Four Ways to Balance the Budget and Boost the Economy by Taxing Foreigners

Donald Trump’s election creates, for the first time in decades, the potential for major tax reform. On the campaign trail, President-elect Trump proposed several overhauls of the tax system. But the contours of any tax rewrite will be determined by Congress, where Senate Majority Leader Mitch McConnell recently criticized Trump’s plans at a news conference and said “My preference on tax reform is that it be revenue neutral.”

How can Congress cut taxes for Americans without knocking a huge hole in the Federal budget deficit? The best approach is to tax foreigners in order to prevent the harm they are doing to this country. Congress could enact the following four proposals that would raise U.S. tax revenue by taxing foreigners.

1. Close the Foreign Savings Tax Loophole

In 1984 Congress passed the foreign savings tax loophole, which eliminated the 30% withholding tax on interest earned by foreign savers in the United States. The removal of the withholding tax concluded a process that had been going on for decades through tax treaties that prevented the United States from taxing interest earned by foreigners in return for other countries not taxing the interest income earned by rich Americans abroad.

In order to reverse this loophole, Congress would delete sections §871(h,i,k) and §881(c,d,e) from the Internal Revenue Service code, and Trump would direct his Treasury Secretary to renegotiate all of our tax treaties. These bilateral treaties contain provisions so that they can be terminated unilaterally by either country. As a result, they are very easy to renegotiate.

Any treaty renegotiation should be based upon the following principles: full disclosure of all interest earned by foreigners, and final taxation of all interest earned at a rate equal to or greater than the rate that would be paid by U.S. citizens.

Eliminating this loophole would reduce the destructive inflow of foreign savings, which drives up the exchange rate of the dollar, making it more difficult for American producers to compete in world markets. In our 2008 book, we estimated that eliminating this loophole would have increased United States annual income tax collections by about $60 billion in 2006.

2. Tax Foreign Dollar Reserves

The U.S. income tax system provides a special tax break that exempts foreign governments from paying any U.S. taxes on dividends, interest, or any other income earned from their U.S. investments. Other governments have the same policy.

This is a one-sided gentlemen’s agreement among countries, in that the U.S. government has virtually no investments abroad while foreign governments, especially trade-surplus countries like China and Japan, have huge investments in American stocks and bonds.

Their central banks buy U.S. stocks and bonds in order to drive up the U.S. exchange rate and drive down the exchange rate of their own currencies. Doing so gives their businesses a competitive advantage over American businesses.

We would be taxing foreign governments in proportion to the harm that they are doing to our economy by buying our stocks and bonds in order to improve their trade balances at our expense. In our 2008 book, we estimated that in 2006 that a 30% tax upon foreign government reserves would have brought in about $45 billion in tax revenue.

3. Integrate the Corporate and Personal Income Taxes

Why should corporations be taxed differently from partnerships and proprietorships? For centuries, under its “Income and Property Tax Acts,” Britain taxed corporations at the same rate as other businesses. Shareholders were credited for the tax paid by the corporation, the earliest example of tax withholding.

We should return to that system, which worked quite well. Global adoption of such a system would go a long way toward eliminating the use of tax havens to hide corporate revenue.

The tax rate should be the highest tax rate at which individuals are taxed. Corporations would withhold taxes at that tax rate for each of their shareholders. Meanwhile, shareholders would be credited with the withheld earnings against their personal income tax liability.

This system has the benefit of being just as progressive as the personal income tax. If shareholders are in a lower tax bracket, they would get the difference back when they paid their personal income taxes.

Two aspects of this switch could dramatically increase tax revenue:

1.     There would be no need to decrease the corporate income tax to 15% in order to compete with countries that lower their income tax rates in order to steal American factories and headquarters. Americans would pay the same tax rate no matter where a corporation that they own does business.

2.     Foreigners would no longer be able to escape their U.S. tax liability for taxes on dividend income by having American corporations engage in stock buybacks that convert dividend income into capital gains income.

