Paralogize is a verb that means, “to draw conclusions that do not follow logically from a given set of assumptions.” It is derived from Medieval Latin paralogizare which is from the Greek paralogizesthai—to reason falsely.
Having just returned from Washington, D.C. this was the word that came to mind when I reflected on the convoluted and tortured steps that were being taken to end the bias against “made-in-the U.S.” products by taxing imports and not taxing U.S. exports. This is called a border adjustable tax.
Border Adjustable Taxes
First, 165 of our trading partners, the rest of the world, has a border adjustable tax. These countries refund the taxes paid on exports and ensure that all imports are taxed. This is normally done with a value added tax (“VAT”). This means that each step of the production of a product is taxed based on the “value added.” For example, if a log is cut into boards, the VAT would be applied to the increased value of the boards.
If these boards were then exported, the VAT that was paid would be refunded to the exporter. This would allow the boards to be exported at a lower price than if they were sold in their country. Conversely, if boards were imported into their country, the VAT would be assessed at the time of sale to consumers in their country. This policy ensures that products made in their country will not have to compete unfairly with imported products.
The U.S. has long been the only major country that does not follow this policy and our income/payroll tax provides great incentives to subsidize imports and penalize U.S. made products.
Border Adjustable Tax Critics
Many groups are very upset by the idea of a border adjustable tax. These critics mostly sell imports and have long enjoyed their status of being, like at international airports, a “duty-free” zone. By not being subject to the same taxes as U.S. goods, imports are not taxed when they arrive in the U.S.--as imports are when they arrive at the border of our trading partners.
They ignore what most economists point out--if the U.S. enacts a border adjustable tax, the value of the dollar will appreciate and the cost of the imports after the tax to the retailers will not be more than now. For example, if an import cost $1.00 and there is a 20% U.S. tax added, the cost of the product would be $1.20. As an example, if the dollar was worth 20% more than before, as is predicted to happen, then the importer could purchase the product for 20% less and this results in no additional costs to the U.S. seller of the imports and to the consumer.
The opponents also ignore the obvious fact that some of the “increased cost”—if there is any, will be borne by the exporters by reducing their profits if they want to compete with U.S. products. Why is this bad?
Conclusion
Again, the word paralogize also comes to mind to describe the attempt by Speaker Ryan and Chairman Brady to somehow force a border adjustable system of taxation into the income tax framework. In the past, the World Trade Organization, the organization that helps establish the rules for world trade, has rejected attempts to put in “border adjustable” provisions in an income tax. However, aside from likely challenges from the WTO, there are practical reasons why this Ryan/Brady plan is paralogized.
First, since most of the perceived complaints about the border adjustable tax are because of the income tax, keeping the income tax adds some credence to the complaints of those who attack border adjustable taxes. The income/payroll tax system pre-taxes consumption. The sales tax taxes consumption at the time of consumption.
Thus, people have to make $1.25 or more, pay their income/payroll taxes, to take home $1.00. If you ignore the almost certain currency adjustment and keep the income/payroll tax system, the 20% border adjustable tax is adding as much as 20% to the cost of the products. This would be very hard on many consumers. This complaint goes away, even if there is no currency adjustment, if the FAIRtax is adopted and people receive their whole paycheck. They will then have this extra $.25 to $.75 that was being withheld in income/payroll taxes to purchase the product.
Second, all of our 165 trading partners create border adjustability with a value added tax or other consumption tax. The FAIRtax taxes all products sold in the U.S. and eliminates the subsidy on imported products by treating all products the same. When U.S. products are exported, there is no tax added so we provide the same benefits to our exporters as all 165 of the other countries do.
Third, why the FAIRtax and not a value added tax? Because it is far simpler to administer a national retail sales tax and there is no real evidence that compliance under the retail sales tax will be less than under a value added tax. Instead of making all companies do complicated accounting, the sales tax is only collected by the retailers of new goods and services.
It is time for Congress and D.C. to stop paralogizing and draw the right conclusion that does follow logically from a given set of assumptions—enact the FAIRtax!
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Through the "Hope and Change" of the last eight years and the promises to "Make America Great Again," what is Congress and the new administration offering us as tax reform? At this point, both President Trump and the Speaker Ryan are offering a modification of the current failed system. As Kerry Bowers, one of The FAIRtax Guys interviewees, said about Speaker Ryan's "A Better Way" plan, "It transforms the tax plan from a personal income tax, a corporate income tax and a payroll tax enforced and administered by the IRS to a system that includes a personal income tax, a corporate income tax and a payroll tax enforced and administered by the IRS." Is this the best way?
As The FAIRtax Guys discuss in their weekly podcasts, this plan does not represent "Hope and Change" and is not the way to "Make America Great Again." We need true tax reform; we need the FAIRtax. And we provide the listener new and novel ways to discuss the FAIRtax with your friends and neighbors every week.
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