Saturday, November 12, 2011

Could Cain's 9-9-9 Plan Violate WTO Rules? (Hint: Sure Looks Like It)

Herman Cain’s 9-9-9 plan has been in the headlines a lot recently, so I decided to check it out for myself.  Let me first say that, regardless of its details and actual operation, the plan's general concept is certainly attractive to fans of limited government like me (although I'm probably in the camp that fears a new income tax and VAT because of the potential for government abuse).  That said, my review of the 9-9-9 plan has revealed what appears to be a pretty blatant violation of international trade rules because its business tax provisions explicitly discriminate against imported goods.  I'll get into this in more detail below, but the basic gist of the problem is that the plan appears to tax corporate purchases of both domestic and imported goods, but allows US firms to deduct only their purchases from other US businesses.  As such, the plan conditions access to an “advantage” – a corporate tax deduction – on the purchase of domestically-produced goods.  Unless I'm missing something, this would appear to violate basic WTO non-discrimination rules which obligate the United States government to treat domestically-produced and imported goods equally.

Now with that long introduction out of the way...

According to the Cain campaign's website, the 9-9-9 plan would, inter alia, apply 9% “business flat tax” on “gross income less all purchases from other U.S. located businesses, all capital investment, and net exports.”  The precise operation of the corporate tax plan is pretty unclear, but the “scoring” describes the “business transactions tax” as follows:
Each business would pay tax on gross receipts less payments to other businesses. Allowing the subtraction of payments for intermediate goods yields the value added by the company. Subtracting investment as well yields a subtraction method value-added tax. 
In keeping with the basic value-added structure, the tax is treated as border adjustable. That is, the tax is on a territorial basis and applies only to sales in the U.S. rather than the worldwide treatment under the current tax system. This approach exempts exports while subjecting imports to the tax.
Thus, according to the (admittedly) limited information publicly available, the 9-9-9 plan is a business VAT that would tax corporate purchases of both domestic and imported goods, but allow US firms to deduct only their purchases from other US businesses (i.e., the domestic goods).

Such a provision might seem relatively innocuous, but it's plainly discriminatory and as such could be problematic under two parts of the WTO Agreements (which the United States and all other WTO Members are obligated to follow).

First, Article III of the General Agreement on Tariffs and Trade (GATT) contains the National Treatment rule, which requires Members to treat imported goods the same as or no less favorably than domestically-produced goods so as to ensure that discriminatory internal taxes are not used to afford protection to domestic industry.

Second, the WTO Agreement on Trade-Related Investment Measures (TRIMs Agreement) essentially interprets and clarifies the provisions of GATT Article III (and Article XI) where measures are linked to "investment rights."  The Agreement disciplines the use of investment measures by prohibiting things like local content requirements and trade-balancing requirements.  Both types of measures discriminate against imported products by subjecting their “purchase or use” by an enterprise to less favorable conditions than the purchase or use of domestic products.  In particular, a "local content requirement" is a law which mandates the purchase/use - or gives businesses and/or individuals an incentive to purchase/use - domestically-made goods over their imported counterparts.  And it's prohibited by the TRIMs Agreement.

TRIMs are not limited to laws/regulations that deal with investment; instead, WTO jurisprudence interpreting the TRIMs Agreement has broadly construed it as covering any "advantage" under domestic law.  For example, the WTO Panel in Indonesia – Autos rejected the argument that the TRIMs Agreement had to be limited in application only to foreign investment laws, and instead found that the Agreement prohibits "local content requirements, compliance with which may be encouraged through providing any type of advantage.

Thus, any law which conditions access to a government-provided "advantage" (such as a tax break or deduction) on the purchase/use of domestic goods (or goods from a domestic supplier) will run afoul of the TRIMs Agreement.  For example, that WTO Panel in Indonesia – Autos found that Indonesian programs providing tax advantages to cars that were manufactured using a certain percentage of local content violated the TRIMs Agreement.

And that brings us back to 9-9-9....

Although the 9-9-9 plan’s precise operation is a little unclear, it would appear to violate GATT Article III and the TRIMs Agreement because it conditions access to a corporate tax deduction on the purchase/use of goods made or supplied by US companies.  The corporate tax system thus discriminates against imported goods which cannot qualify for the deduction, in violation of the National Treatment principle.  In short, if you "buy American," you can deduct all such purchases from your VAT bill; if you buy foreign imports, you can't.  What's odd is that the 9-9-9 corporate tax system probably would've been non-discriminatory (and thus WTO-consistent) if it had just (a) applied the tax deduction to all domestic purchases, regardless of the origin of their manufacture or supply; or (b) exempted imported goods from the business VAT.  However, according to the limited public information out there, neither of these criteria applies.

I somehow doubt Team Cain ever thought about this problem - even experienced legislators and tax wonks could miss this flaw, and, let's face it, Team Cain's not really known for their extensive legal and policy experience.  And it's certainly attractive from a purely political (and "nationalistic") perspective to incentivize the purchase of "American" goods via hypothetical tax policy.  Unfortunately, in the real world such encouragement is a subtle form of protectionism and a pretty blatant violation of the United States' international trade obligations.

So while 9-9-9 might make for an interesting debate, it's definitely not ready for primetime... at least not yet.

No comments: