Tax Foundation

Vol . 35, No. 5 May/June 1991

Tax Features

Tax Foundatio n

Tax PolicySeminar

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"FrontBurner"

1

Property Taxes 2

UniformBusiness Tax 4

I FoundationMessage 7

FoundationEvents 8

Foundation SeminarExamines TaxPolicy's Impact onEconomic GrowthOver one hundred tax executives, congres -sional staff members and Administration offi -cials gathered May 22nd in Washington, D .C .for the Tax Foundation's seminar "Rebuildin gthe U .S . Industrial Base: The Role of Tax Policy. "

James C . Miller III, co-chairman of the Ta xFoundation and former Director of the Office o fManagement and Budget under Presiden tReagan, introduced keynote speaker Lawrence

Lawrence R Lindsey, special assistant to th ePresident for economic policy development, and aFederal Reserve Board nominee, leaves theseminar surrounded by reporters after bi skeynote address.

B . Lindsey, special assistant to the President fo rdomestic economic policy, with an admonitionto the press that his remarks had to be off th erecord due to his pending confirmation to theFederal Reserve Board .

The first panel on pro-growth tax policies ,moderated by economist Leif H. Olsen, in-cluded speeches by Congressman Richard T .Schulze (R-PA), William C . Dunkelberg ofTemple University, and Charles Hahn of DowChemical Company .

The second panel on U .S . tax policies'impeding transborder investment was chairedby Catherine Porter of Miller & Chevalier.Speakers induded Alan J. Lipner of AmericanExpress Company, Marlin Risinger from th eTreasury Department, Edmund K . Harding ofXerox Corporation, and George N . Carlson ofArthur Andersen & Co .

See Seminar on page 7

Concern about theability of U .S . busi-nesses to competewith foreign firms Senator Jobn Cbafeehas been increasingin recent years . International competitive-ness has become one of the top concern sof Congress, and rightly so . Given theimportance of this issue, government poli-

cies, especially tax policies, should be carefullyscrutinized to ensure they do not hinder ourability to compete .

One area of tremendous importance intoday's competitive environment is researc hand development (R&D) which leads to tech-nological innovation. Since 1929, more thantwo-thirds of our economic growth has resultedfrom technological innovation . The nationswinning the competitiveness race are those tha trecognize the importance of advanced technol -ogy — because it results in new marketabl eproducts and more efficient production andmanufacturing . These countries work to attractcompanies that will establish research anddevelopment facilities within their borders .

To achieve greater economic competitive-ness we must not impede U .S . investment inresearch and development . With this goal inmind, Senator Baucus and I are introducinglegislation to help U .S . business regain itscompetitive edge . Our bill will change a taxpolicy which actually impedes our ability tocompete, and may, in fact, encourage theexport of R&D activities and important techno -logical advances.

Yet, the U.S . is falling behind in its develop -ment of new technologies. One of the reason sfor this decline is the research allocation rulescontained in Treasury Regulation Section 1 .861 -8, issued in 1977 . This is confirmed by a

See Chafee on page 2

Senator Job's Cbafee, Republican from RhodeIsland, serves on the Senate Finance Committee.

The opinions expressed in the Front Burner are notnecessarily those of the Tax Foundation . Editorialreplies are encouraged .

Bring Order toResearch andDevelopmentTax Policy

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Tax Features May/June 1991

Chafee from page 1

recommendation in a report by the Coun-cil on Competitiveness to "place a per-manent moratorium on Treasury Regula-tion 1 .861-8, . . . This regulation increasesthe effective rate of U.S . taxation of R& Din the United States . "

"Stable tax policies withregard to research anddevelopment are extremely

important. Without stability,we cannot expect our majorinvestors in R&D to make thelong-range plans that arecritical to some of our mos tpromising research efforts . "

The 861-8 regulations require U .S .companies with foreign operations toallocate a portion of their domestic R&Dto their foreign income. Of course, for-eign countries do not allow our compa-nies to use the cost of research per-formed in the U .S . as a deduction fromthe income earned in the foreign coun-try. The net effect is to increase theworldwide tax liability of the companiesperforming R&D in the U .S ., encourag-ing American companies to locate thei rR&D efforts abroad.

