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96–503 PDF 2005

THE REBATE OF VALUE-ADDED TAXES AT THE

BORDER AND THE COMPETITIVE DISADVANTAGE FOR US SMALL BUSINESSES

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC, JULY 7, 2004

Serial No. 108–70

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

BRAD MILLER, North Carolina 

[VACANCY] 

[VACANCY] 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Policy Director/Deputy Chief of Staff 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Hufbauer, Mr. Gary Clyde, The Reginald Jones Senior Fellow at the Institute 

for International Economics ................................................................................ 2

Barfield, Mr. Claude, Resident Scholar and Director of Science and Technology Policy Studies, American Enterprise Institute ...................................... 4

Jones, Mr. William, Chairman, Cummins-Allison Corporation ........................... 6

MacGuineas, Ms. Maya, Executive Director, Committee for a Responsible 

Federal Budget ..................................................................................................... 8

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 22

Velazquez, Hon. Nydia ..................................................................................... 24

Prepared statements: 

Hufbauer, Mr. Gary Clyde, The Reginald Jones Senior Fellow at the 

Institute for International Economics ......................................................... 28

Barfield, Mr. Claude, Resident Scholar and Director of Science and Technology Policy Studies, American Enterprise Institute ............................... 31

Jones, Mr. William, Chairman, Cummins-Allison Corporation .................... 41

MacGuineas, Ms. Maya, Executive Director, Committee for a Responsible 

Federal Budget .............................................................................................. 47

(III) 

(1)

THE REBATE OF VALUE ADDED TAXES AT 

THE BORDER AND THE COMPETITIVE DISADVANTAGE FOR U.S. SMALL BUSINESSES 

WEDNESDAY, JULY 7, 2004

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS

Washington, D.C. 

The Committee met, pursuant to call, at 2:05 p.m. in Room 2360, 

Rayburn House Office Building, Hon. Pat Toomey, presiding. 

Present: Representatives Toomey, Bartlett, and Chocola.

Mr. TOOMEY. Good afternoon, everyone, and welcome to the 

Small Business Committee. The hearing today is on the topic of the 

rebate of value-added taxes at the border and the competitive disadvantage for U.S. small businesses. 

Today, the Committee will hold a hearing to examine the effect 

primarily on U.S. small businesses of international trade rules administered by the World Trade Organization that permit the rebate 

of value-added taxes at the border while denying comparable treatment for other types of taxes such as income taxes. 

European countries impose value-added taxes as high as 25 percent, depending on the specific country. These taxes are imposed 

whether the goods are manufactured in Europe or imported from 

abroad. However, the VAT is rebated at the border when goods are 

exported from Europe. 

In contrast, current trade rules administered by the WTO do not 

properly recognize the ability to rebate other types of taxes, such 

as income taxes at the border. Because the United States does not 

impose value-added taxes, goods exported from the United States 

to Europe bear the full brunt of U.S. income taxes and the valueadded taxes in Europe while goods exported from Europe to the 

United States enjoy a full rebate of VAT tax at the border. 

As Congress examines this apparent comparative disadvantage, 

this hearing will discuss various options to deal with the issue. 

We have got an excellent panel of experts with extensive experience to testify on the subject today: 

Dr. Gary Hufbauer, Professor of Economics at Georgetown and a 

Senior Fellow at the Institute for International Economics, has 

written extensively on U.S. international taxation. Claude Barfield, 

a Resident Scholar and Director of Science and Technology Policy 

Studies at the American Enterprise Institute similarly is well published on issues of trade. Bill Jones, Chairman of Cummins-Allison 

2

Corp, he will give us his perspective as a business negatively impacted from this practice. And lastly, we will hear from Maya 

MacGuineas—am I mispronouncing that?

Ms. MACGUINEAS. MacGuineas.

Mr. TOOMEY. MacGuineas, Executive Director of the Committee 

for a Responsible Federal Budget. 

I look forward to the testimony of all the witnesses. On behalf 

of the Committee, I wish to thank all of you for being here today, 

especially those who have had to travel far. I would be happy to 

yield to either of my colleagues if they would like to make an opening statement. 

If not, then I will introduce the first witness. 

Let me welcome Gary Hufbauer. Gary Hufbauer is the Reginald 

Jones Senior Fellow at the Institute for International Economics. 

Mr. Hufbauer is no stranger to this Committee having testified before the Committee just this last year on international tax issues. 

We welcome— 

[Pause.]

Mr. TOOMEY. There we go, we are back. We do in fact want to 

hear what you have to say. 

We welcome you again before the Committee, and we look forward to your comments. We will go with five minutes for the statement from each witness. The clock, we have a light there that indicates that. I imagine everybody knows how that works. Orange is 

the one minute mark, is it not, and red means the time is up, and 

then we will proceed to questions. 

So at this point welcome, and I entertain the testimony from Mr. 

Hufbauer. 

STATEMENT OF GARY CLYDE HUFBAUER, INSTITUTE FOR 

INTERNATIONAL ECONOMICS

Mr. HUFBAUER. Well, thank you very much, Mr. Chairman. As 

you know, small business faces numerous disadvantages when selling abroad, and many of them or most of them can be traced to the 

substantial overhead costs of mastering a new environment.

Mr. TOOMEY. Could you bring the microphone a little closer, 

please?

Mr. HUFBAUER. Sure. Is this better? 

So small business faces disadvantages when selling abroad, but 

it also faces larger firms generally competing in the United States, 

in the U.S. market, and they are able to spread their overhead cost. 

But in addition to that we have the tax issues, which you described, and the foreign competitors enjoy the benefit on their 

value-added tax and kindred taxes, such as the Canadian GST. 

The international rules, which are codified in the WTO, on border tax adjustments have a long history and they have attracted 

a lot of scholarly discourse, but just in brief, the rules work to the 

disadvantage of firms based in a country that does not use a VAT 

3

or GST as a source of public revenue, but instead relies on direct 

taxes—particularly social insurance and corporate income taxes, 

and of course, that is the United States. 

Now, over the past 40 years, governments worldwide have turned 

to VAT-type taxes to pay for public needs, particularly entitlement 

programs, and amongst OECD countries, VAT revenues typically 

amount to between four and eight percent of Gross Domestic Product. 

