Tag Archive | "VAT"

How VAT Trade Zones Can Boost American Manufacturing

The following article by Gilbert B. Kaplan and John C. Taylor appeared at the New America Foundation site here.

Exporters of goods from the United States face an enormous disadvantage every time a U.S. product leaves our shores. There is no rebate of the income tax paid with respect to that product, and as such the embedded costs of the export include a tax cost. The exact amount of that cost can vary, but it can be high given that the current U.S. corporate income tax rate is 35%. This contrasts dramatically with exporters of goods from almost every other country in the world, who receive a rebate of their Value-Added Taxes (“VAT”) upon export.

The main reason the U.S. cannot rebate income taxes upon export is because of a provision in the General Agreement on Tariffs and Trade (the “GATT”) which was later incorporated in the WTO. This provision makes the rebate or non-collection of income tax from exporters a prohibited “export subsidy.” In contrast, the rebate of a VAT upon export is permitted by the WTO agreements. In WTO parlance, VAT is an “indirect tax,” and the non-excessive rebate of an indirect tax is not an export subsidy. The rebate of a direct tax such as an income tax, however, is considered to be an export subsidy. It is prohibited, and subject to a variety of WTO offsets and penalties.

The economic effect of this divergence is enormous. It means, for example, that when a U.S. pipe company ships a ton of pipe to Europe it gets no tax rebate. In order to be profitable, the U.S. company must price its pipe at a level sufficient to pay the tax on the income generated from the sale. In contrast, when a Brazilian pipe company sells the same ton of pipe to Europe it is granted a 17% rebate upon export of that pipe as it leaves Brazil. It can therefore be sold at a much more competitive price in the EU (or any other export destination, including the United States), undercutting U.S. manufacturers.

In response to this problem, two major solutions have been offered. First, it has been proposed that the United States should change from an income tax to a VAT system. Currently this is not politically feasible.

The other potential solution is to change the WTO agreements to allow the rebate of income taxes upon export by all producers. But because the United States has the tax system in the world that suffers most heavily from this trade burden, it is very unlikely that the rest of the international community will join in agreeing to this change. The issue has been raised repeatedly over decades in the GATT, and now in the WTO, but it appears to be essentially a dead letter in the Geneva WTO negotiations.

Yet the impact of this unfairness continues to be enormous. U.S. products do not get a tax rebate on export and are thus much less competitive in foreign markets. Moreover, U.S. products can be subject to the VAT in foreign export markets, so they are essentially double taxed, once in the U.S. (with the income tax) and once abroad (with the foreign VAT). This has made it essentially impossible for anything but the most competitive U.S. products to sell in export markets. Products which are fantastic and for which there are few or no competitors-such as sophisticated semiconductors or state of the art agricultural machines from U.S. heavy equipment makers-have a chance to sell abroad. But the average U.S. product cannot overcome the price disadvantage caused by the tax incidence differences, and a commodity product made in the U.S. has almost no hope of doing so at all.

This has resulted in day-to-day disadvantages for U.S. exporters, and has hastened the migration of manufacturing out of the U.S. to foreign locations.

This paper proposes a solution to this problem which has the potential to make U.S. exporters of goods much more price competitive, and thus help to revive the U.S. manufacturing sector. Our proposal is that the United States create VAT Trade Zones, where manufacturers could choose to locate and, in these Trade Zones, would be required to pay a value-added tax in lieu of income tax. In order to simplify the tax accounting treatment for companies who use such zones, one requirement would be that the plant would have to be within its own corporation. This corporation could be a member or “affiliate” of a large U.S. corporate group of companies whose main locus was outside the zone. The rules to establish what income derives from the plant and thus would not be subject to income tax have been fairly well established under U.S. tax law, and could be applied to companies in the zone.

Within the zone, the corporation would be required to pay a U.S. VAT, which would be established as part of this proposal. The exact rate of tax would be determined to equalize the tax effect versus the payment of income tax, but preliminary estimates are that a 5-10% VAT, which is actually lower than the VAT in many other countries, would be close to the right level.