While the regulations may b efounded on what some would conside rvalid technical tax principles, it is difficul tto understand why the United Stateswould adopt policies that discourage thepursuit of domestic R&D . Shortly afte rthe regulations were issued, Congres srecognized that they represented poo rtax policy and placed a moratorium ontheir implementation . Congress has re-newed this moratorium seven times . It' stime to put an end to the controvers ysurrounding Section 861 — over a de-cade of uncertainty is enough .

Stable tax policies with regard toresearch and development are extremelyimportant . Without stability, we canno texpect our major investors in R&D t omake the long-range plans that are criti-cal to some of our most promising re -search efforts. With permanent reform ofSection 861, we have an opportunity to

both change a misguided policy and toincrease long-term R&D investment .

Efforts to reform Section 861 haveoften been misinterpreted. It has beenalleged that reform is some type of taxbreak — I assure you that is not the case .Section 861 is a penalty on domesti cR&D, because it requires U .S . R&D per-formers to engage in an accountingfiction that leads to double taxation an dincreases their worldwide tax liability .Removal of this penalty simply allowsAmerican companies to be treated lik etheir counterparts all over the world .

It has also been alleged that reformof section 861 will only benefit multina-tional corporations . In a way, this is tru e— a U .S . company must have foreig noperations in order to be penalized bySection 861 . However, small companiesthat conduct U .S . R&D and sell abroadare also penalized by Section 861, jus tlike the larger corporations. There arehundreds of small companies that will beburdened less, and made stronger an dmore competitive, if the section 86 1penalty is removed .

"Shortly after the regulation swere issued, Congressrecognized that theyrepresented poor tax policyand placed a moratorium o ntheir implementation .Congress has renewed thismoratorium seven times. It'stime to put an end to th econtroversy surroundingSection 861 — over a decadeof uncertainty is enough . "

Fortunately, President Bush has le dthe way toward settling this issue with aproposal to extend the current morato-rium for one additional year . However ,the President's proposal does not go fa renough . These pro-competitive policiesmust be made permanent to encouragenew technological innovation by ou rcompanies, to improve American taxpolicy, and promote Americancompetitiveness .

Property Taxes U p$10.3 Billion inFY'89, Hitting$142.5 BillionState and local property tax revenuesincreased $10.3 billion in fiscal yea r1989, up 7 .8 percent from FY'88. Thiscollection of $142 .5 billion in propertytaxes in 1989 is more than double the $6 5billion collected a decade ago, and rev-enues from property taxes currently rep -resent over 30 percent of total state/loca lrevenues .

This decade of prodigious increaseshas spurred taxpayers in some states todemand lower property taxes, thoughthe relief has often been accompanie dby individual and corporate income ta xhikes . Compared to the 7 .8 percentgrowth rate in property taxes in FY'89 ,individual and corporate taxes rose 10 . 7percent and 9.2 percent respectively .

Major Source of Local Revenue s

Property tax remains the leading ta xrevenue source for local governments ,providing 74 percent of the FY'89 total .Local property tax revenue rose $9 . 9billion from FY'88 to FY'89, reaching atotal of $137 billion for 1989 . Althoug hforty-eight states impose some type ofproperty tax, the levies apply to a narrowbase and furnish under 2 percent of tota lstate monies . While the other eight statesdo not impose a property tax, theirlocalities levy property taxes that pro -vide an average of 27 percent of tota lstate and local tax revenues .

Growth Per Capita and Per $1,000 ofPersonal Income

While total property tax revenueshave grown by 119 percent over the pastten years from $65 billion to $142 . 5million, per capita growth in propert ytaxes has risen at a slower rate, 95percent, from $295 in 1979 to $574 in1989. When related to personal income ,property taxes per $1,000 of persona lincome have declined slightly, from $3 8to $35 per $1,000 of personal income.

Per Capita

Taxpayers in four states and th eDistrict of Columbia paid over $1,000each in property taxes in 1989 . States

See Property Taxes on page 3

Tax Features May/June 1991

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Property Tax Collections by Stat e