In economic theory, border adjustments for uniform businesses 

taxes are equivalent to exchange rate adjustments of approximately the same magnitude. So given that theoretical equivalence, 

the classic answer to national differences in business tax systems 

is that exchange rate adjustments will eventually offset any tax differences, such as the ones that you noted, Mr. Chairman, and wash 

away any permanent effect on business location, decisions or competitive disadvantage. 

So according to the classic logic, business firms in neither the exporting country nor the importing country should care where their 

business taxes are adjusted at the border. But there we have the 

theory. On the other hand, we have the practice, and the practice 

is they do care, and they care a lot. 

No country has imposed a VAT, or at least no country of any significance, without adjusting at the border. If they believe their classic theory, they would say, hey, the exchange rate will take care 

of it, no need to adjust. They do not believe it, and they have adjusted instead. 

Now, American firms as you know have complained about these 

adjustments since the early 1970s, and one reason, but not the only 

reason, is that border tax adjustments are immediate and certain. 

You know they are there. You get them. The exchange rate adjustments are distant and problematic. 

Research on fundamental forces that supposedly determine exchange rate, the research shows that they do an exceedingly poor 

job. You will not make money using fundamental forces to predict 

exchange rates. You would do better to flip a coin. 

So if fundamental forces cannot explain exchange ranges, then 

what confidence can you place in the classic prescription that any 

benefit on border adjustments will be offset by exchange rate 

changes? I suggest you cannot place much in that. 

My suggestion, if the Congress repeals the FSC, which it seems 

about to do, that it should pass yet another resolution calling upon 

the European Union and other WTO members to abolish their preferential border tax adjustments for indirect taxes. They should 

cease exempting these taxes when they export and cease imposing 

them on their imports. 

Now, I know that sounds pretty academic and pretty theoretical, 

but what I would suggest if a last call to the WTO members falls 

on deaf ears, the Congress should seriously consider for this and 

other reasons scrapping the corporate income tax in its entirety 

and replacing it with a business tax that can be adjusted at the 

border. U.S. firms can then enjoy tax parity with their foreign competitors, both at home and abroad. 

Thank you, Mr. Chairman. 

[Mr. Hufbauer’s statement may be found in the appendix.]

4

Mr. TOOMEY. Thank you very much, Mr. Hufbauer. 

Our second witness is Claude Barfield, Resident Scholar of the 

American Enterprise Institute. We look forward to drawing on your 

experience with international trade law. Welcome. 

STATEMENT OF CLAUDE BARFIELD, AMERICAN ENTERPRISE 

INSTITUTE

Mr. BARFIELD. Thank you very much, Mr. Chairman. 

Because one of the other panelists, my colleague, Gary Hufbauer, 

is an acknowledged expert in the tax side, I am going to confine 

my testimony, at least my oral testimony, to the larger and the 

broader implications of a whole series of FSC decisions, ending 

with the decision that would allow you to invoke $4 billion worth 

of damages against the United States. 

I would like to point just to four issues, three problems, and then 

some suggestions for reform of the system. 

First, the question of national sovereignty versus the reach of 

WTO rules into domestic policy. And I should say as a footnote, I 

am a strong supporter of the WTO. You may not think so by the 

time I finish my testimony. 

The FSC/ETI decisions raise troubling questions about the reach 

of multilateral trading rules versus the right of national governments to determine fundamental tax policy. Because these decisions cannot be overturned short of a unanimous agreement by 

WTO member states, they also highlight a constitutional flaw in 

the WTO that is already operating in this and other cases to undermine its legitimacy; that is, the imbalance between the highly efficient and virtually unchecked dispute settlement system and the 

inefficient and practically unworkable consents of rule-making procedures. 

In the final appeals before the WTO appellate body in these 

cases, the Bush administration clearly recognized the gravity of the 

issue or issues raised by the earlier decisions, and starkly warned 

the appellate body of the consequences of an adverse ruling. In an 

unprecedented move, they sent not a career USTR lawyer, but the 

Deputy Secretary of the Treasury, Ken Dam, to the hearing. 

And Dam said the following: ‘‘Few things are as central to a 

country’s sovereignty as how it raises revenue. The necessary implications of the panel’s analysis is that the WTO may second guess 

the reasonableness of a member’s decision regarding the most basic 

elements of the tax system.’’ 

Now, in almost every aspect, I would argue the final judgment 

of the appellate body of the earlier panel reports despite protestations to the contrary ignored Dam’s warning, and in my judgment, 

the Bush administration should have taken a much stronger stand, 

at least verbally, after the decisions, and even raised the question 

that the United States ought to be rethinking its relationship with 

the WTO. We can talk about that later. 

Secondly, the problem of the WTO as what I would call an incompetent world tax court, and here I am not going to go into details, but my point is that if you get into the details of the decisions 

you can see that the reasoning and the conclusions of both the panels and the appellate body—there were two panel decision and two 

5

appellate body decisions—really were or at least showed a stunning 

ignorance of international tax law. 

And I point out in the final ETI ruling, the appellate body posited the necessity for clean, bright lines between domestic and foreign source income, ignoring the impossibility of finely tuning such 

divisions when attributing income from transactions related to 

R&D, manufacturing, marketing, advertising, and transportation. 

In the complex and shadowy world of international taxations, 

systems aim at avoiding double taxation inevitably allows some income to escape all taxation, and in most countries these fine lines 

are the subject of endless haggling between the government and its 

corporations. 

Thirdly, the WTO as avenger, this was the—the damages that were levied, the $4 billion, is being called by some international tax 

experts as outrageous, and I think that is true. Remember, the 

WTO is a reciprocity-based organization, or the rules, and thus it 

has been a standing practice since the early days of the GATT the 

retaliation for a breach of obligations should be limited to the trade 

effects of that breach. There are also WTO subsidy rules that have 

the obligation that retaliation be proportionate. 

In this case the United States argued, after it lost the case, that the damages should be no more than $1 billion for the subsidy effects, not even the trade—beyond even the trade effects. The EU 

argued, however, that the amount of the subsidy should be the 

amount of the worldwide subsidy, the worldwide effect, and astonishingly the arbitrators had bought this interpretation. 

They did so on the basis of what they called the ‘‘gravity’’ of the 

breach and the nature of the upset of the balance of rights and obligations, ignoring the mandate for portionality. To reach this conclusion, the arbitrators invoked international law normally used for 

political and human rights violations, arguing that the U.S. breach 

represented an ergo omnes process. That is against all members 

and not against the EU. 

