Posted on 05/15/2003 11:23:58 AM PDT by Willie Green
For education and discussion only. Not for commercial use.
The European Union is threatening $4 billion in trade sanctions against the United States over the manner in which American corporations are taxed on overseas income. Courtesy of globalization and U.S. membership in the World Trade Organization, foreign nations can now dictate American tax policy, once the sovereign realm of the U.S. Congress.
Any economic or trade decision by the EU must, of course, be seen not simply as a matter of “harmonizing different systems,” but as an attempt to skew the playing field in their favor. It is an exercise in power politics, and not principles that are at stake. There is escalating tension between the French-German faction of the "old Europe," which controls EU policy, and the United States. The EU´s goal is fairly simply stated: to curtail America's global preeminence.
Since 1984, Foreign Sales Corporation (FSC) provisions have enabled U.S. exporters to exempt between 15% and 30% of their export income from U.S. taxes. According to Internal Revenue Service data, FSC provisions were used on almost half of U.S. goods exports. In 1998, the EU filed a complaint with the World Trade Organization (WTO), arguing that the United States' FSC tax benefit was an export subsidy in violation of WTO rules.
An interesting question has been why the EU waited almost 14 years to challenge the FSC. The answer lies in the slowdown of the world economy since the 1997 Asian financial crises. All trade issues have become more difficult as states and corporations seek economic advantages in rough times.
In October 1999, a WTO panel ruled in the EU=s favor; and in November 2000, the United States revised its export tax provisions in an attempt to meet WTO requirements without crippling American exports. U.S. firms must compete with European firms, which have a portion of their value-added taxes (VAT) rebated by their governments on goods they export. American exporters pay a 35% U.S. corporate tax on their profits. In addition, they pay the VAT on goods they export for sale in Europe. The FSC compensates American manufacturers for this double taxation, thus leveling the playing field and preserving American jobs in the export sector.
However, the EU challenged the revised system, and the WTO ruled on August 30, 2002 that the EU can impose $4 billion in punitive duties on U.S. exports. By this time, the U.S. dispute with France and Germany at the United Nations over Iraq had heated up.
Although the U.S. economy is growing slowly, the EU seems to be heading back toward a recession. The ongoing conflicts at both the UN and WTO show the role of economic rivalry in world politics. France and Germany want the UN to run the reconstruction effort in Iraq, so as to protect the substantial trade and investment ties they had with Saddam Hussein's regime. EU Trade Minister Pascal Lamy of France has threatened to challenge the United States over Iraq at the WTO.
The EU cannot match the U.S. as a global military power, but it can use its influence in multilateral organizations to strike at the economic foundations of American strength. The foreign judges who decide WTO cases represent countries whose interests would be advanced if the competitiveness of American firms and products can be undermined. For this reason, among others, it was a dreadful mistake for the United States to accept the creation of the WTO, and the Bush Administration would be wise to exercise its right to withdraw. The making of tax and trade policy and the conduct of negotiations are the proper duties of the national government, not matters to be surrendered to third parties who have no concern for, and often a marked bias against, the interests of the American people.
The FSC case is the largest action brought before the WTO and represents a substantial break with the idea that the WTO would only deal with minor trade disputes as a way of shielding the major powers from unnecessary conflict. The largest case the U.S. has brought at the WTO was in 1999 when it imposed punitive tariffs on $308 million of EU exports over trade restrictions on bananas and hormone-treated beef. The U.S. retaliation for bananas was lifted in 2001, but $116 million in duties remain from the beef dispute, a pittance compared to the $4 billion EU threat.
On May 13, the Bush Administration finally filed a long overdue WTO challenge to the EU's moratorium on biotech foods and crops. Washington has exercised on this issue even as the EU has led a coalition to block the liberalization of world farm trade, which has been the primary U.S. objective in WTO negotiations. EU resistance was a major cause of the 1999 failure to launch a new round of talks in Seattle and has now stalled the Doha Round. The EU has even used its diplomatic clout in Africa to block the acceptance of American food aid as prejudicial to European farm interests.