Per Capita and Per $1,000 of Personal Incom e

Fiscal Years 1979 and 198 9

Per Capita Property Tax Property Tax Per $1,000 of Pers . Income

StateAmount Percent

ChangeRan k

1989Amount Percen t

ChangeRan k198 91979 1989 1979 1989

Total $295 $574 94 .6% $38 $35 -7 .6% -

Alabama 73 148 104 .1 51 12 12 -0 .4 51Alaska 826 1,257 52 .2 1 76 se -12 .8 1Arizona 353 600 70.0 23 50 41 -18 .1 1 9Arkansas 125 21.1 68.0 49 21 17 -17 .3 4 8California 266 543 104 .0 27 30 30 -2 .1 3 3Colorado 326 635 94.6 19 42 39 -7 .3 2 2Connecticut 456 1,003 119.8 5 51 44 -15 .4 1 5Delaware 165 276 67.1 44 19 16 -17 .6 4 8Florida 247 549 122 .3 24 34 34 1.0 2 7Georgia 209 444 111 .8 33 31 30 -6 .2 3 4Hawaii 191 335 76.9 39 23 20 -13 .3 43Idaho 245 386 67 .5 37 36 31 -14.4 3 1Illinois 350 657 88.1 18 39 38 -4.3 2 3Indiana 247 480 94.6 30 32 32 0.6 29Iowa 339 824 84.1 20 42 43 0.5 17Kansas 357 617 72.6 21 46 39 -13 .8 2 1Kentucky 131 228 74.8 48 20 18 -10.6 47Louisiana 102 241 137 .8 46 15 20 27.6 46Maine 303 666 120 .2 16 48 45 -7.4 13Maryland 276 546 97.8 26 33 28 -13 .9 3 6Massachusetts 546 743 36 .1 10 69 36 -47.9 2 4Michigan 376 764 103 .3 9 44 46 4.3 11Minnesota 311 659 111 .8 17 40 40 0.3 2 0Mississippi 138 291 111 .7 43 25 26 4.3 3 8Missouri 206 318 64.9 41 28 21 -26.5 4 2Montana 408 679 66.4 15 61 63 -12 .7 6Nebraska 389 698 79.4 14 52 47 -7 .9 10Nevada 356 386 8 .8 36 40 23 -41.9 3 9New Hampshire 426 1,058 148.6 3 59 66 -5 .8 3New Jersey 506 1,056 108 .7 4 68 48 -16.7 9New Mexico 131 180 37.0 50 20 15 -28 .5 5 0New York 482 929 92.9 6 58 48 -17 .2 8North Carolina 163 322 97.7 40 25 23 -8.4 4 0North Dakota 257 441 71.4 34 36 34 -6 .9 2 6Ohio 260 476 83.0 31 33 31 -6 .9 3 2Oklahoma 149 267 78.9 46 21 20 -5 .1 4 5Oregon 366 795 117.4 8 47 54 16 .5 4Pennsylvania 230 467 103 .4 32 30 29 -2 .5 3 5Rhode Island 399 737 84.7 11 53 44 -17 .3 1 4South Carolina 151 353 134.3 38 24 28 14 .8 3 7South Dakota 343 644 58 .7 26 60 43 -14.3 16Tennessee 155 296 90 .9 42 24 22 -9 .6 41Texas 274 613 123 .8 22 36 42 16.4 18Utah 230 420 82 .1 35 37 35 -6 .3 2 6Vermont 360 729 102 .4 12 66 48 -12.8 7Virginia 223 541 142 .7 29 29 31 6 .8 30Washington 308 542 76 .0 28 38 34 -10.6 28West Virginia 131 237 81 .7 47 20 20 0 .6 44Wisconsin 346 710 105 .2 13 46 46 -1 .1 12Wyoming 513 870 69 .6 7 63 63 0 .4 2Dist. of Columbia 323 1,177 263 .8 2 32 64 69.7 6

Source: Department of Commerce: and Tax Foundation computations .

In terms of the decade's growth ratein per capita property taxes, nineteenstates and the District of Columbia morethan doubled their collections . The Dis-trict of Columbia led the nation with a264 percent growth rate, with New Hamp -shire and Virginia following behind a t149 percent and 143 percent respec-tively . None of the fifty states reported adecline in per capita property collection sbetween 1979 and 1989 .

Per $1,000 of Personal IncomeWhen comparing property taxes pe r

$1,000 of personal income, Alaska ($66) ,Wyoming ($64), and New Hampshire($56) led states with the highest collec-tions. The lowest property tax burdensby this yardstick were in Alabama ($12) ,New Mexico ($15), and Delaware ($16) .