This decision went far beyond anything that had been negotiated 

or that had been present in the WTO. 

Finally, stepping back from the details of these cases, I would 

argue that what is needed is a major change in the mindset in intellectual isolation of the WTO dispute settlement system. 

In the FSC/ETI cases, both the panels and the appellate body 

demonstrated a stunning technocratic determination to barrel forward with their own pet legal theories and ignore the political history in the context of the issues at hand. I have suggested, not just 

for this case but in other forum because I think this case represents a kind of classic and extreme reach of what can happen 

when you go beyond the negotiated rules, I think this is happening 

in other areas, in anti-dumping, in safeguards, in environmental 

rules. 

There are two things I think we should consider in terms of the 

future of the WTO dispute settlement. 

One, and this is a legal term that they manage to invoke it sometimes, is ‘‘non-liquet,‘ and that phrase is just a Latin phrase. It 

means ‘‘it is not clear.’’ 

Given the widespread agreement that WTO tax are replete with 

lacunae and contradictory provisions, and given the questions conVerDate 0ct 09 2002 15:16 Jun 07, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\HEARINGS\96503.TXT MIKE
6

cerning the legitimacy of judicial decisions are magnified at the 

international level, the panels and the appellate body should be instructed to use this doctrine more frequently and throw decisions 

back to the WTO general council or to trade—that is C-O-U-N-CI-L, not counsel—or to trade round negotiations. 

The critics of non-liquet argue that it is prohibitive because 

international law is necessarily complete, or that is, the duty of 

judges to step in and fill gaps, and particularly in contentious 

areas. WTO rules by common consent are certainly not complete, 

and arguments for gap-filling by judges reflect a dangerous and 

even anti-democratic myopia. 

Alternately, you could have the invocation of a doctrine that we 

have used in the United States, the so-called political issues doctrine developed by the U.S. Supreme Court. The doctrine is meant 

to provide a means by which the judiciary can avoid decisions that 

have deeply divisive political ramifications and thus in the opinion 

of the court should be settled through judicial democratic processes 

involving both the legislature and the executive. 

In this case, it would involve trade negotiations, and not have 

the appellate body and the panels get out ahead of those negotiations. 

In summary, the proposition advanced here is that heading off 

corrosive conflicts between the United States, the EU, and other 

WTO members in the future will necessitate the forum of international trading rules that have now enmeshed and entrapped both 

trade superpowers. 

Thank you very much. 

[Mr. Barfield’s statement may be found in the appendix.]

Mr. TOOMEY. Thank you very much. 

Our next witness is Bill Jones, Chairman of Cummins-Allison, located in Mount Prospect, Illinois. In addition to heading up a small 

manufacturing business, he also serves as the chairman of the 

United States Business and Industry Council. 

Mr. Jones, welcome. 

STATEMENT OF WILLIAM JONES, CUMMINS-ALLISON 

CORPORATION

Mr. JONES. Also Cummins-Allison is an Indiana corporation 

founded by the Allison family, which you may be familiar, Mr. 

Chocola. 

But Mr. Chairman and Committee Members, my name is William Jones, and I am Chairman of Cummins-Allison, a privately 

held manufacture company based in Chicago. As you said, I also 

serve as the chairman of the United States Business and Industry 

Council this year, and I am a member of the National Association 

of Manufacturers. 

I appreciate the chance to be here today to talk with you about 

an issue that is extremely important to me, namely, the crisis in 

American manufacturing, and the way the rules of the game in 

international trade are stacked against American companies. 

The subject of this hearing, which is the disparity of the treatment of U.S. and foreign taxes in global trade, constitute a blatant 

7

example of how American manufacturers are currently disadvantaged and how policymakers must become more aggressive in the 

defending of U.S. interests. 

Cummins-Allison is one of the world’s leading producers and 

innovators in the manufacture of equipment that scans, sorts, denominates, and authenticates currency for national security issues. 

This is an area that is quite literally essential to America’s economic and national security, providing the critical function and deterrence of counterfeiting and the preservation of the dollars, the 

world’s preeminent currency. 

Unfortunately, we, like so many manufacturers in this country, 

have been dramatically and negatively affected by an uneven playing field in the global trading system. 

Twenty years ago American companies accounted for 90 percent 

of the U.S. requirements in the field of currency authentication. 

Today, that percentages is down to 30 percent, and we, Cummins, 

are the only surviving U.S. producer. This is a story that could be 

repeated for any number of American manufacturer industries and 

their workers. 

What is happening? You hear a lot of talk about cheap foreign 

labor and lower costs abroad, about the inability of an advanced 

economy to compete against low-cost developing world, but what we 

consistently fail to recognize is how much of our problem has nothing to do with the cost or the competitiveness or wage rates, and 

everything to do with the rules that literally make no sense and 

serve no readily apparent purpose other than to artificially punish 

U.S. manufacturers. 

No issue is more illustrative of that point or more important to 

the bottom line of American companies and workers than the one 

that the Committee is considering today. I do not come here as an 

expert on the legal niceties relating to the border adjustability of 

taxes, but I can tell you that I understand the fundamental business importance of this issue. 

The problem is as simple as it is unbelievable, and amounts to 

essentially the double taxation of U.S. producers selling abroad 

while our foreign competitors sell largely tax-free in this market. 

Let me illustrate. 

If our company, Cummins, or any other American company 

wants to sell a product in China or Europe where the value-added 

taxes predominate, we get no refund or rebate of U.S. income taxes, 

but we do have to pay the foreign VAT. Meanwhile, foreign producers export to America get their domestic VAT rebated while 

picking up no income tax here. 

While there are complexities in calculating the exact effect of this 

practice, including issues relating to the effects of state sales tax 

in the United States, it has been estimated that this results in as 

much as a 25 percent difference in the price they can sell for here 

versus what we can sell for there. 

What is astonishing is that, as far as I can tell, the international 

rules that allow this to go on have no legitimate economic basis 

whatsoever. The rules are based on an artificial distinction between so-called direct taxes and indirect-like VAT taxes, even 

though economists have shown that these taxes tend to have the 

same incidence and effect. Allowing indirect but not direct taxes to 

8

be rebated on exports are imposed on imports makes no sense from 

a policy or economic standpoint, but I can tell you that it makes 

the task of keeping jobs and businesses in the United States far 

more difficult. 

