VAT or Value Added Tax is Getting a Look in D.C.

The Washington Post is covering the VAT or value added tax and suggesting the concept is gaining support in Congress. Unfortunately WaPo characterizes this tax completely incorrectly as a national sales tax. It's not frankly, it is a legal method by which to address the trade deficit.

Fortunately Trade Reform has a better understanding of what a VAT really is:

The trade benefits would be substantial, and grow our economy. That is because the huge wave of foreign goods coming in would pay U.S. taxes through a U.S. VAT at the border. They would pay for our health care and infrastructure just as our goods pay for theirs. We would level the double-digit disadavantage of our paying their VAT-tariffs and them not paying ours.

Here is trade reform's main points on a VAT, which I repost here:

We could substantially dampen offshoring with a VAT because the disparity in VAT tariffs make our goods about 17% more expensive than they would be without a U.S. VAT.

(The VAT subsidy part of the trade equation comes from the fact that other countries can rebate their VAT when their domestic companies export, because those exports are not consumed in the source country. The rebated VAT there means their goods come here free of much of the tax burden and we don't tax them at the border).

There are problems. Especially for farmers and ranchers. Ag producers buy from monopolists, like crop seed and fertilizer and equipment. They also sell to monopolists (technically monopsonists) like Cargill, Tyson, Smithfield and ADM. The VAT tax is a new cost that farmers would have to pay, but would arguably be unable to pass on to the powerful buyers of their products. Farmers like income taxes because they don't pay tax if they have a loss year, but pay if they make money. Because farm income is so volatile, that is an advantage to income taxes.

So while it appears to be a regressive sales tax, oh not so fast, it is quite the tool to deal with trade deficits.

The Urban Institute is suggesting a VAT be used to fund health care reform. Now that is a concept worth examining for such a plan would greatly assist in reducing the regressivity of a VAT, all the while assisting the United States in reducing it's trade deficit.

[lobbyist alert! not to fund for profit health insurance corporations!]

In topics like this it's time to recommend TaxProf blog. He covers everything you wanted to know about taxes but were too asleep to ask.

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Sorry, don't like it

Forgive me, RO, but while I see your point on the trade thing, it still doesn't past the test. For starters, this will not cause companies to move factory work over here. The cost differential between building widgets in China and the US is still greater than even the 25% rate that I've heard. Secondly, in other places that have a VAT, you haven't seen trade deals renegotiated or as such. At the end of the day, it is what it is, a heavily regressive tax. Wealthy people will game this like they did when they imposed taxes on yachts, they went elsewhere for the boats.

Who gets hurt those most will be folks like you and everyone else who have to purchase consumer staples. Now one thing I've heard was that certain items would be excluded, but I am very skeptical that it would remain so. If you rebate the money (a la the Neal Bortz model of his national sales tax), that will invite more hassle a kin to what we do for our income tax, only this would be added to the former. On top of this, if you live in a state with a sales tax, then its almost a double whammy. Here in Cook County, home to Chicago, the county sales tax alone is about 10%. The city of Chicago has additional taxes based on what you buy. So really, assuming it's the 25% that I've heard, your tax liability here will be at least 35% of your total bill.

Also do you really believe it would be just on products? Mark my words, you will see a VAT on services as well. Yes, you may see some stuff made here, and you know what I would be happy to have my next gizmo made in America. But I am highly doubtful the full benefits foretold on your article will come to fruition. Bottom line, there won't be any real change in trade, and all costs associated with this dumb tax will be passed on to the consumer.

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tax policy is just one aspect

of all the things that need reform. But note, all other countries have a VAT and who is being hollowed out by trade?

The United States. Check out Pat Choate's book, I link to it, and he goes into great detail on why/how it would work and not be as "regressive" as advertised.

The added caveat of having it pay for health care seems to sweeten the pot.

But the biggest thing, it's legal in the WTO. If someone wants to do broad tariffs or even specifics, without plain withdrawing from the WTO it would be challenged and the WTO likes to rule against the United States.

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A VAT is regressive.

Wealthy people put some of their income into wealth accumulation, with pays VAT at a rate of 0%. Poor people put all their income into consumption, with pays VAT at the face value. So its an income tax that starts at the full face value and declines based on how much money is shifted toward wealth accumulation.