The corporate income tax turns corporations into tax shelters which use stock buybacks to convert normal income into capital gains. Integrating the corporate income tax with the personal income tax would end this distortion.

In an earlier commentary, we estimated that this integration would accrue at least $100 billion of additional tax revenue, much of it coming from foreign owners of U.S. stocks.

4. Impose Trade Balancing Tariffs

Congress could pass the WTO-consistent Scaled Tariff, which would just be applied to those countries (including China, Japan and Mexico) that had sizable trade surpluses with the United States.

The tax on imported goods from each country would be designed to collect, as government revenue, half of the value of the U.S. trade deficit (goods plus services) with that country. The tax rate would go up as our trade deficit with a country went up, down as that trade deficit went down and disappear when trade with that country reached approximate balance.

This tax wouldn’t start trade wars; it would end them. If a country were to respond by increasing its taxes upon American products, it would be raising our tax rate upon its products, and the U.S. would switch its purchases to countries that buy from us when we buy from them.

Congress could give President Trump the discretion of postponing the imposition of the tax upon a particular trade-surplus country if negotiations with that country were making progress. Such a provision would give Trump tremendous leverage in his negotiations.

Although the revenue from this tax would go down as trade moves toward balance, revenue from the economy as a whole would go up, because balanced trade would speed economic growth by about 1% per year.

This tax would provide the United States with approximately 50% of our trade deficit in tax revenue. In 2015 our trade deficit with the world was $522 billion, so it would have brought in about $260 billion in revenue.

Conclusion

These four tax changes would discourage foreign activities that are harming our economy. Adding up our ballpark estimates, the amount of revenue brought in by them would be approximately $465 billion per year.

If Congress enacts these proposals, they could cut the taxes of working Americans, grow the economy, and shrink the budget deficits, all at the same time!

--

The Richmans co-authored the 2014 book Balanced Trade published by Lexington Books, and the 2008 book Trading Away Our Future published by Ideal Taxes Association.

Donald Trump’s election creates, for the first time in decades, the potential for major tax reform. On the campaign trail, President-elect Trump proposed several overhauls of the tax system. But the contours of any tax rewrite will be determined by Congress, where Senate Majority Leader Mitch McConnell recently criticized Trump’s plans at a news conference and said “My preference on tax reform is that it be revenue neutral.”

How can Congress cut taxes for Americans without knocking a huge hole in the Federal budget deficit? The best approach is to tax foreigners in order to prevent the harm they are doing to this country. Congress could enact the following four proposals that would raise U.S. tax revenue by taxing foreigners.

1. Close the Foreign Savings Tax Loophole

In 1984 Congress passed the foreign savings tax loophole, which eliminated the 30% withholding tax on interest earned by foreign savers in the United States. The removal of the withholding tax concluded a process that had been going on for decades through tax treaties that prevented the United States from taxing interest earned by foreigners in return for other countries not taxing the interest income earned by rich Americans abroad.

In order to reverse this loophole, Congress would delete sections §871(h,i,k) and §881(c,d,e) from the Internal Revenue Service code, and Trump would direct his Treasury Secretary to renegotiate all of our tax treaties. These bilateral treaties contain provisions so that they can be terminated unilaterally by either country. As a result, they are very easy to renegotiate.

Any treaty renegotiation should be based upon the following principles: full disclosure of all interest earned by foreigners, and final taxation of all interest earned at a rate equal to or greater than the rate that would be paid by U.S. citizens.

Eliminating this loophole would reduce the destructive inflow of foreign savings, which drives up the exchange rate of the dollar, making it more difficult for American producers to compete in world markets. In our 2008 book, we estimated that eliminating this loophole would have increased United States annual income tax collections by about $60 billion in 2006.

2. Tax Foreign Dollar Reserves

The U.S. income tax system provides a special tax break that exempts foreign governments from paying any U.S. taxes on dividends, interest, or any other income earned from their U.S. investments. Other governments have the same policy.