How does something like this happen? Apparently this was just 

an obscure line squirreled away in the original agreement of the 

General Agreement on Tariffs and Trade, something that never 

made any sense in a situation where our negotiators just simply 

got out-foxed. 

For decades, Democrats and Republicans, Congress and administrations, and commentators and economists have all agreed that 

this rule is ridiculous. Every fast-track bill says we should make 

it a priority to fix it, and yet nothing is ever done. 

From a business standpoint, I have to implore you, stop the madness. We have lost 3 million manufacturing jobs, we have a trade 

deficit that is literally unprecedented in the history of the universe, 

and we have been the most important market in the world for 

many, many years. 

How is it that we do not seem to have the leverage to get the 

issue like this taken seriously? Of course, we do. We only have to 

be willing to use it and to play hardball the way our trading partners do so well and so effectively. The prescription is quite simple. 

We should make clear that we will not agree to any new multilateral trade agreements that does not fix this problem, and more, we 

should make clear to our key trading partners that we intend to 

see this accomplished in the short term, say the next year to 18 

months. After that, we should make clear that we are willing to 

take more aggressive steps, including possible limitations on market access here until we see a resolution. 

The rest of the world has had more than five decades to reap the 

benefits of this absurd inequity. They have had their unfair advantage, and enough is enough. It is time to stand up for our manufacturers and change the rules. 

Thank you, Mr. Chairman. 

[Mr. Jones’ statement may be found in the appendix.]

Mr. TOOMEY. Thank you very much, Mr. Jones. 

Our concluding witness this afternoon is Maya MacGuineas, Executive Director of the Committee for Responsible Federal Budget. 

We welcome you before this Committee, and look forward to your 

comments. 

STATEMENT OF MAYA MACGUINEAS, COMMITTEE FOR A 

RESPONSIBLE FEDERAL BUDGET

Ms. MACGUINEAS. Thank you. Good afternoon, Mr. Chairman, 

Members of the Committee. I should actually just clarify, I am not 

speaking as executive director of the Committee for a Responsible 

Federal Budget, but rather as a director of the Fiscal Policy Program at the New America Foundation. 

As you are all aware, it is the case that while European exporters benefit from rebates on their value-added taxes at the border, 

parallel tax relief for U.S. companies has been ruled illegal by the 

WTO. This is due to the distinction international trade law draws 

9

between the value-added taxes used by most nations and the corporate income tax that U.S. firms are subject to. Accordingly, the 

FSC/ETI benefits for U.S. companies appear to be on track to be 

repealed. 

There is considerable debate about whether border adjustments 

affect the competitive trading positions of nations. On the one 

hand, general economic theory holds that in a system of floating exchange rates, changes in tax levels are offset by changes in exchange rates. Under this line of thinking even for countries without 

floating exchange rates rebates are not believed to make differences in the long run. 

However, on the other hand, if this were true, it would not matter to our trading partners whether their VATs were rebated, yet 

it does matter and they are rebated. 

In the real world, exchange rate movements can be quite sticky, 

and not only are relative exchange rates affected by a variety of 

economic factors, the timing of exchanges can be quite unpredictable. 

So, as is often the case when it comes to theoretical reductions, 

we cannot know for sure whether the economic relationship between border adjustments and exchange rates holds true, nor can 

we know for sure the extent to which U.S. companies will actually 

be harmed by the WTO ruling. Either way, the current bill making 

its way through Congress is premised on the belief that U.S. companies will be severely disadvantaged by the change, and the bill 

therefore includes compensatory measures. 

It is true that the corporate tax bill does little to help small businesses in particular, which are less able to absorb general overhead 

cost, and do not benefit from the economies of scale that many of 

their larger competitors do. From the perspective of this Committee, that may well be problematic. 

Similarly, it is true that the benefits of the bill are spread quite 

unevenly with some sectors benefitting a good bit more than others. No matter the extent to which U.S. companies will be harmed 

by the tax law change, I would argue that the targeted tax relief, 

which is included in the FSC/ETI bill, is not the right approach to 

remedying the problem. 

Already the cost of the bill is quite expensive and it is likely to 

be more expensive than current projections since many of the expiring provisions would undoubtedly be renewed. Since the costs 

will increase budget deficits, thereby decreasing government saving, the effect could actually be to worsen our trade balance and 

harm small businesses. 

Furthermore, the general approach of targeted tax relief delevels 

the playing field between U.S. companies. Distorting the tax code 

to favor particular sectors of the economy may be politically appealing, but it is not good policy, nor does it help American consumers 

or the economy. 

And finally, while I will not mince words here, this bill has become an egregious example of how effective special interest lobbyists have become filling the package with expensive, unnecessary, 

and unjustified corporate handouts, and any pretence that this constitutes good tax policy was lost long ago. 

10

But out of the need to alter our tax policy does come an opportunity. The money saved from removing the illegal subsidy could 

be used to either reduce the deficit or help sweeten a comprehensive tax reform deal along the lines of what we saw in 1986, which 

would include eliminating many existing loopholes and subsidies 

while lowering corporate income tax rates. 

Another desirable option would be to introduce a consumption 

tax, which could be adjusted at the border, to replace income taxes. 

Consumption taxes have a number of benefits, including, of course, 

that they would increase national saving. If we want to improve 

our trade balance, not to mention longer term economic performance, improving our national saving rate could play a critical role 

in this endeavor. 

At the same time, most consumption taxes, such as sales taxes, 

tend to be highly regressive whereas the existing income tax at 

both the corporate and individual level is quite progressive. However, it is quite possible to institute a progressive consumption tax 

that would maintain existing tax burdens or even make them more 

progressive, if desired, rather than shift the burden down the income scale. 

Since my time here is short today and I will not go into the details of how this might work, but a progressive consumption tax is 

desirable not just with regard to tax treatment and trade issues as 

we are discussing today, but in its ability to balance the oftentimes 

competing tensions between tax efficiency and tax equity. 

Thanks for allowing me to testify today. 

[Ms. MacGuineas’ statement may be found in the appendix.]

Mr. TOOMEY. Thank you very much for your testimony. I would 

like to thank all the witnesses for their testimony, and I would like 

to begin with some questions, and I suppose, in fact, starting with 

a comment which some of you may disagree with, and I would appreciate perhaps starting with Mr. Hufbauer, your reactions to this 

thought. 

