The Global Manufacturer

Going to Bat for a VAT

What is the cause of the U.S.'s huge budget deficit? Too little revenue? Run-amok entitlement or defense spending? Rep. Marcy Kaptur (D-OH) has another theory.
 
"I believe we have a budget deficit at the national level because we have a trade deficit,” Kaptur told attendees at the recent NE Ohio Summit on the Revitalization of Manufacturing. “I can't think of another nation that can sustain half a trillion dollars a year, year after year after year, on the trade side and not come to have it register on the national books. We can’t sustain these losses for so many years.”

But the U.S. has been sustaining these losses since 1976. Over the past 10 years, the U.S. trade deficit has averaged approximately $580 billion a year. In 2011 alone, the U.S. trade deficit grew 11.6% to $559 billion, a sign, at least in part, of a recovering U.S. economy that continues to consume more than it produces.

What can be done to right the trade deficit? At the manufacturing summit in Cleveland, organized by the Coalition for a Prosperous America (CPA), several speakers called for a change in our tax system to impose a value-added tax (VAT).

A VAT would require businesses to pay tax on the difference between the price they sell a product or service and what the cost of the input was to produce it. The tax is assessed at each stage of production and sales. More than 150 countries now impose VAT taxes, including all of the countries in the Organization for Economic Co-operation and Development (OECD) ­ except the United States.

Why would a VAT be helpful to U.S. manufacturers? Under WTO rules, member countries are allowed to impose these “border adjustable taxes.” So for example, a U.S. company that exports a $100 product to Germany pays a 19% VAT so that the product now costs $119. However, a German company that sells a $100 product to the U.S. has its VAT rebated by the German government. As a result, that product costs $81, undercutting the price of the U.S. product.

"The result is that U.S. exports are double taxed and foreign imports to the U.S. are largely untaxed," a CPA briefing paper charges. "This is a major cause of offshoring and our persistent trade imbalance."

The U.S. is not "overly taxed but badly taxed," Charles Blum, a former trade official and president of IAS Group, told the Cleveland meeting. Blum says the U.S. should institute a VAT in the range of 15% to 20%, thereby evening the trade field, and reduce its dependence on income taxes.

Pat Choate, an economist and former vice presidential candidate, also supports the imposition of a VAT. Choate would eliminate personal and corporate income taxes and substitute a VAT. He told the Cleveland meeting a 7% VAT would bring in $780 billion, which would cut the federal deficit in half.

Last August, the House Committee on Ways and Means held a hearing to explore alternative tax systems such as a VAT. At the hearing, the American Manufacturing Trade Action Coalition testified that foreign border tax schemes resulted in an estimated $518 billion disadvantage to U.S. manufacturers in 2008, an amount nearly twice the entire deficit run by the U.S. with China. AMTAC noted that VAT rates have been rising and the average border tax rate for all VAT countries exceeds 15%.

“This indirect tax loophole which was once viewed as nothing more than a minor irritant by U.S. trade negotiators has evolved into a hugely significant impediment to U.S. exports…” AMTAC testified. Without action, it said, “the existing trade disadvantage for U.S. producers will not only remain in place but will almost certainly grow worse.”

But despite widespread international adoption, many in the U.S. question the wisdom of introducing a VAT. Because it is a consumption tax, some worry that it is inherently regressive. One concern, voiced by Daniel Mitchell of the Cato Institute, is that a VAT is simply an excuse to add one more tax and does not address the country’s principal budget issue.

“America’s fiscal problem is too much spending, not insufficient tax revenue. Imposing a new tax ­ particularly one capable of generating so much money ­ would be akin to pouring gasoline on a fire and ensuring that America will become a European-style welfare state,” Mitchell warned.

Mitchell dismissed arguments that a VAT would improve trade fairness for the U.S. companies and said there already exists a “level playing field.”

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