View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

For release at 12:30 p.m.
Eastern Daylight Time
Tuesday, June 4, 1963




Tax Policies to Make U» S. Exports More Competitive
Remarks of George W. Mitchell
Member, Board of Governors of the Federal Reserve System
at the
Annual Meeting of the
National Association of Tax Administrators
Seattle, Washington

June 4, 1963

Tax Policies to Make U. S. Exports More Competitive
The difficulties than the United States is experiencing in
reducing its balance-of-payments deficit are well known.

Adding to

this concern is the increasing economic integration of the member
countries of the European Common Market.

Together these developments

are focusing a good deal of attention on policies to make American
exports more competitive.

Competitiveness in international, as in

domestic trade, is a matter of prices, costs, availability, financing,
and established trading relationships.

But in the public discussion

of U. S. competitiveness the factors other than prices and costs are
generally neglected.

And among the cost factors, wage rates, or more

appropriately labor costs per unit of output, are often given exaggerated
importance.

Thus, the comparative advantage that the United States has

in raw material and capital costs is being overlooked.

For example,

raw materials such as natural sulfur, molybdenum and phosphate rock
have comparative advantages as the result not only of plentiful natural
deposits but also of ingenious capital intensive methods of extraction.
Also frequently overlooked in discussions of the competitiveness of
U. S. products are the effects of different national tax structures
and fiscal relationships.
The plan to integrate or harmonize indirect taxation within
the European Common Market and the provisions of the General Agree­
ment on Trade and Tariffs which limit remission of internal taxes
on exports to indirect taxes, are considerations that warrent a reappraisal
of the impact of internal tax policies on our international trade.




Relative Tax Burdens of the Major International Trading Nations
Country-to-country comparisons of the burden and impact of
different national fiscal programs involve judgments about many variables.
The total amount of taxation« the benefits derived from Government ex­
penditures; the types of taxes and the relative reliance on the different
types; tax rates, definitions of the tax bases; and permissible deductions
and exemptions are all factors affecting international comparisons.

Recent

studies, particularly the report of the Neumark Committee on its recom­
mendation for the harmonisation of indirect taxes among the members of the
European Common Market, have provided some information for judgments on
these problems.
Total governmental revenues, central and local, as a per cent of
a country's gross national product seems to be the best measure by which
to compare the tax burden between countries.
In 1959, the taxes from all governmental units, central and
local, in the major trading nations (here defined as members of the
European Common Market, Britain, Japan, Canada, and the United States)
averaged 28 per cent of Gross National Product.

Japan had the lowest

proportion, slightly less than 20 per cent, going to taxes, followed by
Belgium, Canada, the United States (26.8 per cent), Italy, United Kingdom,
Luxembourg, the Netherlands, France, and West Germany which had the highest
proportion, slightly more than 34 per cent of GNP.
Not surprisingly, any broad classification of taxes will show
that the major trading nations hay.^$apped the same general sources of
revenue.

However, the proporti/nr of^jh^total revenue raised by each tax

vcries greatly from country to




[‘
ycs'na^ian and Japanese personal

-3taxes at 6-7 per cent of gross national product are about half as
important as their counterparts in the United Kingdom, United States»
and France.

In West Germany and the Netherlands personal taxes,

including social security taxes, are between 16-17 per cent of GNP.
In the United States, because of the relatively heavy reliance on
personal income and property levies, business and sales taxes in
relation to GNP are significantly less important (about 1/3) than
they are among its major competitors excepting Japan.

And because

of its limited reliance on sales taxes the United States is at è
disadvantage in facing the GATT provision that indirect (sales) taxes
may be rebated*
Since personal and property taxes may be assumed not to be
shifted and, therefore, not to affect the prices of exports, these
types of taxes will be excluded from our analysis.
Consequently, the two classes of levies of principal
significance in competitive costs are business and sales taxes.
Focusing our attention on business and sales taxes, we find
that the United States along with West Germany, Canada, and Japan makes
the greatest use of corporate business taxes —

4.5-6.0 per cent of GNP.