It strikes me that there is a little bit of a irony in this whole discussion because the behavior that we are finding problematic, specifically the rebating by say European countries of the VAT when 

they choose to export their products, really amounts to European 

taxpayers subsidizing American consumers. 

What we are saying is we really do not like it when European 

taxpayers allow American consumers to buy things cheap, which 

strikes me as a bit ironic. 

For instance, if they instead of rebating the VAT, if they rebated 

twice the VAT or 10 times the VAT, and all European countries, 

for instance, did this, and they were all competing, American consumers would get things for free. That would be difficult for American manufacturers to compete with, obviously. But for American 

consumers, it would be an enormous windfall. 

Do you agree that this current system amounts to foreign taxpayers subsidizing American consumers?

Mr. HUFBAUER. Yes, it does, and I think there is always a balance between welcoming the subsidy to consumers and thinking 

about your production base, and that is what all these interVerDate 0ct 09 2002 15:16 Jun 07, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\HEARINGS\96503.TXT MIKE
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national rules are about, trying to strike that balance, recognizing 

that consumers are also producers and that over a period of time 

that, you know, earn what you buy as a household or as a nation. 

So your analysis is completely correct, and we have a number of 

laws in our trading system, and this area is one of them, where we 

say, well, you know, it might be great for consumers, but it is too 

hard on producers to have to compete essentially with the foreign 

treasury, which is what it comes down to, and that is going to be 

too detrimental to our productive apparatus over a period of time. 

I would say in this particular case the balance has been struck 

at the wrong place. We are too welcoming of these, as you say, subsidies to consumers.

Mr. TOOMEY. Mr. Barfield, would you like to comment on that?

Mr. BARFIELD. I fully agree with what Gary said, and my instincts would normally be with the producer, it is a question of balancing. I think this just goes too far in terms of helping producers 

in Europe or other countries—not just Europe since you have the 

potential of VAT and then the rebate all around—against U.S. 

manufacturers. 

I am normally skeptical if people talk about an uneven playing 

field, but I think in this case it is justified. The problem is that—

I mean, we are not going to go in detail here, but if you look at 

the history, you know, the negotiators on both sides were aware of 

this, and it is very difficult to mesh the universal or the territorial 

system, and those who have a VAT, and those who have direct 

taxes, and that is why, you know, 20 years ago, 25 years ago there 

was a compromise. I mentioned this in my testimony. It was put 

together, and both sides would say—basically said—GATT panel 

said that both were wrong in terms of the way they were structured. 

So both the EU and the United States said, well, we will just 

agree to live and let live, and that is the balance that was upset 

here, I think, after 25 years, and in a way, as I try to argue, that 

I think the panels and the appellate body were really just over 

the—this was an issue they know very little about. Somehow they 

were determined to teach a lesson to the United States, and ignored the possibility or even going back to look at the political history here, and that is why we are in the mess that we are in, I 

think.

Mr. TOOMEY. Thank you. This always just strikes me as a very 

peculiar debate that we engage in. It strikes me as irrational economic policy on the part of those countries that choose to subsidize 

exports instead of domestic consumption. I do not know why that 

is good for a given economy to engage in that, and yet they do. And 

then that manifests itself in lower prices for American consumers 

in this case, and we object strenuously to that, and for obvious reasons. There are some manufacturers that are hurt by that. 

I have a question for Mr. Jones, which is, it strikes me that one 

way to address this, and I think somebody referred to this in the 

testimony, I have always been one that believes that corporations 

12

do not pay taxes, they collect taxes, and corporate income taxes is 

counterproductive in many ways. 

If we abolished corporate income taxes altogether, does that not 

solve this problem, do you think its some of the problem? Does it 

solve a problem for your company?

Mr. JONES. No, I would encourage you also to abolish the income 

tax and institute a VAT. 

One of the problems you have as a—

Mr. TOOMEY. I am not necessarily advocating the institution of 

a VAT as a substitute, by the way.

Mr. JONES. It would help us tremendously because the fact is I 

have to sell against manufacturers from other countries that have 

a cost of no government. I have tremendous fixed cost. And what 

happens, and I think strategic planning, particularly on the part of 

certain Asian countries, they understand I have to have a certain 

capacity to cover all of my fix cost. Labor is only seven percent of 

my total cost, okay? Now, my R&D is almost 20 cents on a sales 

dollar. Now my fixed overhead is very substantial. 

So if I can make all of my money in my home market like Japan 

at a much higher price, cover all of my total cost, I can sell in this 

market at a dumped price till the cows come home, and their strategy is to drive all of the U.S. production and get an industry out 

of business, which I have seen happen in many industries. And the 

consumer does pretty good in the short term, but when all of the 

U.S. industry is gone they then raise their prices. 

So there is two losers in the end when we let them follow this 

kind of a strategy to its end. First, we lose our own industrial base. 

Second, the treasury loses the revenue, and we wonder why we 

have a huge federal deficit. Well, as our manufacturing goes down 

the tubes, you do not collect income. I do not care how you are 

going to do it, through a VAT or an income tax or whatever. But 

the fact of the matter is manufacturers produce and create wealth. 

Farming, mining, and manufacturing, that is what creates wealth. 

And if we do not do things to help that, the consumer is going to 

have no job. 

I can tell you I talk to people that used to work for Motorola 

every week, and what has happened to that company through these 

unfair trade agreements, and the lost jobs and the lost income in 

Chicago, I spent several days with Mayor Dailey just a couple of 

weeks ago. He is beside himself. He does not know what he is going 

to do to fix the city’s budget because the exodus of manufacturing, 

he says, his consumers cannot pay their taxes because the good 

jobs are going too. That is the reality. 

You have got to think about it in a global situation, understand 

that these other countries are trading for advantage to advance 

their manufacturing because they know it creates wealth. If you 

want to know what a country looks like that is just a service economy, that is China before they woke up and realized they wanted 

to be a manufacturer.

13

Mr. TOOMEY. I may want to engage in continued discussion along 

these lines. I would come to some different conclusions than you 

have on a variety of these things.

Mr. JONES. A practical world and I know who I have to compete 

with, and I—

Mr. TOOMEY. I think comparing China to the United States in 

that way is an interesting comparison, but let me yield to the gentleman from Maryland for his questions.