The proposal would not be budget neutral, because if the manufacturer elected to export product from the zone, the company would have the VAT rebated, as is the rule in substantially every other trading nation. But, as a result of the fact that the tax being rebated is a VAT tax, and not an income tax, such rebates would not be inconsistent with the WTO, would not be a prohibited subsidy, and would not be subject to WTO penalties. Certain other requirements would have to be met to ensure WTO consistency, such as non-discrimination as to foreign-owned companies, actual tax neutrality between the VAT and the income tax, and general availability of these VAT Trade Zones across companies and industry sectors, but these objectives could be accomplished.

The U.S. could also consider offering other assistance to companies located in such zones, similar to the incentives offered in special industrial zones in other countries.  While the lure of such zones in other countries is often superior industrial infrastructure and tax breaks, many also offer streamlined regulatory processes with “one stop” administrative offices.  Others offer assistance with worker training and have dedicated funds to assist with research and product marketing through loans or grants.  Some zones in China even offer “seed money” for recent college graduates to start entrepreneurial endeavors.  One indirect benefit from the location of manufacturing enterprises in such zones could be clustering, which leads to increased innovation and closer cooperation between input suppliers and downstream manufacturers.

Once this program went into effect it might ease the transition to a more broadly applied VAT. But even if that broader VAT were established, the other Trade Zone benefits described above could still remain in effect, such as those relating to streamlined administration, research grant money, and, perhaps most importantly, clustering of manufacturing plants.

The question then becomes, why would this VAT Trade Zone system be easier to implement than adoption of a VAT across the entire economy? There are several reasons.

First, this proposal would create U.S. jobs. Rather than making things off shore because of the advantages accruing to countries using a VAT tax and rebating it, manufacturers would be drawn to the United States because of these VAT Trade Zones that would offer similar tax benefits.

Second, the concern about the regressivity of the tax would be lessened as it would only apply to a small segment of the economy.

Next, the administrability of this program could be eased by the fact that the United States already has a Foreign Trade Zone Program where certain trade and customs benefits are provided to users. As such, there is already a mechanism for setting up trade zones (though such zones have no VAT or other tax elements) and that mechanism could be extended into this program.

And finally, this proposal would encourage    U.S. exports, a goal which is almost universally supported politically. In fact, President Obama has set a goal of doubling exports over a five year period. Nothing could more fully accelerate progress toward that goal than the immediate enactment of this program.

The issue of the revenue impact would certainly have to be considered. However, it is worth noting that the United States has one of the highest corporate income tax rates in the world, and there have been strong calls to lower that rate. Even President Obama has indicated a willingness to consider reductions in the corporate income tax rates. Our proposal, rather than lowering the corporate tax rate overall, would be to enact this VAT Trade Zone Program and provide the benefits of tax rebates to manufacturers who create or preserve U.S. plants and jobs through increased exports.

We therefore urge the Administration and the Congress to pass immediate legislation to create the American Manufacturing VAT Trade Zone Program, (the AMVATTZ Program, as we call it) and proceed to unleash the export power and imagination of U.S. manufacturers.

Gilbert B. Kaplan is an International Trade Partner at King & Spalding law firm in Washington, D.C. He formerly served as Deputy Assistant and Acting Assistant Secretary at the U.S. Department of Commerce. J.D. Harvard Law School., A. B. Harvard College.

John C. Taylor is an International Tax Partner at King & Spalding in London.  He previously was a partner at the London office of one of the “Magic Circle” firms. LL.M. in Taxation New York University School of Law, J.D. University of Tennessee, B.S. University of Tennessee.

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Daniels open to VAT, oil tax hike

The following article by James Hohmann appeared at Politico.com here.

Indiana Gov. Mitch Daniels opened the door Thursday to supporting both a value added tax and a tariff on imported oil, bold proposals that could cause trouble for him with conservatives as he flirts with a long-shot bid for the presidency.

The Republican, staying mum about his 2012 plans, was the guest of honor at a dinner sponsored by the conservative Hudson Institute. He received an award named for Herman Kahn, the legendary nuclear theorist who founded the respected institute 49 years ago and helped inspire the character “Dr. Strangelove” in the movie by the same name.