Between 1979 and 1989, thirtee nstates and the District of Columbia expe-rienced increases in property taxes in

This decade of prodigiousincreases has spurre dtaxpayers in some states todemand a lighter property taxburden, though the relief hasoften been accompanied byindividual and corporateincome tax increases.

relation to personal income. The Districtof Columbia reported the largest in-crease of 70 percent, from $32 in 1979 to$54 in 1989 . Massachusetts and Nevadarealized the sharpest reduction in th eproperty tax/income ratio during th edecade, down 48 percent and 42 percen trespectively.

OutlookA recent Tax Foundation survey o f

the fifty states revealed that many statesare re-examining property taxes. Kan-sas, Michigan, New Jersey, Oregon, an dWisconsin have already placed propertytax reform at the top of their FY'92agenda. Many reforms are efforts by thestates to balance the increase in othe rtaxes . Taxpayers may witness reforms i nproperty taxes for FY'92, which woul dinclude tax relief plans in the form o fcredits and rate reductions. n

Property Taxes from page 2

with the highest per capita burden areAlaska ($1,257), District of Columbia($1,177), New Hampshire ($1,058), Ne wJersey ($1,056), and Connecticut ($1,003) .States with the lowest per capita property

tax burden were Alabama ($148), Ne wMexico ($180), Arkansas ($211), Ken-tucky ($228), and West Virginia ($237) .Residents with the highest per capitaproperty tax collections paid an averageof $909 more than citizens in the lowestper capita states .

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Tax Features May/June 1991

Uniform Business Tax Would Revamp U .S. Corporate Taxes

On April 30, 1991, Tax Foun-dation economistPaulG. Merskiinterviewed Congressman

Richard T. Schulze on his pro-posal for a Uniform BusinessTax which would replace thecurrent corporate income taxand the employer portion of theSocial Security tax with a ninepercent tax on business receiptsless the cost of goods sold .

In the tradition of theFoundation's serving as aforum for objective debate o nkey tax policy issues, businessleaders from a cross-sectionof American industry respondto the congressman's proposalon page 6.

QCurrently, there seems to be aconsensus that the U .S . corporatetax system has become the most

complex in the world and costs almost a smuch to comply with as it raises i nrevenues . What is the "Schulze Solution"and will it simplify our complex corpo-rate tax system ?

A There are several excellent stud-ies which show that it costs thebusiness community almost as

much to maintain tax records and fill ou tcorporate tax forms, as is raised in rev-enues. One several years ago showeddefinitively a cost of $ .66 for each dollarcollected . Since that time we've had theTax Reform Act of 1986, we've ha dTEFRA, DEFRA, OBRA, COBRA, TAMRA,OBRA II — a virtual alphabet soup of so -called tax reform or tax revisions . Unfor-tunately, if anything, the tax code hasbecome much more complex . My an-swer to this problem is the UniformBusiness Tax, or UBT, and one of m ygoals with the proposal is simplification .As a matter of fact, what we're striving fo ris to greatly reduce the $90-100 billion itnow costs corporate America — thebusiness community — just to compl ywith the corporate income tax . What Iwould like to see is a tax system tha twould eliminate this huge dead-weightcost of tax compliance and administra-tion both for the government and thebusiness community.

QTaxpayers, as you pointed out ,have already witnessed 14 majortax bills enacted over the pas t

decade, and yet we are still facing recordbudget deficits . How would your Uni-form Business Tax legislation addressthe deficit without increasing the recor dhigh tax burden on the America ntaxpayer?

A The Uniform Business Tax willnot increase the tax burden onAmerican taxpayers . The UBT will

substitute a flat 9 percent tax on gros sreceipts less the cost of goods sold for th eexisting corporate income and payrol ltax. Our goal is to raise just about the

same amount as corporations now pay .The border aspects, or the territoria laspects, of this tax, however, being col-lected at the border and rebated o ngoods sold overseas, would bring i napproximately $50 billion of additiona lrevenues, which could make a meaning-ful contribution toward deficit reduction .

The idea of implementing a value-added type tax has been aroundfor decades but has never re-

ceived much support from the businesscommunity . How does your UBT differfrom a value-added tax?

A I'm glad you asked that questionbecause it's very difficult trying t oexplain that the UBT is not a VAT .