Mr. BARTLETT. Thank you very much. 

I would like to continue a bit of discussion on the issue that Mr. 

Toomey raised about corporate taxes, and make the argument that 

corporate taxes are a very bad idea, that they are the most regressive tax that we have, that they hurt poor people in two ways: 

The first way that they hurt poor people is that they increase the 

cost of the products that poor people have to buy because, as Mr. 

Toomey says, businesses do not pay taxes. They collect them. Tax 

simply becomes a part of the cost of doing business and you add 

it to your cost, and you charge enough for your product so that you 

can pay the tax and still make a profit after the tax. And so poor 

people are now paying more for everything they buy because of corporate taxes, which is a very regressive tax. A rich guy can pay the 

increased cost. It does not hurt him. It hurts the poor guy. 

The second way that the poor guy is hurt by this is that it makes 

our businesses less competitive in the global marketplace, which is 

what we are here talking about today.

Mr. JONES. Absolutely.

Mr. BARTLETT. And so the poor guy not only has to pay more for 

his product, and he does not even have a job now to get the money 

to buy the product because the job he would have had has now 

gone to the Pacific Rim or somewhere because of corporate taxes 

which among many other things has made our businesses in this 

country noncompetitive globally, and so it is gone. 

So why is not the best idea—and by the way when I talk to my 

liberal friends, they understand this for about five minutes, and 

then beyond that, they say, gee, those companies are rich, let us 

collect taxes from the companies. I have to come back and tell 

them, gee, you cannot collect taxes from a company. All the company does is collect the taxes from the people that sells its product 

to, or its service, because if they do not do that, they are going to 

be out of business. 

So why is it not the best solution to your problem just to do away 

with the corporate tax? Would not everybody be better off, you, and 

consumers, and everybody better off? And if the government needs 

more money, now, I think the government needs to cut its spending 

and stop doing unconstitutional things like philanthropy, like 

health care except for our military, like education, none of which, 

by the way, can you find any hint in Article 1, Section 8, are legitimate functions for the federal government. 

14

But if you really need more money, would it not be less regressive to get it simply by an increased income tax so that rich people 

now pay more of it?

Mr. JONES. Who are you asking?

Mr. BARTLETT. Sir? Any of you, you know. But I just think that 

the corporate tax is a very bad idea for businesses. We have driven 

jobs overseas with it. We are making products cost more for our 

poor people, and why cannot we convince our liberals, who claim 

to love—by the way, I know they really love poor people because 

they make more of them so they have more to live, but why cannot 

we make that argument that corporate taxes are a bad idea?

Ms. MACGUINEAS. Could I respond to that?

Mr. BARTLETT. Yes.

Ms. MACGUINEAS. I would certainly agree with what both of you 

said, that corporations do not pay taxes, people pay taxes. I think 

it is not quite clear that the corporate tax is so regressive. In fact, 

generally I hear it is one of the more progressive taxes because it 

is passed along both in the form of lower wages, higher prices as 

you talked about, and also lower returns on capital. And I think 

the distribution or the incidence of that tax probably changes during the different business cycle where different parts of the market 

are tighter or are looser. 

But I agree with you that getting rid of the—I would agree with 

both of you that getting rid of the corporate income tax has a lot 

of benefits to it. One of them is that it is one of the least transparent taxes we have, and the world of bad budgeting, which is the 

world we live in right now. I think a lack of transparency on both 

sides of the budget is very problematic. You need to know the ways 

in which you pay taxes. 

However, I think you can eliminate the corporate income tax if 

you keep the individual income tax in place, because then you have 

what amounts—

Mr. BARTLETT. Wait, if you would hold just one moment. I am 

no fan of the corporate—of the personal income tax.

Ms. MACGUINEAS. I had a feeling you would say—

Mr. BARTLETT. I would do away with that in a heartbeat and put 

in its place a consumption tax.

Ms. MACGUINEAS. Right.

Mr. BARTLETT. So I think do away with the corporate tax, put 

in place a consumption tax. Now, this is clearly not regressive. You 

clearly are now helping poor people.

Ms. MACGUINEAS. Well, and I think what I am suggesting when 

I talk about a progressive consumption tax or something like the 

15

Nunn-Dominici tax that was brought up about 10 years ago is that 

consumption taxes are desirable for so many reason. And if we 

could sort of come to an agreement that there is a role for them, 

particularly in this economy, and then hammer out the details of 

how progressive to make them, and I might want a more progressive tax. I probably would want more of a progressive tax than you 

would overall, but we could argue about how to structure the tax 

burdens. But create a corporate tax, not a wage tax, but a corporate tax to replace both the corporate income and individual income tax. I think that there is a compromise there to be had.

Mr. BARTLETT. Is not any corporate tax regressive?

Ms. MACGUINEAS. Not—

Mr. BARTLETT. Because the consumer has to pay the tax. You 

just admitted that people pay taxes, corporations do not pay taxes.

Ms. MACGUINEAS. Absolutely.

Mr. BARTLETT. Does not that make any corporate tax a regressive tax?

Ms. MACGUINEAS. No. When it makes it progressive is when its 

shareholders who are paying the tax, capital owners who tend to 

be higher earners, and nobody knows for sure what the incidence 

of this tax is, but a lot of people believe that the corporate income 

tax is actually one of the more progressive taxes.

Mr. BARTLETT. I am having some trouble understanding that.

Mr. HUFBAUER. If I could, this is a very interesting debate, we 

could spend all afternoon on it. One of the vices, but it is also the 

great virtue of the corporate tax is that nobody knows, including 

economists who have spent their lives studying it, who actually 

pays it. So the non-transparency is kind of a legislative virtue because you can say the guy behind the tree pays it. 

The second point that I would make is that the system for reasons that congressmen know better than anybody else, the corporate tax is a mess. I mean, it is unbelievable. And everybody 

kind of agrees that we ought to get rid of it. 

I would not refer to the replacement tax—the government needs 

money—I do not refer to it as a consumption tax. It is a business 

tax, business pays it. When VAT is collected, the person who buys 

the good as an individual is not legally liable for paying that VAT.

Mr. BARTLETT. Sir, if you will excuse me for just a moment. 

When I talk about a consumption tax, I am not talking about VAT. 

