The 35% Import “Tarriff” on Carrier – Internationally Legal

[johnkarls]

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Introductory Comment

Yours Truly is simultaneously with this posting, proposing a Possible Topic For Future Meetings on the referenced topic of this posting.

The following text of the Possible Topic For Future Meetings is also being posted here because it is relevant to the topic of our 12/14/2016 meeting.

However, it does rate a meeting all its own, in addition to being noted as part of the landscape for our 12/14/2016 focus.

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The Proposal

I propose that we study why the oft-proposed 35% import “tariff” on Carrier Corporation air conditioners if Carrier continues to insist on moving its manufacturing to Mexico under NAFTA -- is PERFECTLY ACCEPTABLE under the World Trade Agreement (“WTO”).

[NB: Carrier Corporation, a U.S.-incorporated company based in Farmington CT with annual sales of approximately $15 billion, has since 1979 been a subsidiary of United Technologies Corporation, which is the old United Aircraft Corporation based in Hartford CT with annual sales of nearly $60 billion and such other subsidiaries as Pratt & Whitney (the legendary manufacturer of aircraft engines) and Sikorsky (the legendary manufacturer of military helicopters).]

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Brief Explanation of Value-Added Taxes (“VAT’s”)

Since time immemorial, most European countries have raised most of their governmental revenue from VAT’s which, essentially, are national sales taxes.

However, the clever European pols fooled their voters by making their VAT’s “invisible”!!!

In the United States, sales taxes are traditionally the province of state-and-local governments. And, more importantly, are ADDED onto the sticker price, so the voter/consumer is well aware of how much sales tax is being paid.

VAT’s are NOT disclosed in any sales documentation (such as a cash-register receipt), so the voter/consumer is fooled!!!

The mechanics by which VAT’s are imposed (which involves paying the VAT at every stage, but taking a credit for VAT’s paid by suppliers) helps to make them invisible to voters/consumers.

Let’s take a simple example of a uniform-rate VAT of 10%. And a retailer that assembles its $100 product using components that it purchases from 2 different suppliers for $25 each.

Each of the suppliers pays a $2.50 VAT on the component it sells to the retailer.

The retailer would pay a VAT of $100 * 10% = $10.00, except that it takes a credit for the VAT’s paid by its suppliers ($2.50 each), so it only pays $5.00.

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How VAT’s Function As Import “Tariffs” and Export Subsidies

One of the most important features of VAT’s is that DIFFERENT RATES can be imposed on different goods -- INCLUDING COMPLETE EXEMPTIONS FOR SOME GOODS AND SERVICES (which are simply called “zero-rated” goods or services).

Another important feature of VAT’s is that they are imposed ON IMPORTS, and EXPORTS ARE EXEMPT!!!

That is a LETHAL COMBINATION for countries like the U.S. that just “sit back and take it on the chin”!!!

Because protectionist countries can impose high-rate VAT’s on a specific industry to make imports from foreign competitors in that industry uncompetitive.

And, of course, countries that have VAT’s subsidize their exports by exempting them from VAT.

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So Why Would A 35% Import “Tariff” (aka VAT) on Carrier Be Legal Internationally

The following explanation is quoted from p, 12 of “Value Added Tax: A Comparative Approach (Cambridge Tax Law Series)” (Cambridge University Press - 2/2/2015 - 570 pages) --

[NB: footnotes omitted.]

“There are several reasons why VAT has become such a popular source of revenue. France adopted a primitive version of a VAT after World War II. In the Treaty of Rome (1957), France and the other member countries agreed to share some of their national revenue (including revenue from VAT) to finance the operation of the European Economic Community, now the European Union. The treaty required the member states to convert their turnover taxes (described earlier) [Reading Liberally Editorial Comment = VAT’s are “turnover taxes”] to a harmonized VAT. All newly admitted members are likewise required to adopt a harmonized VAT.

