of these jobs are good paying 
     manufacturing jobs using the best and newest technologies. My 
     own company is one of the smaller members of the industry, 
     but we employ approximately 50 people and, to date, more than 
     68,000 of our modern surface finishing systems have been 
     installed worldwide. In recent years, 15 to 20% of our sales 
     have been exports. Thus, we are strong believers in export 
     trade and in the benefits to America that derive from an ever 
     increasing flow of ``American-made'' goods into global 
     markets.
       We also believe that American businesses and their 
     employees should be able to compete on a level playing field; 
     most particularly that the tax system of the United States 
     should not be biased against our own best interests in the 
     global marketplace. American-made machine tools comprise only 
     13% of the world supply. Worse, about 50% of the machine 
     tools used in the United States are of foreign origin. How 
     much greater would our share of domestic and foreign markets 
     be if the American tax system were not biased against us? It 
     is hard to say. The same is true of American industry in 
     general. Taxes are not the only factor as we all attempt to 
     compete at home and abroad against foreign competitors. But 
     we and our employees would like to have the opportunity to 
     compete on a level tax playing field and we believe it is a 
     matter of urgent national policy that we and they be given 
     the chance.
       It would be one thing if the anti-investment, anti-export 
     biases in the Internal Revenue Code of 1986 were necessary--
     if there were no alternative. But that is not the case. There 
     are alternative tax systems which are not only far more 
     congenial to successful international competition but also 
     more fair, efficient and consistent with the best interests 
     of the United States and the American people. We hear much 
     about ``tax fairness'', but there is certainly nothing fair 
     about a tax system, such as the present federal income tax, 
     which impedes economic growth, costs jobs and lower's living 
     standards.
       For the most part, the pro-job, pro-growth alternative tax 
     systems are well-known and well-developed in substantial 
     detail. The principal ones are identified in the notice of 
     your Committee's hearings. We applaud the Chairman and the 
     Committee for putting the international focus on the leading 
     alternative tax systems and we welcome the opportunity 
     to comment on them. This Committee, this Congress, and the 
     next, have an historic opportunity to fundamentally 
     restructure the American tax system for the better. Just 
     as it is vital that we not lose that opportunity, it is 
     equally vital that we not lose sight of the world trade 
     aspects amidst the many other concerns that bear upon 
     taking such a monumental step.
       Focusing on international trade necessarily puts a heavy 
     emphasis on taxes paid by businesses, but, in doing so, we do 
     not mean to diminish the importance of the way individuals 
     are taxed under any new alternative tax system. Successful 
     international competition depends on a higher level of 
     personal saving and investment in the United States. 
     Therefore, from every perspective, fundamental tax reform 
     must begin with removing the present strong bias against 
     saving. Individuals should either be allowed to deduct the 
     amount they save (and later pay tax when they withdraw their 
     deferred income from the national savings pool) or, if they 
     are allowed no deduction, the earnings on their savings 
     should be excluded from tax. So long as the present bias 
     against personal saving exists, no matter how good the new 
     international tax rules may be, the U.S. economy will not be 
     able to compete at its full potential in the global market. 
     Similarly, to the extent that corporations and other 
     businesses are taxed separately from individuals, businesses 
     should be allowed to expense capital equipment purchases. 
     Fortunately, the present law penalty on personal saving and 
     business capital investment is so indefensible that its 
     elimination is now almost synonymous with fundamental tax 
     restructuring. In one way or another, elimination of the bias 
     against saving and investment is embodied in all the leading 
     alternative tax proposals we have evaluated. In that respect, 
     AMT endorses them all.
       Before going on to evaluate and compare the strictly 
     international tax rules of the leading alternatives--most 
     notably as related to exports, imports and taxation of 
     foreign-source income--AMT would like also to share with the 
     Committee a few overall perspectives which we believe are 
     highly relevant to choosing between the various alternatives. 
     First, any new tax system should be considered as a whole--
     the individual portion and the business portion must be 
     considered together. In short, it must truly be a tax 
     ``system'' that is internally consistent and that actually 
     works. Indiscriminate cherry-picking of particular aspects of 
     different proposals--no matter how appealing