I want taxes to be—I would like the tax to be in big, red numbers, 

bigger than the cost of the product, so when the American pays the 

tax he knows it. A VAT tax is hidden. I want that to be a consumption tax of something like 20 percent on everything you buy. 

Every time you buy it, I would like you to know how much your 

government is costing you. 

16

By the way, tomorrow is the first day this year you will be able 

to work to get any money for yourself. Today is cost of government 

day. You have worked all year so far to pay for the cost of government—

Mr. TOOMEY. And on that note—

Mr. BARTLETT. —state and local taxes and unfunded federal 

mandate.

Mr. TOOMEY. And on that note I will yield for a question to the 

gentleman from Indiana.

Mr. CHOCOLA. Thank you, Mr. Chairman. 

Just quickly, before I got here I was—I lived in Mr. Jones’ world. 

I was CEO of a publicly traded company that about 40 percent of 

our sales are outside the United States. We utilized the FSC and 

the ETI benefits. We have competed against companies importing 

here, they got VAT rebates. 

Would you argue that the VAT rebate is in effect exactly the 

same as a FSC/ETI benefits?

Mr. HUFBAUER. No. The FSC/ETI was very small. It was very 

modest.

Mr. CHOCOLA. But in effect the same?

Mr. HUFBAUER. Well, you could say very roughly qualitatively 

similar, but in terms of magnitude, always much smaller, and it 

only applied on the export side, not on the import side. There are 

many companies that would not take advantage of the FSC/ETI 

for—well, basically small business had a hard time taking advantage of it. Not all small business, but many did.

Mr. CHOCOLA. Has anybody filed a claim with the WTO against 

the VAT rebates?

Mr. HUFBAUER. Well, if you go back to the time that Claude was 

talking about, this was a major issue in the early 1970s, and U.S. 

Steel Corporation then did bring a case, and for a combination of 

what I would call political, the alliance issues of the day, and economic reasons, the treasury department rejected that case and the 

treasury department’s holding, the decision was upheld by the Supreme Court, not on the economics of it, but on the grounds of the 

competent administrator. 

So yes, 30 years ago there was a very lively dispute in this country, and the United States went, for reasons that Mr. Jones thinks 

were quite misplaced, in the direction of accepting the rebate of the 

VAT.

Mr. CHOCOLA. Would it be your suggestion or recommendation 

that a claim be filed with WTO? And if so, what do you think the 

conclusion would be?

17

Mr. HUFBAUER. My suggestion, just to hog the microphone a little bit more, is that I would not pursue the litigation route because 

I think it is a loser given the ways the rules are now written. I am 

exactly with what Ms. MacGuineas and Mr. Jones have said. 

We need to change the rules, and we have to make it a priority 

to change the rules. And if we cannot change the rules, then I suggest with this reason and others we change our own system, because the corporate tax is, I think—words cannot express what I 

think about the corporate tax.

Mr. BARFIELD. I would just like to add just on the trade side, I 

will defer to my colleagues on the intricacies of the tax side, it is 

also true, I think, that in the late seventies both the Europeans 

and the United States were told that the tax—this part of their tax 

system was GATT-illegal, and that is when they reached in 1981, 

what both sides at the time thought was a compromise. You will 

live and let live. 

So the FSC cases came fifth, and then the United States, because 

it thought that what it had was still probably too egregious a 

change to the FSC. Then you had 15 years where nothing happened, including the Uruguay Round. One could argue about 

whether or not you should have been more specific, but as I say 

in my testimony, the panels and the appellate body had this history before them. They knew this, and they blew right through it, 

determined to put their own stamp on it in a way that I think was 

really incompetent and clearly ignorant of international tax rules. 

Let me just go back and talk about the colloquy we have had for 

the last 10 or 15 minutes. You know, we have now—starting with 

the FSC and ETI decisions, we have now gotten into a debate 

about the U.S. tax system. That is a great debate to have, but the 

problem with it is to have that debate under the gun of the WTO 

and under the deadlines of retaliation means that you are not 

going to—you really are not going to have a good outcome. 

And the lesson here from me is, and I have a great deal of sympathy with Chairman Thomas and with the administration. I think 

the reason that they did not raise more hell than they did when 

the series of decisions came down or were not really more firm is 

that—my view, my view is that both the administration and Thomas thought that they could use the decision to effect reform in the 

United States. And that is a bad—without criticizing, that is a—

clearly we are seeing how, as Ms. MacGuineas has pointed out, a 

bill that is a Christmas tree bill that has been done because it is 

under the gun of retaliation and timing. 

And so this judgment was, I think, a flawed judgment. And as 

a lesson for us not to think that you can just use a WTO decision 

and retaliation to somehow get a better economic policy. I think 

normally it is not going to happen because you cannot get over the 

particular interests, particularly in taxes.

Mr. TOOMEY. I have got another question if we care to do another 

round. I would like to pursue just a couple of ideas. 

First, a question maybe either the economists could help us with 

this one, and I am one that thinks we do shoot ourselves in the foot 

with regard to our manufacturing in many ways—the level of 

18

taxes, the litigation that we tolerate, the regulation that we impose—we systematically put ourselves at a competitive disadvantage. 

Having said that, does anybody on the panel happen to know 

what the—where the total absolute value of American manufactured goods are today in relative terms to the past? What percentage? Are we at an all-time high? Are we at a many year low in 

terms of the dollar value, adjusted for inflation or not, of total manufactured output? Does anybody know?

Mr. HUFBAUER. Let me toss out a few figures. What has happened in manufacturing because of its very high productivity is 

that the labor force engaged in manufacturing has been on a very—

Mr. TOOMEY. Right.

Mr. HUFBAUER. —long-term downward trend.

Mr. TOOMEY. Right.

Mr. HUFBAUER. From about 30 percent in the early 1950s to 

about 15 percent today. However, the share of Gross Domestic 

Product accounted for by manufacturing has not fallen nearly by 

that percentage.

Mr. TOOMEY. Right.

Mr. HUFBAUER. About 22 percent of Gross Domestic Product is 

now in the manufacturing sector. And if you do the arithmetic, you 

can see that manufacturing workers produce more than their pro 

rata share of the labor force, and that is down somewhat. 

