Archive for U.S. VAT?

Understanding the Border Adjustment

Kyle Pomerleau from the Tax Foundation writes a comprehensive overview of what the House Republicans want with the “Border Adjustment” legislation.

I have now officially given up on explaining to my fellow Americans that businesses have a right of input tax reclaim under a common VAT. So if the House proposal does not  provide for a VAT on domestic sales, then the border adjustment is definitively NOT similar to a VAT as we know it.

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Border tariff and/or an export exemption?

President Trump seems to warm to a broad-based tariff…

But according to his advisers, all options for tax reform are still on the table:

“Cohn said all options for corporate tax reform are on the table, including the border adjustment levy, which taxes imports. He stressed that no decisions have been made on particular provisions.”

It almost looks like Trump wants the tariff as a trade negotiating tool, or as a way to make someone (the American people) pay for the Mexican border wall. It looks like he separates the tariff (and the proposed income tax exemption for exports) from the much broader tax reform discussion.

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U.S. tax reform: No way out anytime soon

Tax reform is a royal pain – as Puerto Rico, Malaysia, Brazil, India and the Gulf countries have recently found out. Here in the U.S., tax reform has been an on-and-off hot topic, and over the past couple of weeks politicians, academics, journalists and traders have engaged in a Babylonian war of words and intentions.

The waterfall of issues cascades through the media: Must tax reform be budget-neutral? Should tax reform pay for “The Wall”? Are we not punishing ourselves – instead of Mexico – if we impose a tariff? Will we have agreement on a new tax system by August or will it take much longer?

Greg Mankiw, the conservative professor of economics at Harvard, summed it up very succinctly:

“1. Impose a retail sales tax on consumer goods and services, both domestic and imported.
2. Use some of the proceeds from the tax to repeal the corporate income tax.
3. Use the rest of the proceeds from the tax to significantly cut the payroll tax.”

He says that this is in effect what the Republicans are proposing.

See (a little) more here:

Mankiw also says that the retail sales tax is collected not collected at retail level, but along the “chain of production” (I think he means supply chain).

I don’t quite understand how a tax that is not collected at retail level, can be a retail tax. Also, how is this a VAT, if the tax is actually paid along the supply chain (and there is no offset / input tax mechanism). Third, if there is no offset, the import tax is a real business tax.


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Import tax to fund Mexican border wall?

The Trump administration keeps “floating” tax proposals – here is the latest one (1/26, 5pm EST):

Obviously, the border wall financed this way is paid for by the American people.

Other than keeping updated with the daily developments there is not much a worried Tax VP can do…

Port of Seattle in the morning

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The Fair Tax Act of 2017

Abolition of income taxes and the Internal Revenue Service, and thus leaving collection of a national sales tax to the states. The proposed rate is 23%.

Have a look at what Senator Jerry Moran (R-KS) has put forward for a national sales tax. A major legislative work it is not.

Avalara’s comments are here, duly filed under “Wacky Wednesday”:

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“Destination-based” and “Border adjustable” taxes vs VAT

White & Case makes a good effort to explain what is currently going on in U.S. tax reform:

… and Eversheds reviews the proposals against the common VAT:

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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: 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.

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