[[Page S11636]]

     they may seem in isolation--could produce a monstrosity 
     similar to present law. Second, the new tax system for 
     America's future must be enacted as a whole. Not only must it 
     be fair, it must be perceived as fair by the American people.
       Further, we believe that the new tax system should truly be 
     an ``American'' tax system. International comparisons are 
     often relevant, particularly when illustrating the relative 
     disadvantages presently imposed by the Internal Revenue Code 
     of 1986, but the basic elements of the new tax system should 
     be chosen on their own merits, without regard to what other 
     countries may or may not do. For example, there is an 
     independent rationale, well-grounded in tax policy and 
     economics, for allowing a deduction for personal saving and 
     business capital investment. Cross-border adjustments for 
     exports and imports in combination with a territorial rule 
     that excludes foreign-source income provide a logical and 
     meritorious framework that stands on its own. The presence or 
     absence of similar rules, in varying degrees, in other 
     countries' tax systems is not the reason for their adoption 
     here. Similarly, the fact that a new American tax system may 
     have some elements in common with a foreign tax system does 
     not mean that we are adopting that foreign tax system per se. 
     Quite to the contrary. For example, appropriate border tax 
     adjustments for exports and imports are not the exclusive 
     province of the European ``VAT''. They can directly or 
     indirectly be incorporated into some tax structures which are 
     more consistent with our American experience.\1\
---------------------------------------------------------------------------
     \1\ See Gary C. Hufbauer, Fundamental Tax Reform and Border 
     Tax Adjustments (Washington, D.C.: Institute For 
     International Economics, 1996).
---------------------------------------------------------------------------
       There is no reason why the United States should be limited 
     by the tax experiences of other countries. There is no reason 
     why we should not have a better tax system than anyone else--
     one that is fairer, simpler, more efficient and, above all, 
     in the long-term best interests of the United States in a 
     global economy. You on this Committee have an historic 
     opportunity and you should take advantage of it.


                II. international competitiveness index

       AMT has evaluated three leading alternative tax systems 
     against a common set of criteria directly and indirectly 
     related to international competitiveness. The criteria 
     include all of those specified by the Chairman of this 
     Committee in a public announcement in 1995, as well as 
     several others. We fully endorse the Chairman's list of 
     criteria for fundamental tax reform and agree with its 
     emphasis on simplification and on international 
     competitiveness. The alternative tax systems we have 
     evaluated are: the business-level USA Tax (the Unlimited 
     Savings Allowance System in S. 722 by Senators Pete V. 
     Domenici and Sam Nunn); the business-level Flat Tax (in 
     general, H.R. 2060 by House Majority Leader Armey); and the 
     general idea of a retail sales tax.
       In the cases of the USA Tax and the Flat Tax, the results 
     of AMT's Competitiveness Index evaluations are set forth 
     below in comparison to the present corporate income tax. 
     Because the retail sales tax does not fit readily in this 
     index format without further explanation, the retail sales 
     tax is evaluated separately in connection with a later 
     general discussion of that subject.

                   INTERNATIONAL COMPETITIVENESS INDEX                  
------------------------------------------------------------------------
                                                               Present  
                                    USA tax      Flat tax     corporate 
                                                             income tax 
------------------------------------------------------------------------
Expenses capital equipment cost   Yes (+1)     Yes (+1)     No (-1)     
 in U.S.                                                                
Excludes from tax all exports of  Yes (+1)     No (-1)      No (-1)     
 American-made products.                                                
Taxes imports of foreign-made     Yes (+1)     No (-1)      No (-1)     
 products.                                                              
Is territorial (i.e., applies     Yes (+1)     Yes (+1)     No (-1)     
 only in U.S.).                                                         
Foreign royalty income is         Yes (+1)     No (-1)      No (-1)     
 excluded export receipt.                                               
Is neutral as between labor and   Yes (+1)     No (-1) \2\  No (-1)     
 capital.                                                               
Allows credit for employer-paid   Yes (+1)     No (-1)      No (-1)     
 payroll tax.                                                           
Solves transfer-pricing problem.  Yes (+1)     No (-1)      No (-1)     
Is revenue-neutral (No overall    Yes (+1)     No (-1)      Yes (+1)    
 increase/decrease in business                                          
 taxes).                                                                
Is simple and efficient.........  Yes (+1)     Yes (+1)     No (-1)     
                                 ---------------------------------------
      Net score (Max. 10).......  +10          -4           -8          
------------------------------------------------------------------------
\2\ At the business level, it is not neutral, but tends to be neutral   
  when combined with the individual tax, except for the absence of a    
  payroll tax credit. In this latter respect, returns to labor are taxed
  more heavily than returns to capital.                                 