These data are for 1959 and since that time the U. S. has lessened it$
dependence on the Federal corporate income tax slightly and a further
reduction is proposed.

Italy makes very limited use of this tax: in

France and some other Common Market countries it ranges from 2 to 3
per cent.
Difference in reliance on sales and value-added taxes are even
more striking.
field —

Here the U. S. at 5*6 per cent of GNP is well below the

9 per cent in Belgium, Netherlands, Luxembourg, and Japan;

10 in Canada; 13 in Wèst Germany; and 16 in France,




-4Differences in Sales and Business Taxation
Sales (indirect) taxes differ in a variety of details from country
to country, but the significant economic difference has to do with the
degree to which they are pyramiding or cascading.

When the tax is levied

on gross receipts from the sales of goods or services and is applied at
each stage of production through which the goods pass, the tax previously
paid becomes part of the tax base at subsequent sales of the goods, and a
tax on a tax results.

The turnover tax is used by all members of the

European Common Market, except France.
Beginning in 1954, France has been moving from a turnover tax
toward a tax on value added.

The French value-added tax (TVA) is of

particular importance at the present time because the Report of the Fiscal
and Financial Committee of the European Common Market has not only
recommended that other members shift from the turnover tax system to a
value-added tax system but has also suggested a tentative time table for
the changeover.

The aim is to remove fiscal as well as custom frontiers

between the member countries.
The tax on value added is levied on the gross receipts of a
business, minus the cost of materials and supplies purchased from any
other business. Payroll is not a deduction; therefore, the value added
by labor is included in the tax base.

The tax can apply to services as

well as manufacturing and distribution of goodr..
If there are no exceptions or exemptions and a single rate
schedule, the vulue-added tax is the equivalent of a retail sales tax of
the all-inclusive type where capital goods and services as well as con­
sumer goods are in the base.

In a form limited to manufactures it

resembles a manufacturer's sales tax without pyramiding«

Or in its pure

form, the value-added tax also comes close to being a flat rate tax on



all forms of income.

In the national income accounts, depreciation,

indirect business taxes and business transfer payments, as well as
purchases of materials and supplies are deducted from gross receipts to
obtain a net value added at factor costa*

If value added for all types

of business activity were summed, it would equal national income less the
wages and salaries paid by governments.

Consequently, a uniformly applied

value-added tax is similar to a proportional income tax, except that the
tax is collected before the distribution of income, rather than afterwards.
The value-added tax in France, however, is not in this all*
inclusive form.

It applies only to manufacturing and most services.

Manufacturers pay a higher rate than service industries.

Agriculture,

some services (generally utilities), some goods like bread and dairy
products are exempt from the tax*

Wholesale and tetail trade are not

subject to the value-added tax but are subject to a local turnover tax**
Thus the French indirect tax system, at present» is a combination of a
turnover tax and a value-added tax.

It is planned, however, to put the

local turnover tax on a value-added basis also.
TVA encourages its forward shifting.

Computation of the French

Hie tax is computed on gross receipt»

and then the tax previously paid is deducted»
The excise taxes are still a third form of sales taxation.

The

excise taxes, such as the Federal manufacturer's excises in this country
and the purchase taxes in Britain, are levied on specific goods, usually
as a per cent of the value of the goods.

All countries have sumptuary

excises on tobacco and alcoholic beverages.

In addition, all the countries

have excises on petroleum products which are frequently earmarked, as in
the United States, for the construction or maintenance of the highway
system.
The final general form of sales taxation is a retail eales tax,
such as occurs in Sweden and State and local government



units in the

-6United States.

One of the major differences in retail sales taxation is

that in other countries the tax is frequently uniform throughout the
country and collected by the central government.

The proceeds are then

redistributed to meet the costs of local government units.
Direct taxation of business generally takes four major forms:
(1) a tax on income, usually as a percentage of profit; (2) a tax related
to payroll to finance social security programs; (3) a tax on the value of
property^; and (4) business licensing levies, which are of minor impor­
tance in the United States but are a relevant part of the revenue system
in some of the European Common Market countries.
In most cases the taxes on profits and the taxes on property are
the most important.

