While pressuring the surplus nations to end unfair mercantilism and increase consumption, the U.S. must shift capital and labor from low-value-added industries like restaurants and retail to high-value-added manufacturing, high-value services, and research and development. Export-oriented, import-competing industries like automobiles and aerospace tend to have much higher productivity growth and R&D spending than other industries. Manufacturing-led growth for both the U.S. and global markets can melt away the debt legacy of today's economic emergency more rapidly.
In the new era of American developmental capitalism, the tax code will have two purposes -- raising adequate revenue and promoting "onshoring" or the growth of high-value-added production inside U.S. borders, by domestic and foreign companies alike. To encourage onshoring, the U.S. should lower or abolish its high corporate income tax, one of the few sound ideas of the American right. This would stimulate foreign direct investment in U.S. production. It would also reduce the incentive for U.S. companies to engage in tax avoidance schemes.
If the corporate income tax remains, then, as the economist Ralph Gomory has suggested, it should be made variable and lowered for high-value-added production inside the U.S. Alternately, the U.S. could replace the corporate income tax with a value-added tax [[VAT). This would level the playing field for American companies. They are punished by de facto tariffs in the form of VATs in Europe and Asia, even as European and Asian exporters get government subsidies in the form of VAT rebates from their governments. In addition, a "Gomory VAT" could be reduced for high-value-added U.S. production, regardless of the nationality of the company or investors.
Adding a VAT to the mix of federal taxes would shift the U.S. toward the European mix of national consumption, payroll and income taxes. In the next half-century, even after runaway healthcare costs are controlled, the U.S. government share of GDP, while remaining relatively low by international standards, needs to expand by several percentage points to pay for universal healthcare, adequate retirement and a permanently higher level of infrastructure investment. Invisible taxes like payroll and consumption taxes are a better way to finance modern big government than highly visible taxes like income taxes and property taxes. Because they do not cause "sticker shock" to check writers around April 15 or when mortgage payments are due, they are harder for politicians to inveigh against on the campaign trail. Consumption and payroll taxes tend to be regressive in their effect on middle- and low-income people. But the exemption of necessities from consumption taxes, payroll tax rebates or [[better yet) allowing biweekly credits against payroll tax withholding,
an idea I have suggested
elsewhere, can make these taxes more progressive.