In one of the brochures we send topeople who ask us about it, we havemade up a list of comparisons betweenthe VAT, the UBT, and the corporat eincome tax. I will try to briefly comparethe VAT with the UBT. Let me first saythat one of our major goals was, and is ,tax simplification . With a standard Euro-pean type VAT, at every level of produc-tion there is an additional tax, an addi-tional transaction, paperwork, taxes paid,credits given, slips back and forth, auditscalled for — it is extremely complex . Or

let me turn that around and say, it iscomplexity in the extreme . One of thecries against a standard European styleVAT has historically been its complexity.My proposal will hopefully achieve theother extreme of simplicity . That is amajor difference between the VAT taxand the UBT. Normally, a VAT, whenapplied, is added on top of existingtaxes. The UBT would not be added, bu twould be used in place of existing taxes .It is not a multi-staged sales tax like theVAT. I believe that the business commu-nity would pay this tax, which is paid i n

Congressman Richard T. Schulze (right), a member of the House Ways and Mean sCommittee, is interviewed by the Tax Foundation 's director offiscal affairs, Paul G. Merski.

Tax Features May/June 1991

5

total at the end, rather than a standardadd-on European type VAT. Even inretail stores they have the price plus aVAT and so it's very obvious that it' sadded on top. I think the UBT is not onl ysimpler, but it's not passed on totally t othe consumer . So two of the key differ-ences between them are the incidence o fthe tax and the method of calculation.The difference between a credit for aVAT and a deduction from the UBT is alarge difference and I think that it make sthe UBT much preferable .

QGiven our global economic envi-ronment, the impact that U .S . taxpolicies have on transborder in -

vestment cannot be ignored . How wouldthe UBT impact our competitivenes swith major trading partners, and is i tconsistent with international taxatio npractices?

A It certainly is consistent with inter -national tax practices and that' sbeen one of our major objectives .

The UBT is a GATT-legal tax which ha sa high degree of consistency with ourmajor trading partners without reall ychanging our entire structure and mak-ing it like the European type system . Theborder applicability of this tax makes i tdovetail very well with all of our majortrading partners, all of whom have som eform of border tax or territorial tax . So ininternational trade, it has a tendency tolevel the playing field . Products made inthe United States today have built intothem all of the costs of government :local, state, and federal government ,through the various taxes that are paid bythe producers . When these products areshipped, for instance, to a Europea ncountry, as it crosses the border, the cos tof their government is added to tha tproduct so that not only is the cost of ourgovernment involved in the product, bu tthe cost of the ultimate user country i sincluded as well. When that same prod-uct is made in a European country an dshipped to the United States, the taxwhich has been paid is rebated and, asa consequence, their cost of governmen tis not involved . As it comes across theborder our cost of government is no tplaced into it, which puts us at aneconomic and competitive disadvantage .And so I think that the UBT is not onl yconsistent with our international obliga-tions and the practices of our tradin gpartners, but helps the domestic producer.

A common complaint of U .S .manufacturers is the high cost ofcapital relative to other industrial-

ized nations . Would your UBT helpreduce capital investment costs here i nthe U .S . ?

My belief is that it will allow adramatic reduction in the cost ofcapital because the UBT allows

immediate expensing of capital goods.Our goal is to lower the cost of capita land, in fact, put an incentive in fo rexpansion, modernization, and improv-ing plant facilities and productivity. Ithink we can achieve that with the UBT.

QMany taxpayers fear that new taxlegislation automatically translatesinto higher taxes . Your UBT leg-

islation plans to raise an additional $50 or$60 billion per year — does that meanhigher taxes and increased governmen tspending?

AI'm convinced that it will no tmean higher taxes and highe rspending . There exists a transfe r

pricing problem in our country whensome foreign corporations operating i nthe U .S . are making inordinate profits athome and avoiding paying taxes in th eUnited States . The border aspects of theUBT would cure a portion of the transfe rpricing problem . If products coming intoAmerica now have been over-price dsomewhat, or their prices are not in linewith other markets elsewhere, the differ-ence will be absorbed immediately b ythe shipping country or company withlittle impact on the domestic prices . Inmy opinion, in a competitive environ-ment, the tax would not be passed on todomestic consumers, butwouldbe mainl ypaid by foreign corporations an dcompanies .

In addition to replacing the corpo-rate income tax, the UBT alsoreplaces the existing employer-

paid portion of the FICA payroll tax . Willthis aspect jeopardize revenues goinginto the Social Security Trust Fund ?

