Monday, November 22, 2010

The Case for a National Sales Tax: Part 3

Potential Economic Benefits

One of the biggest potential impacts that this system could have on American businesses is to make them more competitive in the global market. Removing payroll taxes alone would lower the overall cost of U.S. labor without shrinking workers' wages. And labor costs are routinely mentioned as one of the top reasons for manufacturing moving overseas. However, a system such as FairTax would remove not only payroll taxes, but all other corporate taxes as well. This means that a firm that manufactures widgets in the U.S. would be charged no direct taxes. Domestically, the widgets themselves would only be exposed to taxes at the time of retail sale. If the widgets were exported, there would be no U.S. taxes involved at all (barring some import/export tax) and the economic advantages of moving production overseas begin to look much less attractive. More domestic production would lead to an improved (or ideally eliminated) trade deficit, increased employment opportunities, etc.

It is also worth noting that removal of corporate taxes would most likely cut down on the games played by companies such as the "Double Irish Arrangement" and "Dutch Sandwich". Such structures allow many international firms to avoid much of the U.S.'s 35% corporate income tax. For example, Google manages to only pay 2.4%. Such maneuvers are by no means rare and ensure that firms who only operate domestically or do not have the resources to put into tax avoidance are the only ones paying the full rate. Removal of loopholes associated with complex tax policies would certainly improve financial transparency.

Next up: "Fairness" Benefits

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