Daniels, once the Hudson Institute’s chief executive, described himself as an acolyte of Kahn’s and marveled at the creative thinking evident in his 1982 book, “The Coming Boom.”

Daniels recited from Kahn’s book: “It would be most useful to redesign the tax system to discourage consumption and encourage savings and investment. One obvious possibility is a value added tax and flat income tax, with the only exception being a lower standard deduction.”

“That might suit our current situation pretty well,” said Daniels, who served as George W. Bush’s Office of Management and Budget director and was a senior adviser in Ronald Reagan’s White House. “It also might fit Bill Simon’s line in the late ‘70s that the nation should have a tax system that looks like someone designed it on purpose.”

The so-called VAT, common in European economies which have stagnated, is a toxic acronym to fiscally conservative activists like Grover Norquist and Dick Armey. It slaps a tax on the estimated market value for products at every stage of production. Progressives, meanwhile, loathe flat income taxes because they’re regressive and punish the poor. But some on the right have found the VAT attractive as an alternative to progressive income taxes and levies on capital gains.

Daniels also suggested support for increasing gasoline taxes. Kahn wrote, in a passage Daniels read from Thursday, “One fully justifiable tax would be on imported oil. Any large importation of oil by the U.S. raises security problems. There are, in effect, external costs associated with importing oil that a tariff would internalize.

“Now, maybe that transgresses some philosophical viewpoint of yours,” Daniels told the well-heeled crowd of 250. “But to me, that’s an interesting point today, just as valid as the day he wrote it.

“Now, none of us is Herman’s equal. But we are all his heirs, if we choose to be,” he added.

These comments come on the heels of a September profile in Newsweek, in which Daniels said tax increases might be necessary to tackle the federal deficit. “At some stage, there could well be a tax increase,” Daniels told the magazine. “They say we can’t have grown-up conversations. I think we can.”

Daniels has previously clashed with Norquist over the former’s refusal to sign the “No New Taxes” pledge.

Musing about tax hikes in speeches and interviews isn’t something a serious Republican contender usually does, but the soft-spoken Daniels’ biggest strength may be that he’s not a typical GOP candidate.

Conservative bona fides afford him the credibility to be more candid than other possible 2012 contenders. He inherited a $200 million deficit in 2004 and transformed it into a $1.3 billion surplus. He paid off the state’s outstanding debts, doubled venture capital investment in the state and reduced the number of government jobs by 15 percent. His well-established reputation as a penny-pincher makes it hard to stereotype him as a tax-and-spender.

“He thinks outside the box, and you don’t see that too often today in politics,” said former Vice President Dan Quayle, who introduced Daniels at the Willard InterContinental Hotel, just two blocks down Pennsylvania Avenue from the White House. “Because, you know, you have the conventional campaigns. You’ve got all the consultants. You’ve got things you can do and can’t do. It’s pretty well, many times, scripted. But Mitch has always been a person that would think outside the box. And that’s why, I think, he’s been tremendously successful in Indiana.”

Ironically, Quayle lost reelection in 1992 partly because President George H.W. Bush — who led the ticket — reneged on his pledge not to raise taxes. In that same year, independent candidate Ross Perot, who led what some see as a precursor to today’s tea party movement, proposed a 50-cent-a-gallon tax on gasoline to help eliminate the federal budget deficit and reduce consumption.

Milling about Thursday night were members of the old-guard GOP establishment and neoconservative luminaries from the George W. Bush-era, including Defense Secretary Donald Rumsfeld, Dick Cheney chief of staff Scooter Libby and ex-World Bank head Paul Wolfowitz.

Allan Tessler, the chairman of Hudson’s Board of Trustees, called Daniels “a rare hybrid,” a think-tanker and politician “all wrapped in one.”

That, indeed, is how he sounded in his speech: more theoretical than an average politician but not as aloof as many intellectuals who work in ivory towers.