Not only do the rates of profit taxation vary but the

definition of taxable profit is unique to each country.

A good deal of the

difference revolves around the definition and timing of depreciation.

The

definition of property tax base ranges from assessed valuation of all real
and personal property, which is the most common in the United States, to
net worth or some fraction of tangible assets.
GATT Agreements
The differences in the form of internal business taxation, partic­
ularly the variation in the degree of reliance on direct business versus
sales taxation, has special significance for exports.

The General Agree­

ment on Trade and Tariffs (GATT) permits exemption or rebate of indirect
(sales) taxes for exported products, but not exemption or rebate of direct
business taxes.

The Agreement also permits governments to levy charges

1/ National accounts record this as an indirect tax.




-7on imports to equalize the indirect (sales) tax burden on comparable
domestic and imported goods but a levy to equalize the internal direct
business tax burden is not permitted.
All of the major trading countries exempt or rebate the sales
taxes on exported goods.

Where the tax is levied only at one stage of pro­

duction, like the U. S. manufacturing excise taxes, the process of exemp­
tion is relatively simple.

Retail sales taxes levied by a governmental

unit other than the central government are only marginally involved.

For

example, retail sales taxes are ordinarily included in the price of those
goods and services purchased by foreign tourists.

Some countries attempt

to treat their tourists more openhandedly; France exempts all purchases
made with foreign currency travelers checks.
When the sales tax is not levied at a single stage of production,
internal sales of goods destined for export are exempt from the tax where
practicable.

However, it is frequently difficult, if not impossible, to

determine in the early stages of production whether a particular sale will
eventually be embodied in an export.

Consequently, those countries with

pyramiding turnover or value-added types of sales tax have rebates of taxes
previously paid on exported goods.

These rebates are frequently rough esti­

mates of the previously paid taxes and there is some suspicion that the
amount of the rebate is larger than the previously paid taxes, thus pro­
viding a partially hidden subsidy to exports.

There is also a suspicion that

the import equalization levies tend to over-compensate and thus discriminate
against imports.

However, abuse of the export rebates and import levies is

not excessive except for specific countries and occasionally specific goods.




-8Japan is the only one of the major trading countries which pro­
vides rebate of direct business taxes on exports.

Trading companies are

allowed to deduct 1 per cent and manufacturing companies 3 per cent of
the proceeds from their export contracts from their taxable income.

The

maximum amount deductible cannot exceed 80 per cent of the income arising
from such exports.

Japan has agreed with GATT to eliminate this provision

of their corporate tax law by March 1964.

In addition to Japan, Australia,

Columbia, India, Ireland, and Uruguay have some remission of direct taxes
on exports.
Other Tax Incentives for Exports
Common to all the countries discussed here, exporters are
permitted drawback of customs duties on material used In exports.

Exporters

are allowed to reclaim import duties paid on raw materials and parts which
are contained in finished goods exported.

Other types of export incentives include accelerated depreciation
allowances for exports (France and Japan), the establishment of special
tax free reserves against losses from exports (Japan and Norway), and
over-expensing of promotion costs (Australia and New Zealand).
Tax Policies to Increase the Competitiveness of American Exports
A.

Incidence of Direct and Indirect Taxes.
The GATT agreements accept the classical economic theory of

incidence of direct and Indirect business taxation.

This position is

that corporate net income taxes are not shifted forward as increased prices
but are absorbed by the factors of production— that is shifted backward.
The theory is that the suppliers or manufacturers are always attempting to
maximize profits and have, therefore, already moved to the scale of output




-9-

which equates marginal cost and marginal revenue.

Since imposition of a

profits tax could not change the output at which profits are maximized it
follows that a net income tax would not affect the price.
The classical theory of Incidence of sales taxes considers such
taxes a wedge between the cost of production and the sales price.
Indirect taxes are passed forward as a net addition to the price of the
product.
The classical theory applied to international trade would conclude
that the country relying more heavily on indirect (sales) taxation would
tend to have higher prices than the country relying more heavily on direct
(net income) taxation.

