I was working on an updated map of nations that use a Value Added Tax (VAT) for the Coalition for a Prosperous America and thought I’d share it. Nations in RED have a VAT. Nations in BLUE don’t.
Basically, the VAT is a national sales tax on products sold, at various levels in the value chain. It varies from country to county in actual rate and implementation and it is pretty complex to really figure out who has one and who does not. Mostly it is just the US, big oil producers in the Middle East (Places like Iran, Saudi Arabia, Syria don’t make much of their own consumer goods and keeping their citizens docile depends on cheap imported stuff), island tax havens like the Caymans, and some semi-lawless places like Western Sahara, Angola and Burma. Odd bedfellows we have no?
Why does this matter?
Well it matters, because most countries tax U.S. products (and other imports) coming in with their VAT and then EXEMPT or REBATE taxes on their exports. (You may have experienced this as a consumer in some countries where you can collect your receipts and get money back as you exit the country.) Well managed, by a smart country, the VAT can act as both a tariff and a subsidy.
In China’s case that’s a 17%+ (more with local and provincial taxes) whack on U.S. made products. Since, as you can see from the map, everyone in the WTO is playing this game, nobody is going to back up American complaints about this process. While most academic free traders bristle at tariffs, they seem to hardly blink an eye at the VAT scam.
That is one of the very good reasons we should consider replacing our national income tax with a VAT. A tax is a disincentive for the activity it taxes and an income tax, particularly the corporate one, is essentially a distinctive for production. A Chinese style VAT is a disincentive for importation. If we have to disincentive something, I’d rather it be consumption than production. Despite what most economists and our government seem to believe, no nation has ever consumed its way to prosperity!
So, if we can’t beat ‘em, we should join ‘em. Let taxes be laid on imported Chinese junk and not be firms doing business in America or the wages American workers earn. Taxing imports is how the U.S. raised almost all our federal revenue during the first 150 years of our history and if we hide it in VAT, like all most of our “trading partners”, apparently nobody will notice or complain. (Actually, when America finally gets wise, I’m sure it will become a serious negotiating point, but that is another story.)
Greg Autry serves Senior Economist with the American Jobs Alliance and is co-author (with Peter Navarro) of Death by China: Confronting the Dragon – a Global Call to Action.
If our goal is balanced trade, why not just go directly for a balanced trade policy? The VAT seems to be proposed here as a roundabout tariff, which means it will add a consumer expense and only indirectly affect balance of trade.
I dont agree,
Trade flows are all about relitive costs. Becasue countries that use VAT’s have a artifical subsidy in our market and impose a tax on our products it encourages purchasers to choose the artifically low cost items here. We cant have consummers in the US if they are alos not workers. Artifically low costs goods are a short term gain with a long term economic malase. Trade ballance and correcting the issue of VATS with our major trading partners is a must for solving our economic problems.
As an American living abroad and paying 10% GST (VAT) I see no difference in paying this tax and paying sales tax(es) in the USA. There is no USA tax when I buy goods exported however I must pay the GST upon arrival to Australia. Similarly there is no GST when exporting and I assume there is sales tax added when these goods are sold in the USA. Can somebody tell me the difference? FACT IS the world uses VAT and the USA does not. It is time for the USA to reform the antiquated tax system and update to a fair and equitable program proven everywhere.
Hello Burl, Yes trade flows are about relative costs, but policy is our only hope of intervening in those flows, especially when competing against low wages and state-supported economies.
The problem with a VAT or other tariff plan is that consumers in our country already face so much economic hardship. The last thing we need is punitive tariffs that raise the cost of traded goods and services. It is too indirect an approach towards the goal of making things here, towards achieving balanced trade.
Ken Davis has been advocating a balanced trade policy, a modified version of the plan that Warren Buffet proposed around 2003. A balanced trade policy using import certificates (import licenses) would be a way to reduce the amount of imports without generating any additional costs to either the consumer or the Treasury.