Daniels, for his part, says he feels optimistic about the country’s future if only its leaders will “think long term and skeptically about what is commonly accepted and (then) practically, openly-mindedly following the facts where they lead.

“The people of Hudson were trained by Herman and his group to think in a way that was principled, yes, but practical, immensely practical,” he said, before receiving a standing ovation at the end of his 26-minute speech.

Former Japanese Prime Minister Shinzo Abe said word of Daniels’ stellar reputation on economic stewardship has reached Asia. “To tell the truth, we could use some of your ingenuity in facing down our fiscal challenges,” he said during the dinner’s program.

Daniels also caused a stir among social conservatives in June when a Weekly Standard story reported his proposal for a “truce” so that the country could focus on pressing economic issues. He backed off his comments, but not before serious damage was done.

In a brief interview after his speech, Daniels downplayed the significance of his comments. He stressed that he would support a VAT “under only the right circumstances,” reiterating his desire for it to be paired with  a flat income tax.

“If you think that the paramount problem for the country is the debt, and we’ll never get on top of it without really robust growth, one of the things you want is a very different, more pro-growth tax system,” Daniels told POLITICO. “And a quarter century ago, (Kahn) was writing about one. That’s all. There are other ways to get at it.”

“The point here is: think about solutions, think about outcomes,” Daniels added, when pressed on whether he’d back oil tariffs.

An aide said Daniels’ chief political focus this month is on winning control of the Indiana state House. Republicans need just three seats to claim the majority. The governor, with two years remaining in his second term, personally recruited several candidates and hopes to use them to push through significant reform legislation.

POLITICO reported last month that Daniels has been holding a series of private dinners with top Republican business leaders, policy types and donors at the governor’s mansion in Indianapolis since this spring.

Reflecting his stature, C-SPAN filmed Daniels’ speech for airing at a later date.

And Max Eden, a senior at Yale, just started what he calls the “Student Initiative to Draft Daniels” for a presidential run. He said there are eight students in New Haven already behind the effort, and that they’re already setting up chapters at 20 other colleges. The Ohio native, who met Daniels for the first time Thursday, hopes to build a large grassroots network after the midterms.

The only problem: Eden’s a registered Democrat.

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Germany is doing well - a state managed economy

Another state managed economy, not a free trader… Germany.  They rebate a 19% VAT for all exports.  And charge us 19% for selling there.

This from MarketWatch.

Germany’s Ifo index, a closely watched gauge of business sentiment, rose sharply in July for its largest increase since reunification in 1990, underlining improving morale in Europe’s largest economy. …

“The fact is … that the German economy has remained in a rather favorable position, in particular benefiting from foreign trade,” said Thorsten Polleit, economist at Barclays Capital in Frankfurt.

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The Ever-Increasing Need for an American Industrial Policy

The following is an article by former South Carolina Senator Fritz Hollings that appeared in the Huffington Post back in February here. It is just as relevant today.

I thought my begging President Obama for an industrial policy to make the United States competitive in globalization was futile — until this morning. In this morning’s The Wall Street Journal (2/8/10) on the lower right-hand corner of the Op-Ed page appears the headline: “The U.S. Needs An Industrial Policy.” Thank the Lord for the author, John Hofmeister, former President of Shell Oil Company.

When my friend, John McCain, told the Michigan automobile workers in the Presidential campaign that their jobs were not coming back, I knew then John didn’t understand globalization. Globalization is nothing more than a trade war with production looking for a cheaper country to produce. And BMW automobile jobs had already “come back” in South Carolina; Mercedes Benz in Alabama; Nissan in Mississippi; Honda in Tennessee, and Toyota in Kentucky. Competition in the trade war was so fierce that the enemy had already invaded the United States with its production and jobs. Germany, with a 19% value added tax that’s rebated at export allows Mercedes Benz to ship the engine and parts from Germany at a cost of 4%, making its U. S. production 15% cheaper than any Detroit production.