If the classical theory of incidence of direct

and indirect taxes is accepted, then the country which relies more on
direct taxation could undersell the country relying more on indirect
taxation in the short-run.

Equalizing this short-run advantage is a

rationale for permitting rebates of indirect taxes.

However, no allowance

is made for the long run adjustments implicit in classical theory.

The

country which relies more heavily on direct taxation may be earning a
lower return to capital as a consequence of backward shifting.

It cannot

equalize the return to capital by selling a larger quantity because it loses
Its price advantage when indirect taxes are rebated.
capital discourages investment.

The reduced return to

Restriction in the return to capital may

reduce the capital stock or slow its growth.

The resulting distortion in

the economic allocation of resources may lead to increased cost of production
and ultimately raise prices.

To the extent that prices are ultimately in­

creased in the country relying more heavily on direct taxation, direct taxes
are shifted forward.




-10Businessmen generally corae to approximately the same conclusion
by a more direct route.

They aj.gue that prices are set to cover average

cost plus an allowance for net profit.

Under these conditions, the

profits tax becomes a cost element and is passed forward as increased
prices, just like indirect taxes.
Most recent studies of incidence have emphasized that the longrun incidence for both the direct and indirect business taxes depends on
the elasticities of demand and supply for the product.

If the demand

for

the product is completely inelastic (that is the same quantity will be
sold regardless of price) any business tax, direct or indirect, will be
passed on as an increase in price.

If the tax is fully passed on as an

increase in price, the secondary incidence is a reduced level of real
private consumption, which may or may not be compensated for by a rise in
real public consumption, depending on how the proceeds of the tax are used.
On the other hand, if the demand for the product is completely elastic (at
a given price any quantity can be sold, but at a higher price, nothing can
be sold), then none of the tax can be passed forward as an increase in
prices and the burden of the tax must be absorbed by the factors of produc­
tion.

In reality, demand for various products is rarely at one extreme

or the other.

And therefore the amount of forward shifting of either direct

or indirect taxes varies from one product to another.
The differential treatment of direct and indirect taxes on exports
has implications for tax policies aimed at encouraging American exports.
If one accepts the view that direct as well as indirect taxes are to some
degree passed forward as increased prices, then the current practice of
remitting only indirect taxes tends to favor countries which rely more




-11heavily on indirect rather than direct business taxation.

The price of

the exported product is reduced by uhe amount of the rebated indirect
tax.

Whereas, that portion of the price of the product which reflects

direct taxation is not rebated.

Everything else being equal, the nation

having a larger proportion of direct taxes on business would have higher
international prices for its goods.

Or there would be lower prices on

exported goods, than those sold domestically, thus reducing the return
from exported goods compared to goods sold domestically.
The United States does have relatively higher direct business
taxes for which no allowance is permitted in International trade.

Leaving

aside for the moment the provisions of the GATT agreements, two possible
changes in tax policy could increase the competitiveness of American
exports; permitting some form of rebate of direct business taxes for
exports; or changing the tax structure so as to increase the proportion
of indirect relative to direct business taxes.

Both policies raise addi­

tional problems.
B.

Export Tax Credit.
The export tax credit proposal immediately raised the problem of

how the credit is computed and who gets to take it.

If the business which

makes the actual foreign sale is permitted the credit, it might be rebated
not only its own taxes but the taxes paid by the producers at prior stages
of production depending on how the credit was determined.

Tracing the

amounts of direct taxes paid at each stage of production on goods finally
exported would at best be difficult if not impossible.

There are very few

American products manufactured primarily for export and exemption of goods
destined eventually for export from direct taxation doesn’ improve the
t




-12problem of redistributing the tax rebate.

However, after a period of

aging, trade practices would tend to result in some sharing of the benefits
of the rebate.
There would also be the usual problems tax administrators worry
about.

An allocation of profits would have to be made between goods sold

domestically and goods sold internationally and the tax credit would
encourage some companies to alter their operations, treating the rebate as
a challenge to their tax avoidance ingenuity.

