The Business Transfer Taxfor

Comprehensive Reform of theFederal Tax Code

Presented by

David A. Hartman

The Lone Star Foundation10711 Burnet Road, Suite 330

Austin, Texas 78758

Phone: 512.339.9771 Website: lonestarfoundation.org Fax: 512.997.7826 Email: dahartman@hartman-llc.com

Recommendation For Comprehensive Reform of the Federal Tax Code by Adoption

of the “Business Transfer Tax” (BTT):

•A Subtraction Method Value Added Tax (VAT)

•Consumption Based by Expensing Fixed Investment

•Border Adjusted by Taxation of Imports and Crediting of Exports

•Replaces Three Quarters of Federal Taxes

•Supersedes all Income and Wealth Taxation (other than Individual Social Insurance Taxes)

The BTT Base is Determined:for Commercial Activities:

All Revenuesless: Export Salesless: Purchase of Goods & Services

(Including Fixed Investment)plus: All Imported Purchasesequals: BTT BASE

for Governments & Not-For-Profits:

All Employment Expensesplus: All Imported Purchasesequals: BTT BASE

The BTT Supersedes the following Federal Taxes:

• Individual Income Taxes

• Corporate Income Taxes

• Employer Social Insurance Taxes

• Estate and Gift Taxes

• Custom Duties

Note: Both Rates Provide “Found Money” From Taxing Net Foreign Trade; 18.2 % provides funding for transition or deficit reduction at the present tax burden on U.S. Citizens.

BTT SINGLE TAX RATES

Tax Revenue Neutral: 17.0% BTT

Tax Burden Neutral: 18.2% BTT

The BTT Prevents Regressivity

• Provides rebates to all citizens of the BTT tax on:

– Family based poverty level income

– Charitable giving

– Home mortgage interest

• Taxes income above poverty level proportionate to consumption

• Terminates Capped Employer Social Insurance(but Retains Federal Match of Individual Contributions)

MISCONCEPTIONS ABOUT THE BTT• Border Adjusted Taxation via the BTT is

NOT Protectionism – It Only equalizes the Competitive Hurdles for U.S. Producers.

• VAT Taxation was NOT the Cause of Runaway Welfare Spending in Europe – It was Due to Adopting VAT Taxes In Addition to Rather Than Replacement of Income Taxation As Proposed for the BTT.

• Border Adjusted Taxation is the Only Realistic Basis for Equalizing Prices to End the Trade Deficit Hemorrhage and the Manufacturing Crisis.

ECONOMIC PROBLEMS Addressed by BTT REMEDIES

● The Manufacturing Crisis ● Border Adjusted Taxation

● Saving for Investment Deficit ● Consumption Taxation

● Outsourcing of Services ● Border Adjusted Taxation

● Relocation of Corporations ● End Corporate Income Tax

● Declining Labor Incomes Share ● Exempt Investment for Growth

● Increase Growth of all Incomes ● All BTT Remedies

●Terminate Complex and Inefficient ●Simple, Broadest Base for Lowest Income Taxes Rate BTT

(See Appendix for Details)

APPENDIX

APPENDIX AThe Manufacturing Crisis

•Foreign Producers are More Competitive than U.S. Producers Due to the Price Advantage of Border Adjusted VAT Taxes. (see EXHIBIT A-I & A-II)

•Manufacturing has declined more than 50% as % GDP from the Mid-Sixties to present. (see EXHIBIT A-III)

•Since 1998 alone the Manufacturing Sector has terminated 20% of its employees – its worst layoff since the Great Depression. (see EXHIBIT A-III)

•The U.S. now produces only $2 of every $3 of goods consumed. (see EXHIBIT A-IV)

•NAM has cautioned that the decline of manufacturing “risks loss of critical mass”.