We have a trade deficit, which has been alluded to, which is concentrated in the manufacturing sector, it is about $450 billion in 

manufacturing. And if suddenly we had a trade balance, and there 

is a lot of macro economics that goes behind that, you would increase the share of manufacturing in GDP by about three or four 

percent. Now, something else would go down in GDP, but that is 

a very rough survey of some numbers.

Mr. TOOMEY. That sounds—if I can just follow up because that 

is not exactly what I asked, and I understand and I agree with everything you have said. But given that the share of our total GDP 

has—that is comprised of manufacturing has declined somewhat, 

but of course total GDP has grown—

Mr. HUFBAUER. Oh, yes.

Mr. TOOMEY. —is it true that we manufacture more today than 

we ever have before?

Mr. HUFBAUER. Oh, yes, yes.

Mr. BARFIELD. Yes, yes.

19

Mr. TOOMEY. So total American manufacturing output is at a 

record high?

Mr. BARFIELD. In the nineties, and I do not have the numbers 

right in front of me, but if you just take the absolute amount for 

1990 through 2002, we increased the volume and the amount by 

much more than our trading partners.

Mr. TOOMEY. Right.

Mr. BARFIELD. Major trading partners.

Mr. TOOMEY. I just think that this is important because I think 

we often lose sight of the fact that we manufacture—our manufacturing today is at an all-time record high. 

Now, it is true that other sectors of our economy have grown 

more rapidly than manufacturing, and so it is not at a record high 

in terms of percentage of GDP, and the productivity gains have 

been much greater there than in other sectors, so as a percentage 

of labor force it has actually declined significantly, but we make 

more stuff than ever in that sense. 

The specific question that I had about this more narrow debate, 

my understanding is, Mr. Hufbauer, you are advocating one potential solution to this problem is to have the WTO change the rules 

so that it would ban the border VAT rebate. Mr. Barfield, do you 

agree that that is a viable solution?

Mr. BARFIELD. I think it is going to be very tough for this reason. 

This is another downside of the new so-called judicial system we 

have got there. The European Union has one big—when you have 

won, they will turn to us and say, what are you talking about, 

change our system. We just won. It not that they might not, but 

it is going to be very difficult, and the price we would have to pay 

in a trade negotiation might be quite high.

Mr. TOOMEY. So politically it is difficult.

Mr. BARFIELD. I would not—I do not disagree with you. I think 

you should try to get—we should—you know, we should get this 

changed because it is—you know, it is an inequity that hits us, but 

I think it is going to be very difficult.

Mr. TOOMEY. Do either of you have a comment about this?

Ms. MACGUINEAS. I think I would prefer to revisit the distinctions that exist between direct and indirect taxes, which I do not 

think make a lot of sense in this environment. But I am probably 

also less concerned about this issue as a whole in some ways—back 

to your initial point, which is there are so many tensions in tax policy, but one of them is that of the producer interest versus the consumer interest, and we are in a situation where the consumer interests are doing pretty well, and I tend to think we end up with 

better overall economic policy if we look at things from the consumer perspective. 

20

So I am less concerned about those changes that are necessary 

to address this problem as much as the larger tax problems at 

hand.

Mr. TOOMEY. Mr. Jones, do you have anything you wanted to 

add?

Mr. JONES. Well, a couple of thoughts. 

You asked earlier about the—you mentioned your company exported. About 25 percent of what we product is exported, and the 

offset we would get from the FSC is not equivalent to the offset 

that the—I would love to be a German manufacturer or a Japanese 

manufacture, I guarantee you. I do not know what it would be, but 

I believe we would export more, significantly more if we had an 

equivalent offset. 

The second thing, in the WTO that always worries me is I do not 

know why we agreed to this, but WTO is one country, one vote, and 

you know, under the old system we had some leverage which reflects the size of our economy, and we certainly do not have one 

vote at the UN, we have a veto. And I do not know what you do 

about that, but it leads me back to what is practical it seems, it 

may be more practical for us to change our tax code which is, 

again, to eliminate the corporate income tax and have some kind 

of a consumption tax or a VAT. That is something we can do. 

I just do not have much hope that the WTO is going to give us 

any relief from what I have seen in their decisions. I think the Europeans, as you say, they have had some very significant victories 

in this area, and you are going to have a hard time there.

Mr. TOOMEY. The gentleman from Indiana.

Mr. CHOCOLA. Just quickly following up on the—Mr. Jones, coming from a manufacturing background you are not gong to find a 

bigger fan of manufacturing or a bigger advocate, but also recognize realities of the global economy we live in, which provides a lot 

of opportunities, and I think we engage in a lot of hyperbole and 

a lot of rhetoric sometimes. 

I think it is important when we talk about trade issues that we 

keep in mind—as Mr. Toomey just said, we essentially make more 

widgets that we ever have, personal incomes are up. And so when 

we say there are no good jobs, I think we compromise the effort of 

focusing on the real problems, and I have always said when I was 

with a company that we would never move our business for low 

wages. We are not intending to compete on low wages. What we 

might move our business because of all the taxation, regulation, 

litigation that we had to deal with. 

Would you agree with that, that really if we only focus and talk 

about low wages we are really taking our eye off on the real problem, is the total cost of doing business?

Mr. JONES. I have not said anything about—

21

Mr. CHOCOLA. No, I am not saying you specifically, but is this 

issue as discussed as I hear it in my district and around the country—

Mr. JONES. I think this VAT inequity is a much bigger burden 

and a challenge for my company than the wage issue. I do not 

know if I am answering your question. I can only speak from my 

experience.

Mr. CHOCOLA. Well, I guess I am hoping to get some input as to 

how we can make sure that we focus on the real issues, which I 

think are things like this—fair trade policies and effective—

Mr. JONES. Right.

Mr. CHOCOLA. —enforcement, and that is why I was asking 

about whether the impact or the effect is the same of the VAT rebate as the FSC/ETI; not the quantitative impact. Because if it is 

the same, then maybe we should try to enforce it more effectively 

with the WTO effort. But I am concerned that we get into the hyperbole which distracts from really focusing on the problems that 

face small businesses and manufacturers in America.

Mr. TOOMEY. Well, I thank the gentleman from Indiana, and I 

thank the witnesses for testifying. Thanks for traveling here to be 

with us today. I really appreciate your input on this as my colleagues do, and the hearing is now adjourned. 

[Whereupon, at 3:00 p.m., the Committee was adjourned.]

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