A. Discussion of Competitiveness Criteria in the Context of the USA Tax

       Because it satisfies all the criteria within a simple and 
     understandable framework, the USA business-level tax provides 
     an excellent illustration of how a low-rate business tax 
     which allows expensing of capital equipment in the U.S. can 
     be combined with border-tax adjustments and 
     ``territoriality'' to produce an essentially ideal result: a 
     neutral, evenhanded tax that treats all businesses alike 
     (whether corporate or noncorporate, capital intensive or 
     labor intensive, financed by equity or by debt, large or 
     small) and which is neither tilted for or against us when we 
     compete in foreign markets nor for or against foreign 
     companies when they compete in our markets.
       The USA business tax is ultimate simplicity. To calculate 
     its fax for the year, a business (l) adds up the amount of 
     its revenues for the year from sales of products and services 
     in the United States, (2) subtracts the amount of its 
     deductible input costs for the year, (3) multiplies the 
     resulting ``gross profit'' by the 11% tax rate, and (4) takes 
     a credit for the 7.65% employer-paid FICA tax imposed by 
     present law on its payroll. The payroll tax credit is a 
     unique feature of the USA Tax and is in lieu of any deduction 
     for wages paid to employees. Like the Treasury's 
     Comprehensive Business Income Tax proposal in 1992, and like 
     other proposals designed to eliminate the bias against equity 
     financing, no deduction is allowed for interest.
       From a world trade perspective, the highly salutary and 
     complementary relationships between border tax adjustments 
     and territoriality can best be illustrated by applying the 
     USA Tax in a series of fairly typical situations.
       (1) TexCorp wishes to compete in the widget market in 
     foreign Country A either by manufacturing widgets in Country 
     A for sale in Country A or by manufacturing widgets in the 
     U.S. and exporting them to Country A. Because the USA Tax is 
     ``territorial'', it does not apply to TexCorp's direct 
     manufacturing and sales operations outside the U.S. 
     Therefore, like the local widget manufacturers in Country A, 
     TexCorp only pays the Country A tax and can compete with 
     these foreign companies on a level tax playing field. 
     Similarly, because exports are excluded from U.S. tax, 
     TexCorp would only pay the Country A tax if it manufactured 
     widgets in the U.S. and exported them into the Country A 
     market. The U.S. tax effect is the same in both cases. What 
     actually happens, as is fairly typical, is that TexCorp 
     starts off by manufacturing directly in Country A in order to 
     penetrate the market and then follows up with exports of 
     American-made components and related product lines. In other 
     cases, also not unusual, TexCorp might start off-with exports 
     to Country A and then follow up with some additional direct 
     investments and operations in Country A in order to expand 
     its export sales of American-made products in Country A. 
     Thus, there is a complementary relationship between the 
     export rule and the territorial rule. (If the tax were 
     territorial, but exports were not excluded from tax, TexCorp 
     would be tax-advantaged by manufacturing abroad to sell 
     abroad.) It is also important to note that because the tax is 
     territorial, TexCorp can bring home its profits from Country 
     A and reinvest them in the U.S. tax-free; the same as it can 
     reinvest its export profits in the U.S. tax-free.
       (2) TexCorp also has a new technology related to widgets 
     which, after developing a foreign market for widgets, it 
     wishes to license to others for use in Countries B and C. In 
     other words, TexCorp wants to export the fruits of some 
     American ingenuity which is also a valuable product. Because 
     of the export rule, the foreign royalty income under the 
     license agreement is correctly excluded from tax.
       (3) NewCorp wishes to sell widgets in the U.S. market. It 
     can either manufacture the widgets abroad in Country X and 
     ship them back into the U.S. or it can build a new plant in 
     New England near its headquarters and manufacture the widgets 
     there. Because of the 11% import tax under the USA Tax, there 
     is no tax advantage for NewCorp if it manufactures abroad 
     instead of in New England. If NewCorp manufactures a $100 
     widget abroad and sells it back into the U.S., an $11 import 
     tax is paid. This is the same rate of tax NewCorp would pay 
     if it manufactured the widget in New England. (Under a 
     territorial rule without a complementary import tax, there 
     might be ``runaway'' plants, but with the import tax there 
     will be none. Thus, the synergistic combination of 
     territoriality, an export exclusion, and an import tax 
     provides the U.S. with all the advantages of territoriality 
     without the disadvantages.)
       (4) ForCorp, a foreign corporation headquartered in Country 
     Y, wishes to sell widgets in the U.S. market. It could remain 
     offshore, manufacture the widgets in Country Y and distribute 
     them in the U.S. through a sales subsidiary or it could build 
     a plant in Kentucky and both manufacture and sell in the U.S. 
     Because of the 11% import tax, there is no tax advantage to 
     ForCorp in remaining offshore.
       (5) In a variation of Situation (4), ForCorp wishes to sell 
     widgets all around the world; not just in the U.S. market. 
     Because the USA Tax rate is only 11% and because U.S. 
     production costs such as capital investment in the U.S. for 
     new plants are deductible, and because of the export 
     exclusion, the U.S. would be a very attractive place for 
     ForCorp to locate its plant.
       Not only does the combination of territoriality, an export 
     exclusion, and an import tax produce consistent procedural or 
     mechanical results in the tax calculation, the combination 
     also produces important results as a matter of economic 
     substance: income and job creation.
       A good example is the combination of territoriality and the 
     export exclusion. A recent study by Edward Graham at the 
     Institute for International Economics will soon be published 
     by the Oxford University Press.\3\ It shows an 
     extraordinarily high degree of

