Americans – and only Americans – are double taxed when selling overseas. Foreign countries have reduced tariffs but replaced them with consumption taxes on imports as trade liberalization has proceeded. Chinese, Mexican and other countries’ manufacturers receive generous consumption tax rebates when exporting. As a result of these tax subsidies, American companies are often priced out of export markets. For decades, government officials have refused congressional directives to solve this problem in trade negotiations.
Of the 150+ or so members of the Organization for Economic Cooperation and Development (OECD) almost all have redesigned their tax code so much of their tax burden is born by consumption via Value Added Taxes (VAT).
Only a few oil producing nations and the U.S. still predominantly tax production rather than consumption. While this is politically convenient by hiding a big part of the cost of government within American products, it makes American products and workers non-competitive internationally. Hence our huge Trade deficit (see photo).
A Value Added Tax (VAT) is a tax on consumption – as opposed to income, wealth, property or wages. It is a tax only on the “value added” to a product, material or service, from an accounting view, at every stage of its manufacture or distribution.
VATs are “border adjustable” and average about 17%. This means that virtually all foreign countries tax our exports with their VAT when our goods cross into their country. While those countries tax their domestic production as well, they rebate their VAT when their companies export. So, in practice, we tax our products and they tax our products – they do not tax their products and we don’t tax their products. This is a “lose-lose” situation for American products, companies and workers.
These Border Adjustable Taxes are the biggest trade problem for the U.S. globally. They are a 17% (on average) tariff on U.S. exports and a 17% subsidy for foreign exports to the U.S. Tariffs and VATs (in practice) are forms of taxation on imports. The U.S. taxes primarily income and labor which tax only U.S. exports.
During the last 40 years, the U.S. has lowered tariffs and other countries lowered tariffs. However, other countries implemented and/or raised their VATs. The net result is that other countries replaced tariff income with VAT income and the U.S. lowered tariff income. This is a leading factor in America’s intractable trade deficit.
No other foreign trade tactic costs the U.S. economy more. Our exports are double taxed – once in the U.S. and once upon arrival in the foreign nation. Foreign countries rebate the VAT upon export, and the U.S. does not apply the tax at our border. However, remedies are available:
How to Finance U.S. Income Tax Reduction with a VAT:
- Add a 12.3% VAT
- Exempt first $100,000 joint filer income from personal income tax ($50,000 single filer income) – Result: 100 million people exempted from income tax
- Personal income tax rates at 16% or 25% for incomes over $100,000
- Reduce corporate income tax from 35% to 15%
- Rebates to very low income filers through earned income tax credit or debit card refunds
Source: Graetz, “100 Million Unnecessary Returns” (2008)
- Neutralize foreign VAT advantage
- Revenue neutral as compared to current system
- Progressivity neutral as compared to current system
- Incentivize domestic savings, investment and supply chains
- Reduce aggregate domestic tax burden by adding imports to the tax base
The proper tax reform could create a manufacturing renaissance in America. Unfortunately, the current debate is about levels of taxation and only nibbles at reforms that would restore the American economy and create good paying jobs. We need to shift the debate on tax reform from the level of taxation to applying more intelligent methods of taxation. We are not saying we should raise or lower taxes. Rather we should replace our outdated code with a modern, smart tax code that works for all Americans by restoring international trade balance. The Michael Graetz plan above does so.
Frank Shannon served in the U.S. Army, was an engineering/operations manager for AT&T for 27 years, was the owner of a small manufacturing business for 23 years, served as Colorado Chair of the Coalition for a Prosperous America and moved to Mesquite in 2013.
Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.