Archive for U.S. VAT?

Tax Analysts: Trump suffers from VAT envy

Robert Goulder writes in Forbes “Diagnosis: Donald Trump Suffers From VAT Envy”:

“Strictly speaking, Trump’s claims about VAT are false. VAT is neither a trade subsidy nor a trade barrier. In fact, VAT is economically neutral. Tax burdens from the origin country do not carry over with exports as they’re transported to their place of consumption. That’s the beauty of the border adjustment, which is an indispensable feature of every destination-based VAT. The border adjustment establishes a level playing field between domestically manufactured goods and foreign imports.”

Well, VAT is not economically neutral, because someone (the individual) will have the economic burden of the tax – but otherwise Goulder is right.

Here is a link to his article: http://www.forbes.com/sites/taxanalysts/2016/12/21/diagnosis-donald-trump-suffers-from-vat-envy/. Highly recommended reading – wish U.S. politicians would read this too.

By the way, five years ago Tax Analysts published “The VAT Reader, What a Federal Consumption Tax Would Mean for America”. I had the honor of adding my 2 cents to this. Below is a pdf.

Download (PDF, 1.69MB)

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U.S. tax reform: import tariff still on the table

From C-SPAN, House Ways and Means Committee Chair Kevin Brady (R-TX) insists that VAT is an export subsidy (transcript below from C-SPAN):

“REP. BRADY: WE HAVE MADE A STRONG CASE THAT FOR AMERICA TO COMPETE AND WIN AGAIN, WE NEED TO CHANGE THE WAY WE TAX.

AND ALL OF OUR COMPETITORS, THEY TAKE THE TAXES OFF THE GOODS AND SERVICES COMING OUR DIRECTION, SO THAT GIVES THEM THE ADVANTAGE OVER US HERE IN AMERICA. WE DON’T, SENDING OUR PRODUCTS AROUND THE WORLD, AND SO TODAY, WE LOSE IN AMERICA AND AROUND THE WORLD.

THIS IS THE KEY PART OF OUR TAX CODE. IT IS GOING TO STAY. AND I THINK BECAUSE TAX REFORM IMPACTS EVERYONE DIFFERENTLY AND INDUSTRIES DIFFERENTLY, WE WANT TO LISTEN TO, AND FIND SOLUTIONS, WITH THOSE WHO RELY A LOT ON IMPORTED GOODS COMING INTO AMERICA, AS WE THINK IMPORTS AND EXPORTS ARE BOTH IMPORTANT TO THE ECONOMY.

BUT WE WILL INSIST THAT THEY BE TAXED EQUALLY HERE IN AMERICA.”

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Border adjustments: VAT misunderstood

Have a look at today’s NY Times article: http://nyti.ms/2hG3nt6 on U.S. tax reform.

I find it simply amazing that the eminences grises of the U.S. tax scene – folks like Sullivan, Auerbach and Graetz – don’t want to understand that import VAT is NOT a tax cost to importers. In a VAT country, import VAT is almost always recoverable, creditable or otherwise refunded.

An ever increasing number of customs authorities don’t even want to cash your import VAT payment: there are reverse charges all over the place in various forms – speak to importers into the EU, Australia, Singapore and elsewhere. Even China is working on some sort of import VAT relief.

Imports are “taxable” by design, because otherwise individuals would simply buy in another country and avoid tax on their domestic consumption. But that does not mean that imports are taxed for businesses. Because their use the imports for business purposes (typically resales), the import VAT is not a cost.

And yes, there is a zero-rate on exports. The reason for the zero-rate is simple: VAT is not designed to be a cost for businesses.

The NY Times writes:

“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 is nonsense. Imports are only an intermediary step in a destination-based consumption tax. A destination-based consumption tax is designed to put the final tax burden on consumption by individuals at the place of their residence. “Taxable” imports by businesses (with tax recovery) is merely the first step in a much bigger indirect tax system.

In order to meet the WTO requirements, the import tax must be 100% recoverable, and followed by a Value-Added Tax, or Goods and Services Tax (they are similarly designed) throughout the rest of the domestic supply chain.

