- The Washington Times - Sunday, January 28, 2007

As Somali and Ethiopian troops routed Islamic Courts forces, the U.S. Navy moved the aircraft carrier USS Eisenhower offshore to attack fleeing al Qaeda terrorists. This was another example of America’s capability to act quickly, thanks to its naval supremacy.

Yet, the Navy continues to decline in number of ships, including aircraft carriers. In 1990, the Navy had 15 aircraft carriers in a fleet of 574 ships. Today, it has only 12 carriers in a fleet of 285 ships. There has been considerable economic growth over this period, and defense spending has fallen as a share of the economy and the federal budget. Indeed, as a share of gross domestic product (GDP), defense spending is as low now as in the 1930s when the U.S. foreign policy was isolationist.

And the situation is expected to worsen. The Congressional Budget Office has presented second-best alternatives to the 30-year shipbuilding plan proposed by the Navy. In most of its scenarios, carrier strength drops to seven. The Navy plan is itself modest, initially expanding the fleet to 330 ships in 2019 (with 11 carriers), but then falling back to 294 by 2035.

The CBO doesn’t think the $10 billion extra per year needed for shipbuilding can be found because of “the many pressures that the federal budget will face in coming decades.” This is $10 billion out of a budget that will approach $3 trillion in 2009, so where is the money going if not to national security?

According to the latest (August) CBO projections, annual mandatory spending will increase by more than $1 trillion between 2006 and 2016, reaching $2.5 trillion. This will put squeeze on all the traditional functions of government. Social Security, Medicare and Medicaid will be the largest drivers of mandatory spending, reinforced by the rest of the welfare state. Federal Reserve Chairman Ben Bernanke warned in Jan. 18 Senate testimony that higher entitlement spending could cripple the economy.

Another rising factor will be interest paid on the national debt, which the use of deficit spending will continue to expand. Over the next 10 years, annual net interest payments will increase by $113 billion to $333 billion in 2016 — double the Navy’s entire budget.

These are baseline projections, which assume spending will only increase at the rate of inflation, a slower rate than past experience. If government spending is to be held fairly steady as a share of GDP, at around 20 percent, then the growth of mandatory spending will mean a reduction in traditional government programs, including national security. The CBO still shows a deficit in 2016, with spending at 20.1 percent of GDP and tax revenues at 19.0 percent.

Since there is no political will to constrain mandatory spending, there is a need to find new tax revenues. Higher income taxes on “the rich” has its allure, especially to a Democratic Congress. Though supply-siders claim tax cuts have stimulated the economy to generate higher tax revenues, this fiscal growth is projected to be much slower over the next decade than during the 1990s when tax rates were higher. Income tax revenue (individual and corporate) doubled 1994-2000, but will not double again from 2006 levels until after 2016.

There is, however, an anomaly in our tax system that, if corrected, would bolster both tax revenue and domestic economic growth. Most of America’s trading partners raise a substantial amount of their tax revenues from what is called a Value Added Tax (VAT). This is essentially a tax on production, which is then rebated to firms when they export. American firms do not get their taxes rebated when they compete with these foreign firms which have escaped taxation.

American firms would like to have their tax burdens lifted too, but that cannot be done in the face of budget deficits. The only practical answer is to require foreign firms to pay their fair share of the U.S. taxes needed to maintain the country in which they want to operate, and the world trading system American forces protect.

To level the playing field, imports from VAT-rebating countries should be taxed when they enter the U.S. This is already done among countries that uses the VAT to equalize the effect. But because the U.S. does not use a VAT, its firms suffer from the uncorrected, unequal taxation.

Congress has struggled, unsuccessfully, with this problem in the past, but its approach has been too convoluted and narrow. It’s time to try a new, more comprehensive approach.

There is no need to radically revise the U.S. tax system by adopting a VAT. All that is needed is a border adjustment tax to compensate for the difference in systems. Such a tax would be in a modest 15 percent to 20 percent range, but when levied on over $1 trillion of imports, would immediately cut the current budget deficit by more than half.

Once on a more equal tax footing, American firms would take back some of their lost market share, expanding the domestic economic base to generate more jobs, profits, income — and tax revenue.

A tax that promotes domestic economic growth is a win-win for the country, while providing financial resources needed to keep America on top both at home and overseas.

William Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council.

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