The following commentary from Manufacturing and Technology News was written by Brian O’Shaughnessy, Chairman of Revere Copper Products and Co-Chair of Manufacturing for CPA.

The media debate about the potential U.S. adoption of a value-added tax (VAT) has missed the mark. Strategically employed, a VAT can legally promote and protect domestic production of anything mined, made, grown or serviced in any country. The question is not whether the United States has new taxes, high taxes or low taxes. The question is whether the country has smart or dumb taxes in relation to promoting economic growth and international competitiveness. The value-added tax is a valuable tool used by 153 countries to gain a competitive edge in trade with the United States.

Americans look at a VAT as a tax on goods and services at each stage of production. This narrow view promotes the wrong idea that a VAT is a consumption tax that is regressive. Overlooked is the strategic importance of a value-added tax structure to international trade, domestic jobs and real wages.

A VAT becomes like a tariff when its proceeds are used to subsidize production in any country competing with another. The average VAT worldwide is about 16 percent. The proceeds of a VAT can be used like any tax, one of which is to fund health care costs. This remains true whether or not the nation’s health care system is socialized or private.

Let’s look at a real world example of how this impacts my company, Revere Copper Products. Revere fabricates copper and brass products for use in other manufactured goods and for the building and construction markets. Revere has a health care plan for its employees. The price that Revere gets for a coil of copper must cover my workers’ wages and salaries plus the cost of metal, energy, equipment, materials and supplies, taxes and health care costs. When a Revere product is shipped abroad, the foreign country applies a VAT. Some of the proceeds of that VAT are then used to help pay for the health care cost of the citizens of that country, not ours. In order to compete globally, my workers must produce at a cost that pays for their own health care costs and the health care costs of the workers in the foreign factory they are competing against.

When the United States negotiates a Free Trade Agreement with another country, both are required to reduce tariffs. VATs and other border-adjustable taxes are not considered “tariffs” even though they act as such. Foreign countries tax American goods to pay for their domestic programs. Canada and Mexico are good examples. Around the period of the negotiations for NAFTA, both Canada and Mexico dramatically increased their border-adjustable taxes, which then offset much of their agreed-upon reduction of other tariffs. The result was that the United States lowered import charges but Canada and Mexico did not.

Europe and the rest of the world have also lowered tariffs, but increased their value-added tax rates, leaving their import charges unchanged. They are trade-wise and strategically smart. The United States is not.

In order for a VAT to be compliant with World Trade Organization rules, it is applied by other countries to their domestic production as well as imports. But the cost of the VAT is largely offset for their domestic production by subsidies financed by the VAT for health care, retirement and taxes that U.S. producers do not receive. U.S. producers pay taxes but do not receive these countervailing subsidies. The result: The United States is not competitive.

Value-added taxes also promote exports. When a product is exported, the VAT is not applied. This means exported products are sold relatively tax-free. That’s because producers in foreign countries still benefit from the same health care, retirement and other subsidies even though no VAT was collected for exports. Thus, while export subsidies are largely banned by the WTO, the VAT rebates accomplish the same thing. Exports from other countries benefit from subsidies provided by a VAT yet still have the average 16 percent VAT deducted from their full value.

So how can the United States compete through a smart tax strategy? Again, look at a real-world example from my company. If the United States had a 12 percent VAT, it would generate about $4 million to the U.S. Treasury from my company. Revere’s health care costs are about $2.5 million per year and FICA is about $1.5 million. So with a 12 percent VAT, Revere’s health care and FICA costs could be subsidized by VAT revenues. That would give Revere a 12 percent cost advantage against imports. This 12 percent advantage gained from the subsidies would be retained for exports since a VAT is not charged for exports. What is good for jobs at Revere Copper Products is good for jobs in the USA.

Imagine how competitive mining, making, growing or servicing anything in the United States would become under such a tax regime? A strategic value-added tax system would put the United States on course to achieve President Obama’s goal of doubling exports in five years.

Companies outsource production to countries that have an attractive tax strategy. Even though many other countries have higher overall tax rates than the United States, they are still better places to produce goods or services because they have a “smart” tax strategy. The national goal of many other nations is to achieve economic growth and attract jobs by facilitating outsourcing from our country at our expense. A value-added tax is a major part of their national trading strategy. The United States does not have a national trading
strategy.

Other nations make strategic use of their VAT to subsidize domestic production so the United States can import cheap goods and export jobs. A value-added tax and numerous subsidies including currency manipulation are all part of having a national trading strategy to capture jobs from countries like the United States and ensure the growth of their gross domestic product.

GDP is equal to consumption plus investment plus government purchases and net exports (the amount that exports exceed imports). The U.S. trade deficit subtracts directly from its GDP. This explains the lack of U.S. economic growth. If net exports are positive, that drives GDP up and explains what is happening in China compared to the United States.

There is a misconception that a value-added tax would lead to increased prices in the United States by the same amount. In recent years, American producers have reduced prices in an attempt to offset foreign value-added taxes in order to remain competitive. This pressure on prices has put pressure on costs and helps explain why real wages have not grown in the United States and why investment has been flat. Similarly, a U.S. value-added tax would partly be eaten by foreign producers. U.S. producers, which would now be subsidized like foreign competitors for health care and retirement costs, would not raise prices fully if given such an opportunity to regain market share. A good estimate is that prices on a macro basis would go up by half of the VAT but would vary by product. More importantly, a VAT would cause real wages to go up and investment to increase.

Indeed, a U.S. VAT would tend to strengthen the dollar against other currencies. This would present a timely opportunity to take substantial action to offset currency manipulation by China and other Asian countries, which would weaken the U.S. dollar. Of course, that presumes the United States thinks strategically about international trade and has a national trading strategy. The strategic use of a VAT is a good place to start to solve the U.S. unemployment problem.

The United States has a patchwork of inadequate trading tactics and no national trading strategy to compete for global trade and jobs. That’s one good reason why the debate on the value-added tax lacks focus. Virtually every regulation, statute or law impacts international trade competitiveness but the biggest negative impact is the absence of a strategic VAT.

It is all about trade. Trade is what determines the location of jobs.

— Brian O’Shaughnessy is Chairman of Revere Copper Products. His company was founded by Paul Revere in 1801 and is the oldest basic manufacturing company in the United States: [email protected], 315-338-2332.