VA Blogger over at Too Conservative has a really good post up that just devastates Bob Marshall’s position on trade. But he leaves out one other important point. Marshall’s blathering about how Value Added Taxes hurt American exporters is simply incoherent.
A VAT tax is essentially a tax on the value added to a product at each step of the manufacturing process. It’s a lot like a sales tax.
Here’s what Bob Marshall has to say:
As of January 2007, the U.S. traded with 137 countries which use a “Value Added Tax” or VAT on imports from the U.S. into their country, yet goods and services from foreign countries sold in the U.S. are not subject to VAT, resulting in unequal trade conditions which hurt U.S. based producers.
Countries with VAT taxes often rebate the VAT when their manufactures sell products to the U.S. in effect subsidizing most imports into the U.S. although U.S. exports to VAT countries are not eligible for VAT rebates. In 2005, 94% of U.S. exports and imports were traded with VAT nations. Foreign manufacturers trading in the U.S. received $239 Billion from their governments for VAT rebates on exports to the U.S.
In 2007, European Union nations imposed an average tariff of 4.4% plus 19.4% VAT equivalent tax for a total levy of 23.8% on products imported from the U.S. Under present World Trade Organization rules, imports into the U.S. are charged an average tax of 1.3% with no VAT penalty.
Now, that sounds pretty unfair, right? But here’s the gigantic problem with Bob Marshall’s logic. Domestic companies in VAT countries have to pay the VAT too. So there while there is a “total levy of 23.8% on products imported from the US,” there is a 19.4% levy on products that are made domestically. The VAT does increase the cost of US goods in other countries, but not relative to any other goods made there. It’s the 4.4% tariff that increases the cost of US good relatively. And while the tariff should ideally be zero, it’s pretty small, especially compared to the problem Marshall makes it out to be.
Marshall’s complaint that other counties rebate or exempt the VAT on exports is similarly illogical. The US doesn’t have a VAT. We have a sales tax instead. Foreign goods aren’t exempt from the sales tax, just like US goods aren’t exempt from foreign VAT taxes. The fact that countries exempt exports from the VAT tax doesn’t give them an advantage in trade, it just levels the playing field. US companies don’t get charged a sales tax on exports. If foreign companies were charged the VAT on exports they would be taxed twice before they got to US consumers, both at home with the VAT and here with the sales tax.
In short, both US and foreign companies pay the VAT tax in foreign markets. Neither US nor foreign companies pay the VAT tax in the US market, but they both pay the same sales taxes. That’s not an unfair barrier to trade, thats a level playing field. To suggest otherwise just betrays Marshall’s ignorance of the issues.
Jeremy Beales 