[[Page S11637]]

     statistical correlation between the amount of direct 
     investment by U.S. companies in a foreign country (as in 
     Situation (1) above) and the amount of U.S. exports to that 
     foreign country. In other words, the more U.S. companies 
     penetrate foreign markets and gain market share by direct 
     ``on-the-ground'' operations in a foreign country, the 
     greater the amount of exports of American-made products to 
     that country. Thus, U.S. foreign direct investment abroad is 
     good for U.S. exports and good for U.S. jobs. The combination 
     of territoriality, an export exclusion, and an import tax 
     facilitiates this synergistic result.
---------------------------------------------------------------------------
     \3\ Edward M. Graham, On the Relationships Among Direct 
     Investment and International Trade in the Manufacturing 
     Sector: Empirical Results for the United States and Japan. 
     Institute for International Economics, 1996. To appear in 
     Dennis Encarnation, editor, Does Ownership Matter: Japanese 
     Multinationals in East Asia (London: Oxford University Press, 
     forthcoming).
---------------------------------------------------------------------------

             B. The Flat Tax and the Competitiveness Index

       The business portion of the classic Flat Tax (H.R. 2060) 
     does allow expensing and is territorial, and both of these 
     characteristics are positives. But, overall, the Flat Tax 
     does not score well under AMT's International Competitiveness 
     Index. There are may reasons for this deficiency, as 
     indicated in the brief presentation of the Index itself, but 
     the most significant reasons appear to be the absence of an 
     import tax and the absence of an export exclusion.
       Without belaboring the point, a few examples may suffice. 
     In prior Situation (1) where TexCorp had the choice to 
     manufacture in the U.S. for export abroad or to manufacture 
     abroad for sale abroad, under the Flat Tax it would be to 
     TexCorp's advantage to manufacture abroad insofar as U.S. 
     taxes are concerned. This is because the Flat Tax taxes U.S. 
     exports. Similarly, in prior Situation (2), because the Flat 
     Tax taxes U.S. exports, foreign royalties from licensing U.S. 
     know-how and technology would be taxed. TexCorp might be 
     better advised to develop the technology abroad instead of 
     developing it here and licensing the use abroad. In 
     Situations (3), (4) and (5), because the Flat Tax does not 
     tax foreign imports, it would have been to the advantage of 
     NewCorp or ForCorp to manufacture abroad for sale into the 
     U.S.