FOREIGN VAT TAXATION

Standard VAT RATE*

EU-15 Countries, Average: 19%

China: 17%

Canada: 15%

Mexico: 15%

30 OECD Countries: 18%

*Or border adjusted tax equivalent

(Source: EU-15 and OECD Data, Misc. Websites)

EXHIBIT A-I

COMPARISON OF U.S. VS. FOREIGN VAT ADJUSTED PRICES FOR COMPARABLE COST PRODUCERS

(Assumes Average OECD VAT Rate)

DAH/LSF/5-05

SOLD IN U.S. MARKET SOLD IN FOREIGN MARKETS

U.S. PRODUCTIONF.O.B. PRICE $1.00 F.O.B. PRICE

$1.00

(Incl. U.S. Taxes) plus: VAT ADDED 0.18

SELLING PRICE $1.00 SELLING PRICE $1.18

FOREIGN PRODUCTION

F.O.B. PRICE $1.00 F.O.B. PRICE $1.00

less: VAT REBATE (0.18) less: VAT REBATE (0.18)

plus: VAT ADDED 0.18

SELLING PRICE $0.82 SELLING PRICE $1.00

EXHIBIT A-II

5

10

15

20

25

30

35

200520001995199019851980197519701965196019551950

% Employment

% GDP

Manufacturing's Share of Total U.S. GDP and Employment

Sources: 1. Statistics for All Manufacturing Establishments: 2001 & Earlier, U.S. Department of Commerce, Census Bureau

2. U.S. Department of Labor, Bureau of Labor Statistics Series LNU02000000 & CEU3000000001

DAH/LSF/5-05

EXHIBIT A-III

DAH/LSF/5-05

5

10

15

20

25

30

20052000199519901985198019751970

Per

cen

t G

DP

U.S. Consumption of Goods

U.S. Production of Goods

The Manufacturing Production Gap(The Trade Deficit in Goods as % GDP)

Production Gap

Sources: 1. U.S. Department of Commerce, Bureau of Economic Analysis International Transactions 2. Statistics for All Manufacturing Establishments: 2001 & Earlier, U.S. Department of Commerce, Census Bureau

EXHIBIT A-IV

APPENDIX B EFFECT OF THE MANUFACTURING

CRISIS ON U.S. EMPLOYMENT• The Average Hourly Real Wage of Production Workers,

has Declined 13% since 1978. (Source: 2001Statistices for All Manufacturing, Census Bureau)

• The Displacement of Manufacturing Employees to Highly Price Elastic Employment in Services has Contributed to Stagnation of Income for 90% of U.S. Employees. (see EXHIBIT B-D)

• This Income Stagnation Coincides with both the Production Gap and the Preceding Adoption of Foreign VATs that are a Principal Cause. (see EXHIBIT A-IV)

• Progressive Taxation as Measured by the Income Tax Share Top 10% of Incomes Appears to Negatively Effect Incomes of the Other 90% due to Real Incidence of Capital Taxation on Labor. (see EXHIBIT B-I)

EXHIBIT B-I

DAH/LSF for

APPENDIX C

OUTSOURCING OF SERVICES

The surplus in Services is Declining due to flight of Corporations to Foreign Tax Havens with Territorial Corporate Taxation, and Outsourcing of White Collar Services Abroad

(See EXHIBIT C-I)

DAH/LSF/5-05

-900

-800

-700

-600

-500

-400

-300

-200

-100

100

200

2005est

2000199519901985198019751970

Bill

ion

$

Services

Goods

Balance in Trade of Goods & Services

Source: U.S. Department of Commerce, Bureau of Economic Analysis International Transactions

EXHIBIT C-I

Consumption Based

Border Adjusted

Marginal Rates

Income Distribution

Economic Growth

Simplicity

Current Tax Code

No No Highest Worst Lowest Worst

Flat Tax Yes No Lowest Improved Better Good

Consumed Income Tax

Yes No Lowest Improved Better Good

Retail Sales Tax

Yes Yes Higher Better Higher Best

Credit Invoice VAT

Yes Yes Higher Better Higher Good

BTT & Retail (50/50)

Yes Yes Lower Good Higher Good

Business Transfer Tax

Yes Yes Lowest Best Highest Good

BTT ADVANTAGES OVER ALTERNATIVES