“Taxing Imports, Not Exports,” Steve Lohr, NYTimes, 12/13/16

“President-elect Donald J. Trump has vowed to protect and create American manufacturing jobs, even threatening high tariffs on imports to help achieve that goal. So far, though, his plan seems to lean heavily on one-at-a-time deals, like the one struck late last month to save jobs at the Carrier plant in Indianapolis.

But proponents of a more far-reaching approach say it could achieve many of Mr. Trump’s goals without tariff walls or presidential jawboning: a sweeping overhaul of the corporate tax system that embraces a concept endorsed by House Republican leaders in their blueprint for tax reform, announced in late June.

“It would be the biggest change in business tax law ever in the United States,” said Martin A. Sullivan, the chief economist at Tax Analysts, a nonprofit tax research organization and publisher. “It might actually work, and I don’t think it’s a partisan issue.”

A central idea is that goods would be taxed based on where they were consumed rather than where they were produced, meaning that imports would be taxed by Washington while exports would not. Tax experts call this a destination-based consumption tax.

This would be a sharp departure for the United States in a number of ways, but taxing imports but not exports is in step with nearly all of America’s trading partners, which have so-called value-added taxes. The import-and-export tax treatment is known as border adjustment.”


Trump Wants to Exempt US from Mexico’s VAT? The Real Antidote Is a VAT of Our Own.

For the first time in seven presidential election cycles, Value Added Tax has entered the arena of a presidential campaign.  Not since Gov. Jerry Brown focused his 1992 presidential campaign on sweeping tax reform including a VAT had a would-be president boldly suggested a VAT.  In this cycle, both Sen. Ted Cruz and Sen. Rand Paul brought forward tax plans with value-added consumption taxes.

During the first debate with Hillary Clinton, Donald Trump pointed to the trade advantage of Mexico’s 16% VAT, which is subtracted from exports.  Mr. Trump suggested he would negotiate an exemption for the US from Mexico’s VAT.

A more realistic solution to the existing price wedge of the VAT between the US and Mexico — and over 160 countries using VAT’s — would be for the US to adopt a VAT of its own in replacement for other taxes, i.e., the Corporate Income Tax (CIT).

Why does every US trading partner employ a VAT?  Because it eliminates the cost of government represented by the tax from the price/value relationship of goods crossing borders.  VAT is added to imports (to match the domestic VAT percentage), and subtracted from exports to permit the importing country to add its own VAT without doubling up on the exporting country’s tax.  That is, VAT is a border-adjustable, destination based tax perfectly suited to this era of globalization.

The usual argument made against the US using a VAT is that it would be used to raise tax revenues to fuel social programs and put the country on a path to socialism.  Opponents allude to the high percentage of tax revenues raised by VAT’s in France and Scandinavian countries.  But, there is nothing that prevents a VAT from being used as a revenue-neutral replacement for other taxes, or for that matter, within an overall revenue cut.  Fear of VAT extends mostly from the notion of using VAT as an “add-on” tax base which it need not be.

Nor is there any justification to assume that the revenues raised by a US VAT would increase as a matter of course.  Among the major US trading partners within the 35 OECD members, the percentage VAT revenue to GDP did not explode over the fifteen years from 2000 to 2014 (the last year reported):

VAT Revenue  % GDP 2000 2111 2014   VAT % Total Tax Revenue 2000 2011 2014
France 7.4 7.0 6.9     16.7 19.7 15.4
Italy 6.5 6.2 6.0     15.4 14.4 13.8
Germany 6.9 7.3 7.0     18.4 19.4 19.3
Japan 2.4 2.7 3.7     14.4 14.4 13.8
Spain 6.1 5.3 6.0     16.6 12.6 16.6
United Kingdom 6.6 7.4 6.9     18.1 20.5 21.2
Canada 3.2 4.1 4.1     9.2 13.3 13.1
Mexico 3.1 3.7 3.9     18.7 19.0 n/a

Source: OECD Consumption Tax Trends, 2014

The meaningful trend among our trading partners is to increase revenues from the consumption tax while reducing CIT revenues.  Japan, for example, raised its VAT rate from 5% in 2013 to 8%, and has planned to raise it to 10% in 2017.  Concurrently, however, Japan reduced the CIT rate from 39.5% to 32.11% in 2013 and will drop its rate further to 29.74% in its 2016 fiscal year.

If the US were to replace the CIT by a VAT, it would put the US on a more competitive footing by eliminating a trade disadvantage.  This change would be positive for economic growth.  With zero corporate income tax, profits parked abroad by multi-national corporations would flow to the US.  The incentive for inversions would disappear along with the corrupting process of lobbying for loopholes.  Trump’s economic advisor, Peter Navarro, has a handle on the VAT concept.  For a full explanation of the impact on US trade, VATinfo has posted a 9-minute video with an explanation and support of VAT from Bill Clinton.

POTUS Campaign | “Free” Trade & VAT Tax Reform

It is little wonder that middle-class workers are flocking to the speeches of Sen. Bernie Sanders and Donald Trump.  Twenty-five years of “free” trade agreements have eroded the hope of millions of Americans for higher-wage manufacturing jobs, which have fallen by nearly one-third since 1990 accompanied by stagnant wages.

What policies might help to stop the bleeding?  Mr. Trump sees tariffs, which could threaten world trade and cause economies to implode.  Secretary Hillary Clinton and Sen. Sanders envision higher education as a ladder to higher paying employment, but that is a longer-term solution based upon speculation that those jobs can and will be created in sufficient numbers.

Most effective in the short-term would be a shift in the way we tax corporations to match our global competition.  Changing to a Value Added Tax as a replacement for the Corporate Income Tax would go a long way towards making American workers more competitive.  How?  Because VATs are border-adjustable, i.e., subtracted from exports and added to imports to eliminate the cost of government from the price/value relationship of goods crossing borders.  For example, China has a 17% VAT that is added to their imports, and 17% is subtracted from the price of their exports.  That is a big difference, coming and going.  Likewise, Germany has a 19% VAT that has enabled their higher-wage country to still be very competitive with higher wages.

Among the presidential candidates, the only remaining contender proposing this shift in how we tax ourselves is Sen. Cruz.  Whether you like his other positions or not, this tax reform deserves your support.  Sen. Paul has proposed a similar plan.  This should not be a partisan issue.  Gov. Jerry Brown ran for president in 1992 based upon the same tax reform.  President Bill Clinton has endorsed the concept, and so have many labor leaders.  Will Hillary Clinton…or Donald Trump?

It’s time we got smart about how we tax ourselves, if we want to compete in the world economy.  It’s time for VAT.