               C. General Discussion of Sales Tax Option

       Setting aside all other considerations and assuming that a 
     retail sales tax replaced the federal income tax, the 
     resulting tax system would score very high on AMT's 
     International Competitiveness Index--in the area of 90 to 
     100%.
       A retail sales tax is implicitly border adjustable for 
     imports and exports and is implicitly territorial. These 
     implicit or indirect characteristics arise because a tax is 
     paid only to the extent that a retail sale occurs in the 
     United States.
       Even if, as some economic analysis suggests, the economic 
     burden, of the retail sales tax is in significant part borne 
     by businesses (and, ultimately, their owners and employees), 
     there is an implicit export exclusion because no tax is ever 
     paid with respect to a sale to a non-U.S. purchaser and no 
     tax ever enters the system potentially to be passed back to 
     the seller. Similarly, if a U.S. company is operating and 
     selling abroad, there is never any U.S. retail sale and no 
     U.S. tax ever enters the chain of price-tax-volume 
     relationships between seller and purchaser. Thus, a retail 
     sales tax is implicitly territorial.
       On the import side, if either a U.S. company or a foreign 
     company manufactures a product abroad which directly or 
     indirectly finally shows up as a retail sale in the U.S., a 
     tax liability arises. Thus, in this indirect sense, there is 
     an implicit import tax, i.e., the retail sales tax is the 
     same whether the product sold in the U.S. is of domestic or 
     foreign origin.


                  iii. conclusion and recommendations

       AMT believes that any new tax system for America's future 
     should be terroritial, should include complementary export 
     and import adjustments, and should relieve the bias against 
     personal saving and business capital investment. The new tax 
     system should also be simple.
       Based on our analysis using the International 
     Competitiveness Index, it appears that there are two 
     fundamentally different ways of doing this. One is the USA 
     Tax (which resembles a very simplified version of a corporate 
     income tax with expensing and appropriate international 
     adjustments engrafted on to it). The other is the general 
     idea of replacing the entire federal income tax with a retail 
     sales tax.
       While the USA Tax and the retail sales tax are far apart 
     and greatly different in many other respects, either one 
     would have a beneficial impact on international 
     competitiveness.
  Mr. NUNN. Mr. President, Senator Domenici and I believe we have a 
solution to the export problems created by our current Tax Code. The 
solution is the U.S.A. tax plan. We believe our proposal will make 
America much more competitive.
  The first thing the U.S.A. tax plan does to level the playing field 
is to make America's business tax--which replaces the corporate income 
tax--border-adjustable. We exclude from our domestic tax base any items 
made by American manufacturers for export, just as our major 
competitors do by rebating their value-added taxes when their goods are 
exported for sale here.
  Conversely, when a company, foreign or U.S. owned, manufactures 
abroad and sells in the U.S. market, the company is, through the 
operation of a new import tax, taxed essentially the same as if the 
factory were located in the United States. Again, we are trying to give 
imports and exports the same treatment our competitors do, rather than 
perpetuate the present system which favors companies that are located 
abroad selling to this country. Imports would be subject to an import 
tax that would equal the overall business tax levied in this country.
  The border adjustability feature of the U.S.A. plan is intended to 
favor and encourage production and employment here in the United States 
and to make American goods, services and know-how more competitive in 
foreign markets. Our current Tax Code does exactly the opposite.
  For example, in Georgia, Ford Motor Co. operates a very large 
manufacturing facility which produces thousands of Ford Tauruses and 
Mercury Sables every year. These vehicles are mid-sized, moderately 
priced automobiles. Many of these vehicles are exported. When a $20,000 
Taurus is exported to Great Britain, it carries with it the burden of 
today's U.S. Tax Code--a 34-percent rate on corporate profits, the 
alternative minimum tax, and numerous other business levies. In 
addition when this Taurus is sold in Great Britain, a 17 percent Value 
Added Tax [VAT] is also imposed on it. This adds $3,400 to the price of 
the car. In essence, doubling the tax burden on this single car.
  Under this same scenario with the U.S.A. tax plan, when this Taurus 
is exported, no U.S. business income tax would be imposed. The car 
would still be subject to a VAT when it reaches Great Britain, but it 
would not be burdened with the cost of the U.S. Tax Code.
  Conversely, under today's Tax Code, when Rover--a British automobile 
manufacturer--exports a vehicle to the United States, the VAT it 
carries in Great Britain is rebated to Rover before it leaves British 
soil. When this Rover vehicle is sold in the United States, it carries 
no U.S. corporate income tax burden nor does it carry a VAT. With the 
U.S.A. tax system, an U.S. import tax would be levied on the Rover 
vehicle. This levy would be the equivalent of the U.S. corporate tax 
carried on the Taurus built and sold in the United States. In other 
words the playing field would be level on goods manufactured abroad and 
sold in the U.S. market compared to goods both manufactured and sold in 
the United States.