A That was the first question theAARP (American Association o fRetired Persons), who keep a very

close eye on such things, asked when w esat down with them and explained theUBT. We explained to them that theemployers' portion of FICA will be pai din a preferential manner just as it is today .That seemed to satisfy them, and th eanswer is that it will not make anychange in the way FICA is handled .

With such a broad-based tax asthe UBT, what would prevent th egovernment from extracting huge

amounts of additional revenue simply b yraising the rate 1 or 2 percent every fewyears above the 9 percent you haveoutlined?

A That's always been a fear with an ytax, and I think, quite frankly, ajustifiable one with today's budget

situation and tax structure . Because ou rcurrent corporate tax code is so com-plex, we tend to pick winners and losersand can pick off the industries andportions of industries to tax. With theUBT's broad-based relatively flat system ,you would impact every business entityin the United States, large and small, ifyou were to make a change . I don't thin kthat would be done either lightly oreasily. As a matter of fact, I think it woul dpose one of the most difficult politicalproblems for anyone who thought the ycould raise this tax in a cavalier off-handmanner. Therefore, I think just the oppo-site — that it would be an extremel ydifficult tax to increase .

QWhat reaction has the UBT re-ceived from your colleagues hereon Capitol Hill and from the busi-

ness community around the nation?

A As with any tax proposal, theinitial reaction is skepticism. Butas we respond to concerns, take a

closer look at the numbers, and view th eproduct with a careful eye on what a taxstructure should do to set sound ta xpolicy, we're getting more and moreacceptance . The proposal is not hard t ounderstand or complicated, but the stan-dard reply from many businesses, afte rwhat they've been through for the las tdecade and a half, is, "No, don't changeanything." But when we sit down withthem and discuss where we're going asa nation, how we're going to get there ,what their vision of the United States is i na very competitive world, the UBT be -comes more attractive . It's really a ques-tion of whether we're going to be able tocompete in a global economic environ-ment, not only in the service industries ,but in manufacturing as well . We'regetting more and more of the reaction ofLee Iacocca, chairman of Chrysler, fo rinstance, who thinks that it's imperativ ethat we make such a change and pu tsound tax policies in effect . n

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Tax Features May/June 1991

Tax Policy Community Responds to the Uniform Business TaxThe UBT : A VAT By AnyOther Name

Michael AltierVice President & Legislative Counsel

National Retail Federation

Congressman Schulze has distributedamong various business groups a pro-posal calling for a 9 percent UniformBusiness Tax (UBT) that would replac ethe current business income taxes andthe employer's portion of the FICA pay -roll tax .

Although proponents of the UB Twish to characterize it as a revampe dborder-adjustable business tax system ,we at the National Retail Federatio nbelieve the UBT is a form of value-adde dtax, and in recent I-louse Ways andMeans Committee hearings, Membersreferred to "border-adjustable taxes" and

We believe the UBT is a formof value-added tax . . . . [its]disadvantages are as validtoday as they were twentyyears ago . . . regressivity,inflationary impact, andpotential complexity.

"value-added taxes" interchangeably .Thus, we must presume that any legisla-tion in this area will be a variation of avalue-added tax.

Over the years, retailers have consis-tently opposed various forms of a value-added tax, and its disadvantages are a svalid today as they were twenty year sago. These include regressivity, infla-tionary impact, and potential complexity .

Congressman Schulze points to theUBT's qualification as a border-adjust-able tax under GATT as a major advan-tage . This characteristic would seem toencourage exports while making im-ports more expensive . Additionally, theUBT claims to export $60 billion of taxliability to foreign entities while leavin gthe U .S . business taxpayer's liability rev-enue neutral. We find it hard to believethat foreign suppliers will absorb such asignificant tax increase — most of th eadditional cost on imports will be passed

through to the consumer.The UBT is a radical proposal in

terms of changing a tax system that hasevolved over the last 70 years. We main-tain that until sufficient economic studie sand other testing of such a proposal canbe done to determine the true impact onthe U.S . economy, such a proposal i sextremely dangerous and cannot beendorsed. Although the current tax sys-tem does have its faults and complexi-ties, it has served the country well . Thisis not to say that changes are not war-ranted, but let us first try to work withina system where the economic outcomeis more predictable .