Mr Davis suggests we could taper down our imports 10% using Import Certificates. That means within just a few years we’d have balanced trade. the reason to not tie the import amounts directly to exports right away is to give supply lines time to reform, give American factories time to retool and hire workers, give everybody some time to react.
The result would be a stimulus to American industry equivalent to $600 Billion per year without costing anyone a dime, just redirect the flow from buying imports to buying domestics. I think it is a brilliant plan, why propose more taxes? Who actually will support more taxes at this time in America’s economic decline? I don’t see VATs or other forms of tariff as even being politically viable. But the stimulus to American industry via balanced trade would be HUGE and, more to the point, would be a direct way to achieve our goal, rather than using a big tax hammer with no actual guarantee of results.
Will,
The import certificates are issued to exporters, they will be of value to importers, so the exporters will be unlikely passing them on the importers without being compensated. The cost of to acquire the import certificates will be part of the importer’s cost of goods sold, therefore each importer that wants to maintain their gross margin percentage will need to mark-up this new cost, so consumers will pay both the cost of the import certificates and the markup.
The link that follows is to a Ken Davis September 2011 post on Warren Buffet’s 2003 proposal unfortunately the link to my Ways and Means testimony, cited in one of my comments is no longer operative:
http://www.tradereform.org/2011/09/guest-opinion-ken-davis/\
The link that follows is to my Ways and Means testimony on Tax Reform and Consumption-Based Tax Systems:
http://waysandmeans.house.gov/uploadedfiles/hugh_j._campbell_7.26.2011.pdf
I would suggest a VAT that includes an exemption for the first $50,000 or even more. It should be revenue neutral and not produce a redistribution. The purpose is not to punish consumers.
The goal however is to move the focus of policy from consumption to production, when you produce well, consumption is no problem.
The VAT is by no means the only solution nor a perfect one, but it is an easy one because it has been accepted by those who would fight to the death over most everything else.
Will, you are on target.
A VAT is the most puntative form of oppression of the poorest among us with no apparent benefit. A tariff at least is imposed on imports, while a VAT is across the board, both domestic production as well as imports.
I really wish folks could get together and support Kenneth Davis’ plan. It is the only one that makes any sense at all.
Again, VATs can have rebates and exemptions the same way income taxes do. It is a solution used by most of the world including the most liberal European states. Importantly it can’t be opposed by our trading partners.
Here’s the rub: If importers need a license to conduct their import-based business, they will a) become exporters and b) use transfer pricing to balance their accounts. Walmart could earn import credits by a) exporting waste material, soybeans and other commodities to a Chinese subsidiary and b) raising the price of those exports to China and reducing the price of its imports. That would lead to losses in China and profits in the US, meaning that the IRS wouldn’t care. But it would likely exacerbate, not ameliorate, the problem of cheap imports. It certainly is no panacea. There is no silver bullet; we need a comprehensive strategic approach.
How could Import Certificates “exacerbate cheap imports” if they are limited to the amount of exports? The whole idea is it WOULD balance trade by basing import amounts on export amounts. It would be a direct approach to the goal.
Because the Import Certificates would be issued to exporters who then sell them on a market exchange, the price of the Import Certificates would actually function as a sort of tariff by increasing the importers’ costs, and they would also function as an export subsidy to the extent that exporters would sell the certificates they earn by exporting. So the only transfer payments in this system would be from importers towards exporters. The exchange itself could be modeled on the exchange markets now existing in Renewable Energy Credits or publicly-traded stocks, it would be pretty easy to do.
Will, I like the idea and would in fact support it. However, a VAT is much more likely to pass both domestic and international opposition.
Additionally it will correct the disturbing imbalance in motivation our tax system creates domestically - pushing consumption as the be all , end all. This has clearly led to little more than massive debt and foreign dependence.
A VAT, with appropriate income exemptions, is not incompatible with pursuing the balanced trade agenda later.
While I understand you want the bet possible solution, sometimes we get the pluton that is possible now. “Perfect is the enemy of good enough.”
- Greg