U.S. lawmakers have also tried to seek compromise. Sen. Chuck Grassley, chair of the Senate Finance Committee, has offered a five year phase out of the FSC. The EU has rejected this reasonable offer. Rep. Phil Crane, chair of the House Subcommittee on Trade, wants to replace the FSC with a tax reduction on all American manufacturing. Without some replacement for the FSC, "U.S. jobs and wealth would be artificially transferred to Europe," argues Rep. Crane. Though Crane's bill (H.R. 1769) offers only minor tax relief, the degree of relief is based on the percentage of a firm's production that takes place in the United States, as opposed to overseas. It is thus a step in the right direction, albeit a small one.
American industrial production and exports have been down the last two years. The United States appears headed toward a $600 billion trade deficit this year (about $100 billion of which will be with the EU), which will exert a strong downward pressure on the economy, shaving a probable two percent or more off of GDP growth.
Washington must warn Brussels that a decision to levy sanctions on American exports will begin a trade war that the Europeans cannot win. The EU challenge should, however, awaken American leaders to the need to reform and toughen trade policy if the U.S. is to prosper in a world were political economy is a blood sport.
William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.
Then why are the Euroweenies protesting the way we currently do it?
Hmmmmmm???
The EU challenge should, however, awaken American leaders to the need to reform and toughen trade policy if the U.S. is to prosper in a world were political economy is a blood sport.
Don't mess with Texas.
No. Shifting the entire burden of a bloated federal government onto consumer purchase would only serve to squash the consumer market. Furthermore, such a proposal does absolutely nothing to reduce the oppressive regulatory bureaucracy and excessive litigation.
It would help
You're more than welcome.
William Hawkins is one of my favorite essayists on the issue of globalization.
However, once again, we find ourselve on opposite sides of the tax reform debate
Yes. That's because the long term effects of your extremist tax "reform" panacea would result in a two-tiered socio-economic stratification of our citizenry: Essentially a 21st Century eco-feudal system where the globo-corporate aristocracy would reign in a tax-free environment while 90% of the consuming peasantry would be encumbered with an onerous and excessively burdensome taxation on consumption to finance the social security welfare redistribution system.
Now to my main point: Under the NRST, consumers WILL NOT be dinged for an increase in the retail price of domestic goods and services.
THERE WILL BE NO INCREASE IN THE RETAIL PRICE OF GOODS AND SERVICES, WILLIE!
Good grief. Of course consumers will be "dinged" for any increase in the retail price of goods and services, just like they always are.
How the hell do you think you're gonna stop prices from fluctuating according to the laws of supply and demand, ninny? Price controls?
A two-tiered society? Please cite for me the research that concludes that such a ridiculous long-term outcome would result when the US replaces the income tax with a National Retail Sales Tax and abolishes the IRS!
Pay attention, Willie. There will be no increase in the price of goods and services solely as a result of replacing the income tax with a National Retail Sales Tax.
The laws of supply and demand are entirely different and have no relationship to the NRST.
Your thoughts on this, Geezer?
There will be no increase in the price of goods and services solely as a result of replacing the income tax with a National Retail Sales Tax.
When you remove a cost from business, whether it be a tax imposed along with costs associated with any remitted tax, or any other cost of doing business, it places that business in a more competitive position. Prices will move to sustain market share, that means room to move retail pricing downward as producer prices decline, with profits and labor costs remaining constant.
The key to remember the NRST replaces all income and payroll taxes, it is not an additional tax, thus does not add to the total cost of consumer products.
The new shelf price plus NRST will just be where todays prices with those embedded costs are now as set by Supply/Demand factors.
Producer prices are expected to fall approximately 22% in response to the repeal of business portions of income & payroll taxes along with the costs of compliance associated with those taxes. With a 23% NRST the total payment for a given basket of consumer goods remains essentially constant with with what it is today.
The NRST merely makes a burden that is now embedded into retail pricing visible to the consumer. It becomes a separated line item on a sales receipt instead of being buried out of view as it is under the income/payroll tax.
As I've pointed out to you many times, the fatal flaw in your arguement is your assertion that the corporate income tax is a "cost". It is NOT. It is a government confiscation of a portion of the profits (if any) AFTER costs are deducted from revenues.
Frankly, your tax will probably stick it too taxpayers even more because you're taking a BIG chunk of the retail price right off the bat, regardless of whether or not the business makes a profit.
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