Or just increase customs duties into the U.S. already and call it a day.

Auerbach wrote a report on border adjustments – See here: https://www.americanactionforum.org/research/14344/

Or download his paper directly from here:

Download (PDF, 702KB)

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U.S.: Progressive Consumption Tax updated

Politico’s Morning Tax writes:

“IT’S BACK: Sen. Ben Cardin (D-Md.), who has been pushing what he calls a progressive consumption tax for years, is back out with another version. Cardin, a member of the Senate Finance Committee, said he’s tweaked his consumption tax some since last releasing it in 2014 and wanted to release the new measure now so it could influence the tax reform debate next year.

The Maryland Democrat’s framework is designed to be at least as progressive as the current U.S. system, with a 10 percent tax rate on consumption. The tax system would also cut the corporate tax to 17 percent, exempt family income up to $100,000 from the income tax and offer rebates to lower-income taxpayers. Cardin’s also bringing his plan back after consumption taxes played a fairly pronounced role in the most recent GOP primary — think Ted Cruz and Rand Paul.”

See for more here: https://www.cardin.senate.gov/pct and here:

Download (PDF, 115KB)

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Trump’s tariff: a U.S. VAT on the horizon?

The post-election weeks have not been easy on most Americans: Democrats see their worst post-election nightmares materialize, and Republicans still believe that the future won’t be as crazy as Trump indicates.

In terms of U.S. tax reform there has been a barrage of media reports recently, most of them pouring over the Republican tax plan from last July and Trump’s considerations for his Cabinet.

The proposal for a “border adjustment” tariff has hit the news often – apparently this is simply a 30% import duty plus no income tax deduction on the cost of imported goods. That latter element is often disregarded, but some U.S.-based companies that have their wares manufactured overseas, have already raised a red flag – see http://www.oregonlive.com/business/index.ssf/2016/12/sneaker_makers_surprise_losers.html.

“A Republican aide told Bloomberg BNA previously that the import tax provision is starting to trigger more negative attention from companies and industry groups, and members who aren’t on the Ways and Means Committee are starting to get calls complaining about how the tax could damage their business models.”

See the entire BNA article here: https://www.bna.com/koch-industries-takes-n73014448261/

So there is a significant concern for U.S. multinationals that Trump will severely constrain free cross-border trade. Also, the World Trade Organization (WTO) is likely to reject a 30% import tariff.

Republicans seem to incorrectly believe that the WTO will approve the tariff, because “adjusting the import taxation does not amount to an indirect tax” and “all other countries have an import VAT, so we can have a tariff” – obviously discounting that an import VAT is recoverable.

I wrote earlier about the nonsense behind a “border-adjusted” import (indirect) tax. I can understand that U.S. companies feel over-taxed (although in practice the effective tax rate of U.S. multinationals is minimal), but there are other solutions for tax reform.

What if this talk of a “border-adjusted” tariff is simply a precursor (or a warm-up) for a serious discussion on a federal VAT or GST? At some point, some lawmaker will probably stand up and say “Hey, this 30% tariff is not palatable for my constituency, but let’s make it so that companies can reclaim the tax – and, while we are at it, let’s allow companies to take a tax deduction for their imports as well”.

A federal VAT as a next step is perfectly acceptable for the WTO – this blog discusses good reasons why every other country has a nationwide indirect tax (VAT/GST/consumption tax).

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Update on Trump and the anti-VAT proposals

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U.S. House: Bipartisan anti-VAT proposal

There is a proposal pending in the U.S. House of Representatives that calls for a fee on imports from countries that do not refund import VAT to U.S. companies. I wrote about this craziness earlier, and within just a couple of days, this post became the most popular post ever on The VAT Blog:

Trump and a Democrat want a retaliatory tariff against VAT

And then someone picked it up on Twitter:

The response of Mr. DiMicco is not very original. The argument that exporters in VAT countries get a “rebate” is persistent – I hear it all the time. See my post for analysis.

Luckily there were more voices of reason:

Tomorrow is November 8 – happy voting all!

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