U.S. export business lost today because of the VAT

Cross posted from TradeReform.org

For those of you who say there is no trade impact resulting from foreign Value Added Taxes, please read this.

I Squared R Element Company is in Akron, New York. It makes industrial heating elements which are used for many processes to make other things, including glass and computer chips. The company was the low bidder on a contract to export to China.

However, the company lost the bid. Why?

I squared R was told it did not include, in its bid, China's 10% customs duty or the 17% value added tax(VAT) that must be paid at the border.

All our goods pay a 17% VAT at the Chinese border. And the uninformed say we are a high cost producer. Chinese exporters also get a 17% VAT rebate, i.e. they get paid to export.

What are potential solutions?

If our trade negotiators had negotiated agreements that allowed access to the lucrative U.S. market only if the other country did not apply its VAT tariff (to our exports to them) or rebate their VAT (to their company exports to us), then it would be fine.

If the U.S. had its own VAT of, for example 12%, which also exempted families making $100,000 or less, then I Squared R Element Co. would have a 12% tax rebate upon export to get that much closer to the winning bid.

But we don't. There was a 27% charge at the Chinese border for U.S. goods. Lost sale.

Meta: 

Comments

Based on this 27% charge

Deleted. You don't want to hear what I have to say about a government that commits treason against it's own citizens, or what we should do to all container ships that are coming from a VAT port.

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Welcome to EP trade reform!

I've read the issues with the at the border assessment on VAT and think you have one hell of a case.

Frankly, I think this concept needs to be rebranded, because as you can see, we have knee-jerk reactions to the term VAT, they do not understand the international tax imbalances and how it affects imports and exports.

I think it should be renamed, TEA - Tax Equilibrium Act.

Seriously, Trade Reform I think needs to show in no uncertain terms, how the 140 other nations (is it 160?) use their VATs to discourage imports and subsidize exports, esp. to the United States.

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Here's a VAT one-pager showing world-wide harm.

 There is no single trade issue that is quantifiably bigger than the VAT.  The average 17% VAT applied to our exports by 140 countries is comprehensive and profoundly large.  The VAT subsidies that those 140 countries rebate to their exporters sending to us is similarly comprehensive and profoundly large.  Not even currency manipulation applies to all bilateral trade from all countries.  Labor, environmental, other subsidies... nothing else comes close.

See this one-pager on the VAT problem.

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Do you have

any intelligent criticisms and not by "shrink gov. to the size of a bathtub Norquist" or others just doing some knee jerk reaction or miscategorizing this as a national sales tax or even worse, as a flat tax (all those who believe in a progressive tax structure despise the flat tax idea).

Or something more Academic to do revenues projections, some sort of offsetting tax to erase the regressivity (i read of a national sales tax that was "turned" into a progressive tax).

Has anyone gotten a detailed policy proposal together or even better, written up a bill, trying to get someone to introduce it in Congress?

As I've read the materials, most of it is about challenging other nation's VATs...and as I understand the situation, getting anywhere in other nation's VATs is going nowhere so now the "rock and the hard place" solution is to counter them with a U.S. VAT tax proposal.

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I resemble RO's remark

I'm convinced of the harm VAT does. I'm just not convinced that more harm is the solution.

No strike that- more harm *IS* the solution, but a new VAT will not produce enough harm to do any good.

Therefore, by your link above, I'm for options #2 and #3- either renegotiate the treaties, or get the hell out of the WTO no matter what that does to the United States, since it's clear they don't want our exports anyway.
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I answered my own question I think

Some of this is coming from Graetz, correct? and his tax reform proposals.

Now I found some intelligent criticism of him at the Center on Budget and Priorities, yet once again, this organization is completely ignoring the globalization effect on our economy and how other nations use a VAT at the border.

Graetz ideas are partially summed up in a competitive tax plan and make no mistake, he is a Yale (Columbia?) Professor, highly respected as a tax expert, testified before Congress, etc.

So, this is not some willy-nilly idea.

Here's a paper (is he still at Yale or Columbia?) of Graetz blasting the flat tax....

but the bottom line on any of this is, I think, at least on EP, we want a Progressive type of taxation structure (as well as increased social safety nets, middle class support), but folks, come on, read. Frankly, can you please consider all comers and listen to real criticisms?

Knee jerk comments without analysis, points are thoughts that aren't helpful.

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I'm convinced now that it is possible

For VAT to be progressive, and to do *some* good for US exporters. The Graetz Competitive Tax Plan is certainly a good example of how to make VAT progressive (though I think he'd do better if he'd replace payroll withholding with a payroll subsidy for anybody earning under $15,000/year/dependent, paid for in VAT rebates).

I'm just wondering if we aren't making the same mistake as India and China at this point though. Bear with me a second for me to make this argument, even though it's more based in politics than math.

The current economy is done for. Petrodollars will soon not be a reserve currency for anybody. The ability of the United States to make money exporting *anything* is greatly diminished. But with every crisis, comes an opportunity (the only intelligent thing I ever heard come out of the Bush Administration, and they used it wrong). We have an opportunity to make a *stable* economy for our citizens.