These automobile jobs were brought back by each state’s industrial policy. For example, South Carolina has just packaged an industrial policy of over $900 million to have Boeing produce the Dreamliner in South Carolina. This is the frustration in Massachusetts and over the country. States are bending over backwards to attract investment and jobs while Washington does everything possible to get rid of the jobs. Washington loves to require business to comply with labor rules, safety rules, environmental rules, a high standard of living, but it refuses to protect its environment, economy and high standard of living, forcing U. S. manufacture to off-shore its production and jobs.

As Hofmeister relates: “The rest of the world actively promotes its core industries.” Washington stimulates tax credits for small business and welfare to keep teachers and firemen employed, but opposes promoting “its core industries” by engaging in the trade war for investment, research, technology, development, production, and jobs.

Washington’s indolence amounts to an industrial policy for China. Its failure to enforce our trade laws; its outright subsidizing the off-shoring of jobs; its failure to compete with a value added tax, forces Corporate America to off-shore. Any United States manufacture that can readily be off-shored will go and produce in China and export its production to the United States cheaper than the U. S. production. It’s gotten so that one can’t manufacture for a profit in the United States.

A country founded on manufacture in a trade war has become a country AWOL in a trade war. In our early days, the Crown prohibited manufacture in the Colony. The Mother Country required the Colony’s exports to be carried in English bottoms, and the Townsend Act that triggered the Boston Tea Party triggered the Revolution. After we adopted the Seal of the United States, the first bill to pass our national Congress on July 4, 1789, was a 50% tariff on imports — protectionism. We were fortunate not to have banks and corporations in those early days. Alexander Hamilton, who gave us the bank, first delivered his famous “Report on Manufactures,” resulting in an industrial policy that financed and developed the Colony into a nation state and an industrial power. We did it all with protectionist tariffs. We didn’t pass the income tax until 1913. As Edmund Morris, in his book Theodore Rex, describes the nation under Theodore Roosevelt:

This first year of the new century found her worth twenty-five billion dollars more than her nearest rival, Great Britain, with a gross national product more than twice that of Germany and Russia. The United States was already so rich in foods and services that she was more self sustaining than any industrial power in history.
At the end of World War II, the United States was the only country with manufacture or industry. We knew that countries in Europe and the Pacific Rim must have manufacture for capitalism to develop a middle class to support democracy. So we fashioned the Marshall Plan, and capitalism defeated communism in the Cold War. But Japan had already started today’s trade war. Japan closed its domestic market, subsidized its manufacture, sold its export at cost, making up the profit in the closed market with Toyota putting General Motors into bankruptcy. South Korea followed suit; and when China joined, it taught all except the economists that the “comparative advantage” in international trade or globalization was no longer productivity like Ricardo’s English woolens and Portuguese wine - but government.

Twenty years ago I called my friend Walter, whom I helped develop Italian production in South Carolina. Walter had gone out on his own, headquartered in California. His stock was up, and I asked Walter for his next expansion to be in South Carolina. Walter shocked me when he said he didn’t produce anything in California or the United States. I can hear him now: “You can go to China, they furnish the plant, and if it doesn’t work you walk away without any capital or legacy cost. If it works, you don’t have to pay any income tax. Just get another operation in China for more profit.” Today, Corporate America off-shored to China doesn’t have to worry about a labor stoppage, retirement costs, health care, OSHA’s safety minions, clear air, clear water, etc. All it needs is a young “eager beaver” watching quality control in China; and the CEO back in the United States can keep up on the internet - have time for a round of golf or drinks at the Links Club.

Job loss from the recession will rebound when the recession ends. But the job loss from off-shoring won’t rebound until we adopt an industrial policy to compete in the trade war. It won’t be easy. Corporate America and Wall Street love the bigger profits from off-shoring. They’ll oppose any trade bill or measure to develop an industrial policy with cries of “free trade,” “protectionism,” “educate,” “innovate.” As Henry Clay long ago cried on the floor of the United States Senate about free trade: “It never existed … it never will exist.” We have enough education to attract Boeing. Tell Tom Friedman innovation doesn’t produce jobs in the U. S. Innovation is immediately developed with jobs in China. Microsoft and Intel have already gone to China. We’ve got to wake up and start manufacturing again. But it won’t happen with Wall Street and Corporate America furnishing Congress the contributions to do nothing.