The UBT: Fairness andSimplification in One

George T. EsherickVice President, Government Relation s

American Iron and Steel Institute

Congressman Schulze's UBT proposal isa good addition to the debate overconstructing a more competitive U .S . taxsystem. To be competitive in the 1990sand beyond, the U .S . needs fiscal poli-cies that address the anti-competitivenature of our present business tax sys-tem. To accomplish this, we need tototally reform the way in which com-merce is taxed in the U .S . As such, theAmerican Iron and Steel Institute favor sthe consideration of a broad based bor-der-adjustable tax as a substitute for th ecurrent business tax system and as avehicle for providing investment and

[We] favor the considerationof a broad based border-adjustable tax as a substitutefor the current business tax.

savings incentives . Such a tax would belevied on imports and rebated on ex-ports, thus improving the competitive-ness of domestically produced goodsboth in the U .S . and overseas markets .

A properly constructed, border-ad -justable tax would create a broader an dfairer tax system which would also beless complicated. It would help enhanceU .S . savings and investment ; not disad -

vantage one industry or region overanother; be revenue neutral for all U .S.taxpayers; simplify the tax code; andhold promise to reduce the federal bud-get deficit without further eroding U .S.competitiveness.

Be Wary of Trading Taxes

Norman B. TurePresident

Institute for Research on theEconomics of Taxation

In the abstract, the UBT— a subtraction -method value added tax — is superior tothe existing business income taxes inmany important respects . It is neutral inits effect on the use of production capa-bility for capital formation compare dwith consumption and with respect t othe use of labor and capital services i nproduction. Because the UBT woul dapply only to value added originating indomestic production, its replacement o fbusiness income taxes would contribut e

The UBT would present a verygreat risk of acceleratinggrowth in federal spending.

to improving the competitive position ofAmerican businesses in the world mar-ket place .

The most important function of a taxis to inform the citizens about the cost o fgovernment . To perform this functioneffectively, a tax must be imposed di-rectly on the largest possible number ofreal persons. Taxes on business entitiesfail this test because their burden ishidden from the real people who ulti-mately pay them . In this respect, the UBTwould be no better than the corporateincome tax it is intended to replace .Because the UBT would also be a muc hmore potent revenue raiser that businessincome taxes, its adoption would presen ta very great risk of accelerating growth i nfederal spending, thereby canceling anyeconomic benefits it might otherwiseprovide . We should eliminate the corpo-rate income tax but not by substitutin gfor it another tax that in practice mightwell be more harmful to economic effi-ciency, growth, and competitiveness .

Tax Features May/June 1991

7

Seminar from page 1

Rejuvenating service sector strengthwas the theme of the third panel . Emil M .Sunley of Deloitte & Touche moderate dand introduced Thomas S . Neubig ofPrice Waterhouse, Henry Ruempler ofthe American Bankers Association, an dJane G . Gravelle of the Congressiona lResearch Service .

Proceedings of the seminar will beavailable soon . Please contact the Foun-dation if you are interested .

Economist Leif H. Olsen finds the literatureon the capital gains tax excessivelyabsorbed with one question: Will a bigberor lower rate produce more revenue? Th emore important issue to Olsen is its effecton capital formation and growth.

Congressman Richard T Scbulze bolds upa Uniform Business Tax form which wouldreplace the current, much more complexcorporate tax return should his idea of auniform business tax be proposed andenacted Professor William Dunkelberg ofTemple University looks on.

Catherine Porter, partner in the law firmof Miller & Chevalier, presided over alively exchange on the wisdom oftb esubpart F rules.

U.S. High-tech Competitiveness an dThe R&D Tax Credi t

The last half of the 1980s was a great disappoint-ment to Americans who see research and develop-ment (R&D) as vital to the nation's economy . Rea lgrowth in R&D expenditures only averaged 1 . 3percent from 1985 to 1988, and suffered a 0 . 9percent decrease in real growth during 1989, th efirst such decline in 14 years . This stagnant periodcontrasts sharply with the first half of the decad ewhen R&D expenditures increased an average o f8.2 percent in constant dollars . The U.S. currentlyspends substantially less than either West Ger-many or Japan on non-defense R&D .

What role has tax policy played in this nosedive? What provisions o four tax code provide corporations with positive incentives to invest inresearch and development? Which provisions of the code inhibit R& Dexpenditures? Everyone here in Washington seems to agree on the benefit sto our economy of more R&D . But despite this unanimity, the U .S. R&Dtax credit has been since its inception in 1981 a jumble of short-term

extensions and technical changes to its calculation that has not provide dsubstantial incentive for U .S . firms to increase R&D expenditures .

