e flat tax proposal, foreign income is tax-free. But firms would continue to battle the IRS over transfer prices, which determine how much of their income is earned abroad. (McNamara 135)An error would arise in areas where the flat tax creates new loopholes. Under Armey’s plan, interest income is not taxed. Thus, an appliance store might offer an $800 refrigerator for $100, provided the customer take a 24-month 400 percent financing. The customer still pays $800, but the dealer will pay tax on only $100. (McNamara 135)Companies and businesses will not benefit overall from the flat tax plan. Though moving to a flat tax would be a vast improvement for corporate taxation, one area where it falls a little flat is in the treatment of the income U.S. companies earn abroad. Currently, the government taxes all U.S. corporate earnings on a worldwide basis. While American companies may claim a credit for the taxes paid overseas, the IRS has devised such a complicated nexus of rules for computing it that the cost of rearranging the company’s finances to qualify for the credit sometimes exceeds its value. In order to qualify for a tax rebate for the cars it sells in Europe, for example, Chrysler is considering establishing 15 subsidiaries, mainly to take better advantage of its European tax credits. Since a flat tax would fall only on a company’s U.S. operations, American based multinationals and exporters would be relieved of much of the administrative burden. (Dishman 46)But that will still leave them at a disadvantage. Some 90 countries with which the U.S. competes rely on value-added taxes (VATs), levies exacted on goods as they are sold at each stage of the production process, as a major source of business taxes. When companies based in those countries sell products abroad, their governments refund the VAT. But international trade agreements do not permit the U.S. to refund any of the flat tax that American exporters would pa...