Congress must adopt an industrial policy that the people will support and pressure Congress to adopt. For example, cancel the corporate income tax and replace it with a 3% value added tax. The average business tax is 27% with China adding a 17% VAT on U. S. imports to China, amounts to a 44% incentive to produce in China rather than the United States. Replacing the corporate tax with a 3% VAT raises more revenue, removes the incentive to off-shore, saves jobs, and promotes exports creating jobs. The people will favor this. But the people will have to pressure Congress to enact it because the CEOs of Corporate America don’t want to have to go back to work producing in the United States.

Cancel the exemption for off-shore profits as President Obama called for in his State of the Union, and make it a 5% VAT with the added 2% paying down the debt. Those wanting to reduce the deficit will join in support. Don’t wait for production to go bankrupt like GM, but once production is endangered impose import quotas and tariffs under Section 201 of the Trade Act. Today, the United States can’t go to war except with supplies from foreign countries. Activating the Defense Production Act of 1950 as reauthorized last year will create millions of jobs. Get President Obama to impose a 10% surcharge on imports like President Nixon did in 1971. An industrial policy like this will get Washington rebuilding our economy.

People wonder why Washington does nothing. It’s because business doesn’t want its taxes cut making Washington find a war that’s not “necessary.”

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Using a Value-Added Tax For Jobs, Health and Retirement

The following commentary from Manufacturing and Technology News was written by Brian O’Shaughnessy, Chairman of Revere Copper Products and Co-Chair of Manufacturing for CPA.

The media debate about the potential U.S. adoption of a value-added tax (VAT) has missed the mark. Strategically employed, a VAT can legally promote and protect domestic production of anything mined, made, grown or serviced in any country. The question is not whether the United States has new taxes, high taxes or low taxes. The question is whether the country has smart or dumb taxes in relation to promoting economic growth and international competitiveness. The value-added tax is a valuable tool used by 153 countries to gain a competitive edge in trade with the United States.

Americans look at a VAT as a tax on goods and services at each stage of production. This narrow view promotes the wrong idea that a VAT is a consumption tax that is regressive. Overlooked is the strategic importance of a value-added tax structure to international trade, domestic jobs and real wages.

A VAT becomes like a tariff when its proceeds are used to subsidize production in any country competing with another. The average VAT worldwide is about 16 percent. The proceeds of a VAT can be used like any tax, one of which is to fund health care costs. This remains true whether or not the nation’s health care system is socialized or private.

Let’s look at a real world example of how this impacts my company, Revere Copper Products. Revere fabricates copper and brass products for use in other manufactured goods and for the building and construction markets. Revere has a health care plan for its employees. The price that Revere gets for a coil of copper must cover my workers’ wages and salaries plus the cost of metal, energy, equipment, materials and supplies, taxes and health care costs. When a Revere product is shipped abroad, the foreign country applies a VAT. Some of the proceeds of that VAT are then used to help pay for the health care cost of the citizens of that country, not ours. In order to compete globally, my workers must produce at a cost that pays for their own health care costs and the health care costs of the workers in the foreign factory they are competing against.

When the United States negotiates a Free Trade Agreement with another country, both are required to reduce tariffs. VATs and other border-adjustable taxes are not considered “tariffs” even though they act as such. Foreign countries tax American goods to pay for their domestic programs. Canada and Mexico are good examples. Around the period of the negotiations for NAFTA, both Canada and Mexico dramatically increased their border-adjustable taxes, which then offset much of their agreed-upon reduction of other tariffs. The result was that the United States lowered import charges but Canada and Mexico did not.

Europe and the rest of the world have also lowered tariffs, but increased their value-added tax rates, leaving their import charges unchanged. They are trade-wise and strategically smart. The United States is not.

In order for a VAT to be compliant with World Trade Organization rules, it is applied by other countries to their domestic production as well as imports. But the cost of the VAT is largely offset for their domestic production by subsidies financed by the VAT for health care, retirement and taxes that U.S. producers do not receive. U.S. producers pay taxes but do not receive these countervailing subsidies. The result: The United States is not competitive.