This is a one-sided gentlemen’s agreement among countries, in that the U.S. government has virtually no investments abroad while foreign governments, especially trade-surplus countries like China and Japan, have huge investments in American stocks and bonds.

Their central banks buy U.S. stocks and bonds in order to drive up the U.S. exchange rate and drive down the exchange rate of their own currencies. Doing so gives their businesses a competitive advantage over American businesses.

We would be taxing foreign governments in proportion to the harm that they are doing to our economy by buying our stocks and bonds in order to improve their trade balances at our expense. In our 2008 book, we estimated that in 2006 that a 30% tax upon foreign government reserves would have brought in about $45 billion in tax revenue.

3. Integrate the Corporate and Personal Income Taxes

Why should corporations be taxed differently from partnerships and proprietorships? For centuries, under its “Income and Property Tax Acts,” Britain taxed corporations at the same rate as other businesses. Shareholders were credited for the tax paid by the corporation, the earliest example of tax withholding.

We should return to that system, which worked quite well. Global adoption of such a system would go a long way toward eliminating the use of tax havens to hide corporate revenue.

The tax rate should be the highest tax rate at which individuals are taxed. Corporations would withhold taxes at that tax rate for each of their shareholders. Meanwhile, shareholders would be credited with the withheld earnings against their personal income tax liability.

This system has the benefit of being just as progressive as the personal income tax. If shareholders are in a lower tax bracket, they would get the difference back when they paid their personal income taxes.

Two aspects of this switch could dramatically increase tax revenue:

1.     There would be no need to decrease the corporate income tax to 15% in order to compete with countries that lower their income tax rates in order to steal American factories and headquarters. Americans would pay the same tax rate no matter where a corporation that they own does business.

2.     Foreigners would no longer be able to escape their U.S. tax liability for taxes on dividend income by having American corporations engage in stock buybacks that convert dividend income into capital gains income.

The corporate income tax turns corporations into tax shelters which use stock buybacks to convert normal income into capital gains. Integrating the corporate income tax with the personal income tax would end this distortion.

In an earlier commentary, we estimated that this integration would accrue at least $100 billion of additional tax revenue, much of it coming from foreign owners of U.S. stocks.

4. Impose Trade Balancing Tariffs

Congress could pass the WTO-consistent Scaled Tariff, which would just be applied to those countries (including China, Japan and Mexico) that had sizable trade surpluses with the United States.

The tax on imported goods from each country would be designed to collect, as government revenue, half of the value of the U.S. trade deficit (goods plus services) with that country. The tax rate would go up as our trade deficit with a country went up, down as that trade deficit went down and disappear when trade with that country reached approximate balance.

This tax wouldn’t start trade wars; it would end them. If a country were to respond by increasing its taxes upon American products, it would be raising our tax rate upon its products, and the U.S. would switch its purchases to countries that buy from us when we buy from them.

Congress could give President Trump the discretion of postponing the imposition of the tax upon a particular trade-surplus country if negotiations with that country were making progress. Such a provision would give Trump tremendous leverage in his negotiations.

Although the revenue from this tax would go down as trade moves toward balance, revenue from the economy as a whole would go up, because balanced trade would speed economic growth by about 1% per year.

This tax would provide the United States with approximately 50% of our trade deficit in tax revenue. In 2015 our trade deficit with the world was $522 billion, so it would have brought in about $260 billion in revenue.

Conclusion

These four tax changes would discourage foreign activities that are harming our economy. Adding up our ballpark estimates, the amount of revenue brought in by them would be approximately $465 billion per year.

If Congress enacts these proposals, they could cut the taxes of working Americans, grow the economy, and shrink the budget deficits, all at the same time!

--

The Richmans co-authored the 2014 book Balanced Trade published by Lexington Books, and the 2008 book Trading Away Our Future published by Ideal Taxes Association.

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