It is doubtful, however,

that any of the possibilities of exploiting loopholes would be worth
viewing with alarum considering the approximate character of tax determina­
tion.
Obviously steps to treat direct and indirect taxes similarly
would have to be preceded by renegotiation of the GATT agreements.

Clearly

the area of greatest importance for the U. S. is the corporate income tax
and it might be desirable to focus attention on this one tax.

Approaching

the problem by alternatively eliminating all indirect tax rebates, would
be too disruptive of present practices.

French export prices, for example,

would rise by nearly 20 per cent, if that were done.
C.

Changing the American Tax Structure.
Another way to increase the competitiveness of our exports by

tax policies would be to increase the amount of indirect (sales) and
decrease the amount of direct (income) business taxes.

In other words,

lower the corporate profits tax rate and institute, say, a national value
added tax.

Putting the matter this way raises the question of what sort

of internal tax system is desirable and whether policies which would improve
the competitiveness of our exports might not result in undesirable internal




-13Cax policies--the same question raised by the dilemma of monetary policy.
One major argument for not tampering with the present tax
structure is that inequities produced by the structure have already been
worked out through shifts in relative prices for goods and services and
in relative returns to the factors of production.

Shifting to greater

reliance on sales taxation in the place of corporate income taxation
would, at a minimum, cause some disturbance in the relative domestic price
structure.

There are possibilities for windfall losses and to the extent

that corporations are not now fully exploiting semi'-monopolistic positions,
possibilities for windfall gains.

But in any event views on the relative

advantages of sales, value added, or corporate income taxes are firmly
held on domestic grounds of neutrality, equity and political practicality.
It is doubtful that the priorities of international competitiveness can
compete with these domestic goals.

One country, Sweden, has substituted

increased indirect taxation for direct taxation and is relying on
expenditures policy to maintain equity in the fiscal system.

England

has been discussing the desirability of such substitution, although there
has been no official sponsorship of such a proposal.
In summary, the United States would enhance competitiveness
of its exports if its business tax system were overhauled with the
objective of eliminating from the price of its export products any
element of tax cost beyond benefit levies (user taxes, local utility
type charges, and some small part of the property tax).

However» the

GATT convention with respect to incidence stands in the way of the
simplest solution to the problem--!.e., remitting taxes on corporate




14protits and miscellaneous business levies, thereby putting these taxes
on a parity with sales and value-added taxes.

And it is hardly likely

that domestic considerations implicit in the present U. S. tax system
will be submerged while the system is revised to

take advantage of

existing GATT rules as might be done by the substitution of personal
income or sales taxes for business levies.
What seems to be called for is a less doctrinaire approach
in the GATT posture to the problem of incidence— a systematic study of
the forward shifting on a product-by-product basis where the elasticities
of demand can be approximately evaluated.

From this body of knowledge a

more realistic program for rebating taxes on exported products should
emerge.




Government Revenues as a Per Cent of Gross National Product
central and local governments combined

1959
Total

Direct Taxes

Indirect

U.8

3.5

5.6

10.U

Personal 1 / I Corporate ¿7"
United States

26.8

(23.7e)*

12.9
(10.6e)*

Total Business Taxes
Other than Property

Property

(U.Oe)*

West Germany

3U.3

16.6

3.2

1.1

13.li

16.6

France

33.U

13.6

2.5

1.2

16.1

17.6

Belgium

2li.U

12.3

2.1

.8

9.2

11.3

Netherlands

30.0

16.9

3.0

.8

9.3

12.3

Italy

28.5

NJl.

N JL.

.8

Luxembourg

29.1

15.8

3.7

1.0

8.6

12.3

United Kingdom

28.8

11.3

U.l

1.1

12.3

16 .U

Japan

19.8

5.8

U.l

1.3

8.6

12.7

Canada

2 5 .0

7.2

U.5

3.3

10.3

1U.5

1U .

NJU

1/ Includes contributions i>o social security.
2 / Does not include business franchise taxes or the German Trade Tax.
*
If new tax proposal were fully effective.
Data in table were difficult to put on a comparable basis. Small differences in percentages are probably
not too significant.
N*A. Not available.