“After World War II, many of the major industrialized countries became signatories to the General Agreement on Tariffs and Trade (GATT), now the WTO. They could not subsidize exports or tax imports more than domestically produced goods. When GATT was being negotiated, most of the European countries relied heavily on indirect taxes for their revenue. For many, international trade also represented a significant factor in their economies. In addition, it was easier to identify the indirect tax component in the price of export and difficult, if not practically impossible, to identify any direct tax buried in product prices. It thus is not surprising that GATT permitted signatory countries (contracting parties) to rebate indirect, but not direct, taxes on exports. Contracting Parties assumed that they could rebate sales tax or VAT but not income or payroll taxes included in export prices. The United States (a nation without a border-adjustable federal broad-based consumption tax) did not object to this provision. Thus, countries that relied on turnover or value added tax had border-adjustable taxes; that is, they were able to rebate these taxes on exports and impose them on imports.

“The International Monetary Fund (IMF) provides technical assistance in the area of finance to member countries. Over the past several decades, the IMF has assisted developing and transition countries to convert their turnover taxes, manufacturer’s tax, retail sales tax, and other indirect taxes to VATs.”

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The Reason Why The U.S. Has Never Adopted A VAT

During his 50-year career as an international tax attorney, Yours Truly has always marveled at why U.S. pols have been willing to let America “take it on the chin” in terms of international trade, as a sacrifice on the altar of constraining U.S. governmental revenues.

Their argument was always that shifting part of the tax burden from income taxes to a VAT was a mirage, because as soon as the VAT is enacted, the income tax rates would rise to their old levels.

It would appear that whether or not the U.S. is willing to Renew 1968 Executive Order 11387 to Halt The Export of American Jobs by Halting The Export of American Capital, the U.S. should at least after all these decades join the rest of the civilized world in imposing a VAT, if for no other reason than to protect its domestic industries and to subsidize exports!!!

But also for the reason that there is so much political pressure from The Establishment (the billionaires who are waging the War on American Workers and “own” virtually all of the pols of both political parties as a result of “campaign contributions” as well as owning many members of the media and academia) to reduce income taxes DESPITE our spiraling deficits AND DESPITE our spiraling national debt (which is the accumulated total of past deficits) -- AS WELL AS inadequate funding for Social Security and Medicare, AND the MORALLY-BANKRUPT LACK OF FUNDING for our inner-city ghettos starting with inner-city education.

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Pipe Dreams

Grand Bargain No. 1

Since the billionaires comprising The Establishment have always applied political pressure to reduce income taxes (corporate and individual) no matter what the consequences, and since they have historically exhibited comparatively-little resistance to sales taxes (which, economically, are what a VAT is) since they spend only an infinitesimal portion of their income and wealth on consumer goods, why not enact a VAT so that America can provide adequate governmental services and stop incurring deficits???

Especially if the VAT will help protect American jobs, like the rest of the civilized world has been protecting their jobs for decades!!!

Grand Bargain No. 2

Impose the Renewal of 1968 Executive Order 11387 on The Establishment!!!

Not a “Grand Bargain” in the sense that they would ever agree to it!!! [It would have to be imposed over their objection.]

But a “Grand Bargain” in the sense of FAIRNESS --

Please come in and enjoy our low income tax rates and our “rule of law” that will permit you to chase your entrepreneurial dreams with protection for your inventions in the world’s largest market.

But we are letting you enjoy these advantages on the condition that the earnings from your efforts WILL REMAIN HERE (as we hope you will do also).

BTW, who cares if third-world countries steal the inventions. Because the third-world countries are going to steal them anyway!!! And inventors should be able to make enough money from the world’s largest market to make their efforts worthwhile so long as we do not permit the foreign thieves to export to the U.S. the goods they manufacture with technology stolen from the U.S.!!!

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Proviso on the Grand Bargains

Shifting the tax burden from income taxes to a VAT (or de facto sales tax) would be regressive.

Since, as noted, wealthy people tend to spend an infinitesimal portion of their income and wealth on consumer goods.

But, even more importantly, since society’s poor tend to spend ALL of their income on consumer goods.

I will try to do some research on how this problem might be addressed.

In this regard, virtually all members of the European Union have income taxes as well as VAT’s.

And the U.S. (and I am guessing probably most European Union countries) have “negative” income taxes which result from refundable credits exceeding the income tax liability -- in the case of the U.S., the additional-child tax credit, the earned-income tax credit and the health-coverage tax credit are examples of refundable credits or “negative income tax.”

So I am hoping that for America’s poor, the amount of VAT that would be imposed on, say, $24,250 for a family of four (which is the “poverty level” under the 2015 Federal Poverty Guidelines) would become a refundable income tax credit.