A parallel and possibly related trend is the decline the U.S. is experiencingin its share of global sales of technology-intensive products . Tax Foundationsenior research fellow B . Anthony Billings will soon publish a study on R& Dintensity that examines its sensitivity to the R&D tax credit, changes in th ecorporate statutory tax rate, and changes in the corporate tax base .

On the political front, the R&D tax credit is in limbo with the rest of th e"extenders" — tax provisions that must be reauthorized, or extended, every year .In judging which provisions should be subject to this reauthorization procedure ,the R&D tax credit seems ill-suited . Since R&D projects that qualify for the creditare planned over a period of several years, the stimulus the credit provides i slessened by the uncertainty of its application in future years . A permanent credit ,or at least a multi-year extension, would be a small but worthwhile step toward sa more stable and reliable tax code, and possibly a boost to U .S . competitiveness .

Seminar Sponsors• Air Logistics Corporation •• American Brands• American Cyanamid Company• American Telephone and

Telegraph Company

•• Arthur Andersen & Co. •• BellSouth Corporation •• Citicorp/Citibank, N.A. •

• Dow Chemical Company •• E.I. du Pont de Nemours and

Company

•• Eli Lilly and Company •

• Georgia-Pacific Corporation •• GTE Corporation •• IBM Corporation

Masco Building Product sCorporation

• Metropolitan Life InsuranceCompanyMobil Corporation

Philip Morris Companies Inc.Reader's Diges t

Sears, Roebuck and Co.

Tenneco Inc .

• Texaco, Inc.3M Company

United Parcel Service Inc.Vulcan Materials Company

Warner-Lambert Company

Dan WittExecutive Director

8

Tax Features May/June 1991

Tax Freedom Day Analysis Brings Media to Foundation's Doo rThe publication of Tax Foundation's TaxFreedom Day Special Report last monthbrought more attention to theFoundation's public information pro -gram than any previous year's announce-ment of Tax Freedom Day .

The Foundation 's executive director DanWitt talks about the growing tax burdenacross the nation on the Radio Americanetwork.

Most of the new demand for Ta xFoundation information came from th estates, as the second year of theFoundation's calculation of a state-by-state Tax Freedom Day spurred interestin how each state's tax burden comparedwith those of neighboring states .

From April 24, the date of the nation'searliest Tax Freedom Day in Mississippi ,until May 26 when the taxpayers of NewYork and the District of Columbia ha dfinally earned enough to pay for govern-

ment, the Foundation's staff did radi ointerviews in over 30 states .

An important benefit of this atten-tion is the media's greater reliance on th eFoundation for economic analysis o nother issues . Paul Merski, the Foundation'sdirector of fiscal affairs, spoke o nMaryland's fiscal situation at a confer-ence entitled Maryland TaxPolicy: WhoPays and Who Benefits. He was joine don the panel by noted federal budgetauthority Allen Schick, Director of theUniversity of Maryland's Bureau of Gov-ernment Research. Also speaking wereMarcia Howard of the National Associa-tion of State Budget Officers, Hal Hovey ,State Policy Research, and Steven Gol dof the Center for the Study of the States . n

Foundation Releases1990 Annual Report

The Tax Foundation's annual report ,just released, explains the mission ofthe Foundation and gives highlight sof its accomplishments during 1990 .Research, membership activities ,publications, and media coverageare presented, along with messagesfrom the Foundation's co-chairmen ,James C. Miller III and James Q .Riordan, and its executive director ,Dan Witt.

Paul Merski is interviewed by the CNNtelevision network after a record-settingsale ofTreasury bonds .

Tax Features

Tax Features (ISSN 0883-1335) is publishedby the Tax Foundation which operates as aseparate unit of Citizens for a Sound EconomyFoundation . Original material is notcopyrighted and may be reproduced. Pleas ecredit Tax Foundation.

Co-Chairman James Q . RiordanCo-Chairman James C. Miller IIIExecutive Director Dan WittDirector of Fiscal Affairs . . . . Paul G . Mersk iSenior Fellow B. Anthony BillingsEditor William AhemEditorial Asst Gretchen GeorgiadisResearch Associate Gregory Leong

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