  The second, related feature of our business tax on imports and 
exports is that the U.S.A. tax is territorial. If a company located a 
plant in a foreign country in order to sell in that country's local 
markets, then under the U.S.A. tax plan we do not allow a deduction for 
those foreign costs, but neither do we include the proceeds of these 
foreign sales as part of our domestic tax base. Overseas sales would 
not be part of that company's U.S. corporate income tax calculations.
  This is what we mean by saying the U.S.A. tax is territorial. 
Businesses would not have to include overseas sales in their profits 
when computing their business taxes, nor would they deduct costs they 
incur purchasing goods and services overseas. I might add that this 
will have another huge benefit--it will greatly simplify the 
computation of U.S. tax liabilities for our international corporations.
  When I have highlighted this aspect of the U.S.A. tax plan to groups 
here in Washington and throughout the country, one of the first 
questions asked about this element of the U.S.A. tax plan is--is it 
GATT complaint? According to the many tax and trade experts, including 
officials at the Department of the Treasury, we have consulted, the 
weight of the legal argument is with the U.S.A. tax plan.
  Should the U.S.A. plan be enacted, we can expect a GATT challenge. In 
fact, a number of our allies' Ambassadors have raised this question 
with me. When I explain the essence of the U.S.A. tax plan to them and 
point out that their country's value added taxes [VAT's] do the same 
thing to U.S. products exported to their nations as the U.S.A. tax 
proposes to do to their exports, the answer I usually receive is a 
blank stare. It seems to me that what is good for the goose is good for 
the gander.
  Another question I receive is the question about the U.S.A. tax 
plan's omission of the deductibility of wages at the business level. 
Wages under the

[[Page S11638]]

U.S.A. tax plan would not be deductible. The principle reasons why this 
deductibility is denied are twofold: first under GATT rules, our Nation 
can not provide wage deductions while also providing, in essence, an 
excise tax on imports and second to provide wage deductibility and 
still maintain revenue neutrality the business rates would have to be 
raised significantly from the 11 percent flat rate we propose.
  While this conclusion seems necessary, the wage nondeductibility 
issue is going to have to be thought through very carefully. Attaining 
a level playing field in international trade is a very important goal 
and to achieve it would be a sea change in U.S. tax policy. The same 
would be true to deny wage deductions to businesses. However, on this 
latter point, businesses need to keep in mind that the business rates 
proposed in the U.S.A. tax plan are much, much lower than today's 
business tax rates. In fact, they would be less than one-third of 
today's rates, yet these rates raise the same amount of revenue for the 
Federal Government as is raised today. It is also important to keep in 
mind that under our proposal, businesses would receive a credit for the 
employer share of Social Security taxes paid. So the effective business 
tax rate on wages paid up to the $62,000 Social Security tax wage limit 
would be 11 percent less 7.65 percent paid in FICA taxes, or just 3.35 
percent.

  Mr. President, in conclusion, the U.S.A. tax plan would promote U.S. 
competitiveness and level the international playing field for American 
business by implementing a territorial and border adjustable business 
tax. All goods, whether produced here or abroad, sold in the United 
States will bear the same U.S. tax burden. And U.S. exports, which are 
generally subject to a value-added tax when they are sold in foreign 
markets, would no longer be subject to a U.S. corporate income tax on 
top of that. It's time we had a Tax Code that works for us, not against 
us, and the U.S.A. plan, for this and many other reasons, provides the 
answers.

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