For example, if the various rates of VAT on the typical market basket of goods and services that would be purchased for $24,250 by an impoverished family was, say, $5,200, then a family of 4 THAT HAS NO INCOME would receive a refundable $5,200 income tax credit which could be paid, say, in weekly installments of $100.

NB: With this example of a refundable-credit mechanism, I am trying to illustrate how the regressivity of a VAT can be offset. If you think that the offset needs to be greater (or if you think it is necessary to do more for the poor than simply offset the regressivity of a VAT), THOSE ARE DIFFERENT ISSUES -- I am only trying here to illustrate how the regressivity of a VAT could be offset.

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Reading Materials

At this time, there does NOT appear to be a suitable book on this subject for us to read, so if this topic is selected, we will probably have to rely on articles and on legal decisions of various tribunals.

The problem is that all publications with which I am familiar, such as the 570-page book on VAT’s from which I quoted extensively above, are much too long and far too technical (vs. policy oriented) for our group.

The reader might be amused to know that the reason why I proposed “5 Easy Theses: Commonsense Solutions to America’s Greatest Economic Challenges” which was adopted as the focus for our 6/15/2016 meeting, was that it was short (288 pages) and, though it had only been published by Houghton Mifflin a mere 6 days before I proposed it as a topic on 5/9/2016 -- I had been doing my periodic Googling for a suitable book on VAT’s and the descriptions of “5 Easy Theses” indicated that it discussed VAT’s.

So Dumb Old Me, I thought that VAT’s would be at least one of the “5 Easy Theses”!!!

[Pat]

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---------------------------- Original Message ----------------------------
Subject: Did You Forget That Sikorsky Was Sold To Lockheed Martin in 2015?
From: Pat
Date: Thu, December 1, 2016 8:12 pm - MST
To: ReadingLiberally-SaltLake@johnkarls.com
Attachment:
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Dear John,

Your Proposed “Possible Topic For Future Meetings” which was also posted under “Participant Comments” for the 12/14/2016 meeting, both of which were entitled “The 35% Import Tariff on Carrier - Internationally Legal,” mentioned that Carrier Corporation is owned by United Technologies Corporation which also owns, inter alia, “Sikorsky (the legendary manufacturer of military aircraft).”

Did you forget that in 2015, United Technologies sold Sikorsky to another prime military contractor, Lockheed Martin?

Regards,

Pat


---------------------------- Original Message ----------------------------
Subject: Re: Did You Forget That Sikorsky Was Sold To Lockheed Martin in 2015?
From: ReadingLiberally-SaltLake@johnkarls.com
Date: Fri, December 2, 2016 4:52 am - MST
To: Pat
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Dear Pat,

Thank you for your e-mail.

Yes, the short answer is that I forgot!!!

Probably because I was distracted by pleasant memories!!!

By way of background, I had encouraged my son Michael NOT to play football when it was offered by his independent school beginning in 7th grade because, in addition to head injuries, he could blow out his knees and never ski again. So he became an outstanding hockey player instead.

However, the football coach forced the football players to ostracize male students who did not play for the team. Making Michael so miserable that he implored me to let him go to boarding school (he was being recruited by all the top boarding schools as a hockey player).

And during his sophomore year at boarding school, Michael left the hockey team because the coach was requiring all of his players to attend a last-minute extra practice the evening before an important game, and Michael had already budgeted that time to study for an important test the next morning.

Which is why he joined the ski team for the winters of 1996 and 1997.

Which produced two of the happiest winters of my life, setting the alarm for just past midnight every Friday evening so that I could arrive at Michael’s boarding school by 5:30 am Sat morning when his dorm was still bolted shut, requiring me to bounce tennis balls against his bedroom window to wake him up, following which we would drive to the farthest points of New England for him to compete.

And part of the pleasure comprised the drive up The Merritt Parkway toward Bean Town because of all the fantastic sights, such as the Sikorsky helicopter factory and its huge heliport just before crossing the Housatonic River. And those occasions on which the landing area was crowded with dozens of helicopters.

So you got me!!!

I was obviously running off at the mouth about pleasant memories, particularly visual memories.

And forgetting to cross-check about subsequent memories of non-visual events.

Thank you again for your inquiry.

Your friend,

John K.