Value-added taxes also promote exports. When a product is exported, the VAT is not applied. This means exported products are sold relatively tax-free. That’s because producers in foreign countries still benefit from the same health care, retirement and other subsidies even though no VAT was collected for exports. Thus, while export subsidies are largely banned by the WTO, the VAT rebates accomplish the same thing. Exports from other countries benefit from subsidies provided by a VAT yet still have the average 16 percent VAT deducted from their full value.

So how can the United States compete through a smart tax strategy? Again, look at a real-world example from my company. If the United States had a 12 percent VAT, it would generate about $4 million to the U.S. Treasury from my company. Revere’s health care costs are about $2.5 million per year and FICA is about $1.5 million. So with a 12 percent VAT, Revere’s health care and FICA costs could be subsidized by VAT revenues. That would give Revere a 12 percent cost advantage against imports. This 12 percent advantage gained from the subsidies would be retained for exports since a VAT is not charged for exports. What is good for jobs at Revere Copper Products is good for jobs in the USA.

Imagine how competitive mining, making, growing or servicing anything in the United States would become under such a tax regime? A strategic value-added tax system would put the United States on course to achieve President Obama’s goal of doubling exports in five years.

Companies outsource production to countries that have an attractive tax strategy. Even though many other countries have higher overall tax rates than the United States, they are still better places to produce goods or services because they have a “smart” tax strategy. The national goal of many other nations is to achieve economic growth and attract jobs by facilitating outsourcing from our country at our expense. A value-added tax is a major part of their national trading strategy. The United States does not have a national trading

Other nations make strategic use of their VAT to subsidize domestic production so the United States can import cheap goods and export jobs. A value-added tax and numerous subsidies including currency manipulation are all part of having a national trading strategy to capture jobs from countries like the United States and ensure the growth of their gross domestic product.

GDP is equal to consumption plus investment plus government purchases and net exports (the amount that exports exceed imports). The U.S. trade deficit subtracts directly from its GDP. This explains the lack of U.S. economic growth. If net exports are positive, that drives GDP up and explains what is happening in China compared to the United States.

There is a misconception that a value-added tax would lead to increased prices in the United States by the same amount. In recent years, American producers have reduced prices in an attempt to offset foreign value-added taxes in order to remain competitive. This pressure on prices has put pressure on costs and helps explain why real wages have not grown in the United States and why investment has been flat. Similarly, a U.S. value-added tax would partly be eaten by foreign producers. U.S. producers, which would now be subsidized like foreign competitors for health care and retirement costs, would not raise prices fully if given such an opportunity to regain market share. A good estimate is that prices on a macro basis would go up by half of the VAT but would vary by product. More importantly, a VAT would cause real wages to go up and investment to increase.

Indeed, a U.S. VAT would tend to strengthen the dollar against other currencies. This would present a timely opportunity to take substantial action to offset currency manipulation by China and other Asian countries, which would weaken the U.S. dollar. Of course, that presumes the United States thinks strategically about international trade and has a national trading strategy. The strategic use of a VAT is a good place to start to solve the U.S. unemployment problem.

The United States has a patchwork of inadequate trading tactics and no national trading strategy to compete for global trade and jobs. That’s one good reason why the debate on the value-added tax lacks focus. Virtually every regulation, statute or law impacts international trade competitiveness but the biggest negative impact is the absence of a strategic VAT.

It is all about trade. Trade is what determines the location of jobs.

— Brian O’Shaughnessy is Chairman of Revere Copper Products. His company was founded by Paul Revere in 1801 and is the oldest basic manufacturing company in the United States: [email protected], 315-338-2332.

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Britain increasing border taxes on U.S. exports

The new Conservative government in the UK has a new plan to reduce the deficit.  It includes raising the VAT that U.S. exporters pay at the UK border from 17.5% to 20%.  All WTO legal.  American companies get to help pay down British debt, and become 2.5% less price competitive in Britain during the process.

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