Basing our recovery on exports in a fickle world market isn't exactly a stable option. The VAT would give us a swifter recovery to be sure, but it's one that is based on the goodwill of other nations that have shown themselves in the past to not have very much goodwill towards us. A recovery based on foreign trade, is a recovery selling your people into indentured servitude.

If, in addition, we choose true protectionism- which there is nothing really wrong with- and either exit the WTO or renegotiate our trade treaties with them to remove the down side of VAT rebates from international trade, then we're going to have to replace imports with domestic manufacturing- and that's a good thing every time you do it. Anything a country doesn't need to import and can make itself is what actually grows a stable economy.

I know the argument "but what about Smoot-Hawley and David Ricardo, doesn't protectionism hurt both countries, especially in a depression?" I suggest that is an argument born from valuing profits for the few over jobs for the many- and by having an economy overly dependent upon foreign trade, you've just given away a huge chunk of your ability to actually have a government of, by, and for the PEOPLE, instead of,by, and for international traitors.
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small business

small business writes off business expenses, so that is basically a rebate direct, although like everything without more income, rebates because fairly useless.

Glad to see you are thinking it through. If they take up any major tax reform, one has to really dig through this to figure out what is good/bad, cause/effect policy and corporate lobbyists, special interests love the tax code because most people in the United States cannot fill out their 1040-EZ form and a W-9 form baffles them.

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simplify the income tax

From what I've read, you appear not to be a fan of the flat tax, ok I get it. But like you mentioned about those 1040s, something has to be done. You need to simplify it, so much time and money is spent on just doing our taxes. It doesn't have to be that way. The complexity of the code is simply a massive opportunity for some slick bastard to "game the system" and not pay or underpay. Now what about say a four-tiered tax structure for personal income tax? For corporate tax, you could have something more complex that would fit with whatever industrial policy one wishes to establish.

Personal Income Tax

Those earning between $20-50k would pay  20% ( it could be more or less, I'm just using 20 for this example). The next tier would be $51-250k, which would be taxed at say 25%. The third level, those earning $250-999,999k would pay 25%. The final income bracket, those earning $1million or more would pay 30%. 

Those below the first tier would be able to apply for 100% rebate from any national sales tax/VAT; they would also qualify for mortgage. People in the first tier would qualify for a 25% rebate on any national sales tax/VAT; and would qualify for mortgage deduction. Those in the third and fourth tier would not qualify for any rebate, but would for mortgage deduction.

Traditional personal deductions should be curtailed. I picked the mortgage one because it is one of the biggest investments one makes. If you're a renter, it should replace the mortgage one with one that is a percentage of your rent. Deductions for dependents, if such a deduction were to remain, should only apply to one tier. Essentially, you want to have the post card test, that is the tax form should fit on a sheet the size of a post card.  

 

 

 

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Thanks to living on stocks during the last recession

I've got extremely complex taxes. And I can't say that I've spent more than $300 to do my taxes in the last 10 years.

I'd personally like to see my tax form get *MORE* complex- use computers and websites to move budgetary authority from Congress and give it directly to the taxpayer.

We very well may likely see some different values expressed in the budget that way. And for those who like their taxes less complex, we can always make the automatic entry in "Allocated by Congress" to be equal to taxes paid, and need to be reduced manually to allocate to other uses.

I'm also for a top bracket of 95% with 100% deduction for household and business payroll. The reason? We had that in the 1950s and it caused the greatest expansion of the middle class the world has ever seen.
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mortgages

I think if that deduction is removed, so many state/local taxes are around property taxes and so there is an entire tax system (almost separate from income), devoted to property.

I think Graetz proposes massive simplification of the tax code in is proposal (which i listed a few valid criticisms I found above).

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Most localities in Oregon

Use property tax instead of sales taxes. The big exception is local lodging taxes, which I guess are also property taxes on short-term rent properties.

I know of only two cities that are not this way. Ashland, home of the Shakespear festival and thus highly dependent on interstate tourism, has a sales tax. And Bonanza, which is very libertarian and runs a municipal casino in lieu of property taxes.
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Lets Be Honest

The clear sense of your post is that the United States must somehow re-industialize with the recapture of home markets as the objective. In my view, this is the only outcome even worth considering. But any thought that such an objective can be achieved through some libertarian mechanism is fantasy, not that you've suggested such a thing. An objective of this kind can only be realized through conscious government planning. What is needed is a kind of Five Year Plan, or series of Five Year Plans, but we will require a garganuan political upheaval as a precursor to launching them if they are to be successful. Can you imagine the kind of Five Year Plan that might be devised by a Summers, a Geithner or some other hireling of the present lobbiocracy? I think we're seeing it. No, first send the protozoa off to concentration camps, then devise the plan. Leave the present power structure in place and any honest attempt at reform forever will devolve into a kind of deja vous. If we're going to face the economic mess squarely, facing the political mess is a necessary first step. They must go.

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Manufacturing policy

You are dead on. The United States doesn't even really collect, analyze macro economic data to formulate economic strategy, never mind consider crafting policy along the lines of a 5 yr., 10 yr. plan.

Guess who does have long term, in the national interest, strategies and corresponding policy? China, Japan, India, ........

I think we've been running on the WWII/Collapse of the British Empire spoils for a long time and it's all petered out.

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In fact, I've got a visceral hatred

Of most libertarian mechanisms.

This will either happen through a five year plan, or it will happen with a bottom-up revolution, starting with subscription farming and going up from there.

Hmm, now there's a thought of a way to do small-scale communism through distributist methods in a capitalist economy- subscription communes.
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Think NET Exports

Seebert's point about the fickleness of export-led growth is worth pondering. Just ask the Chinese, Koreans, Japanese and others whose overseas markets have taken a big hit. But the US case is fundamentally different. We have an enormous trade deficit, still running in excess of $600 billion annually. That means that our initial gains can be at the expense of imports. Imports of what? Energy makes up 30 - 40 percent of the deficit, and we can produce all of that in this country. Autos and parts make up another big chunk, and we ("Big" 3 plus transplants) can produce those here as well. Many of the manufactured goods imported from China (which accounts for most of that category of imports) were onceand could again be produced here.

Where we should aim for a long-term export market is in higher-end capital goods, the sort of product needed in many countries around the world. The Germans have used this strategy quite successfully for a long time, despite the strength of the D-mark and the euro.

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anonymous drive-by NET exports

Very insightful comment. I hope you consider creating an account and participating.

Here's a question then, in terms of overall wages, middle class income and employment, is it the U.S. who is #1 in decline?

Germany does have a better strategy but they too have been hit by global labor arbitrage. Maybe we can ignore E. Germany since they still have not recovered from the reunification of those two economies (W/E), but on a nation-by-nation basis, which workforce/middle class has suffered the most?

It would not surprise me that the answer is the United States but I don't have any statistics at hand.

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The US Needs a Nationally Based Indirect Tax Structure

It is not as if VAT is a new tax. It has been around decades and so has the potential impact on a not VAT economy trading with a VAT economy. The US should scrap all of its state based sales tax regimes and have a single national indirect tax structure - makes it simpler for business and brings balance to inter country trade.

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Not unless states and others got their share

You have too many municipalities, not to mention states, that heavily depend on that sales tax. You would have to insure these parties that they would get their share of the tax pie. Now I don't know what the Constitution says about prohibiting states from keeping or scrapping their own local tax structures. From what I can tell, they can still keep them. But let us, for the sake of argument say that they somehow by some political miracle dump them. Local and state governments are going to start to look to drum up new revenue.

To simply rely on a national sales tax would be deemed too risky by some, and a lot of bonds issued are tagged to revenue flow. So, we could see the introduction of new income taxes in places like Florida. But you could also see the establishment of "smaller" taxes, here in Chicago we have a tax on bottled water. In fact to get a better idea, please look at this link from the City's revenue page.

Some states won't go for the income tax, some may go for property taxes.  The list is endless, and it does not have to be an annual mandated tax.  States looking to compete for business would go the fee route.  Say, for example you have two states who both didn't have a state income tax.  State A could simply adopt an income tax system of their choice, be it a flat tax or something more "progressive."  While State B would simply opt to go the fee route.  Now this would be interesting because one has to figure could a state survive without it's own income and sales tax structure?  State B could have fees depending on services one uses (tolls, vehicle sticker, school fees, water usage, etc); they would also have a cushion from the collection of their share of the national sales tax (or VAT). Of course, poor people, unless theirs a subsidy program, could be hit by the fee scheme more than anyone else; yet they would be able to keep their own income. 

But what about businesses?  State A, also assuming they didn't implement various new fees, would seem simpler.  Yet there is the income tax.  Would a state's income tax (btw, are we eliminating the federal income tax system in your scenario, Nexus?) be significant rate wise?  Whether it was a state that had one before or not, many state legislatures may want to opt to make up for the "lost" revenue from former sales taxes.  And if there is an elimination of the federal income tax, they would realize that Uncle Sam's loss is their gain, hiking taxes to a certain point.  So would State A be where business goes or State B that operates in fees?  Meanwhile there is the new national sales tax.

 

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Pass our own VAT on imports...

Canada did just before it signed NAFTA. Clinton on the other hand repealed ours just before he signed it. Clinton opened more doors to our economic destruction than any of the Republicans ever did.

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Bush vs. Clinton vs. Bush vs. Obama

After watching a very thought provoking Friday Night video last night I observed this:

When it comes to trade, economic, labor policies, the stuff that really matters, it seems to not matter at all who is President or even who controls Congress.

They continue down this inane path, regardless of what the people want and even what all of the statistics say (and they are telling them loud and clear they are destroying the middle class, increasing wealth inequality, eroding the standard of living, already destroyed retirement and with the financial implosion, caused a global economic collapse).

It is like there is no administration change at all. and that could be due to multinational corporations running the country.

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