Well, there's also the middle class people paying 29.9% on their credit card because they were late in making a payment ... while the VAT is assessed on actual products, it normally does not involve taxing important things like the Finance Sector.

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yes but

I think there is a misunderstanding, this is not an "across the board" sales tax. It's on imports, which levels our domestic goods. It's all about the trade deficit and equalizing that out. People are focused on the consumer, but one needs to think about things like U.S. steel vs. India or China or Brazil steel.

So, think of it this way, it's going to generate more U.S. manufacturing jobs, so it's not the same thing as a "flat tax" or other regressive taxes.

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No, its a tax on goods and services ...

... at each stage of production. Imports are assessed the VAT when they come into the country, to bring them to parity with domestic products, and exports are rebated the VAT, leaving it up to the other country whether they want to tax them or not. But it simply is NOT exclusively a tax on imports.

And of course, its the cheaper steal, between US, China, India or Brazil that attracts the lowest VAT.

I was living in Australia when they introduced their VAT (they called it a GST, for Goods and Services Tax, because recent immigrants from Europe were familiar with a VAT, and so the less familiar name was more politically marketable).

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Oh Robert, my friend, I'm sorry to say this...

but you're wrong. While you're saying we're focusing on the consumer, you're only looking at the trade. Do you really honestly believe this will just be on imports? And by the way, until the majority of the stuff that will be slapped with that VAT is made here, you will go through a very long indefinate period of paying high taxes. Secondly, as Bruce smartly pointed out, the rich will not pay this out of their income but the rest of us will. Because at the end of the day, it will not reverse trade deficites entirely or even significantly. Why? Because the costs are passed on to the consumer.

Say you're importing a DVD player, and prior to the vate it cost the importer $15/unit. Let's also assume that his retail price that he thinks the market will bear is double wholesale or $30. Now one of three things will happen here with the VAT. Either it gets slapped on the moment it lands onto shore or when that retail markup is imposed, or what I think is the worst of the two where VAT is utilized on both when it arrives and at the markup. Now, for arguments sake, let's take the worst-case scenario rate that I heard on NPR and CNBC, which was 25%.

So let's review here. DVD wholesale price is $15

Scenario One:
25% VAT import price ($15 + $3.75 VAT) = $18.75
Retail price (double his wholesale cost) = $37.5

Scenario Two:
Import price = $15 (VAT is not applied)
Final Retail Price (double his wholesale + VAT applied only on retail end) ($30 + $7.50 VAT) = $37.50

Scenario Three
25% VAT import price ($15 + $3.75 VAT) = $18.75
Retail price (double his wholesale cost) = $37.5
VAT (25%) applied on final retail value (37.5 + $9.375 VAT) = $46.87

In each case, the retailer or wholesaler passes on the VAT cost to the client. Now I know I'm over simplifying and left out a few things. Also, you could have cases where a business would eat a portion or all of the VAT to gain market share. But I suspect that would not be a long-term plan.

Either way, you could witness the Value Added Tax being applied all along the product chain. You brought up steel, there is nothing to stop provisions being put in place to have VAT ending up all the way to the final product that you buy at the store. From what I have seen, the visibility of this additional tax varies. I have seen some retail operations in Europe display their retail price and then add in "Plus VAT;" resembling possibly scenario two. In other cases, the VAT is hidden.

Once more, this tax encumbrance doesn't even include local sales taxes. Now here in Chicago, whichever VAT scenario is applied, the City (actually Cook County) applies the sales tax on the final value, which stands at 10.25%. So you could actually see a final "sales tax" of 35.25%! Tell me that doesn't hurt the poor or middle class!

Lastly, to assume that this would only apply to imported products is, to say the least, unwise. The government will by like someone who goes to a buffet but has eyes bigger than their stomach, as my mom used to say. The rush of all this cash from VAT will get them thinking "hrmm...we're bringing in all this money on import items, what about domestic products?" Also, given that the service sector is so huge, to the state it will seem as one giant juicy untapped source of revenue.

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no, I am not "wrong"

Firstly, I am getting very irritated. Now the point of EP is not to attack first and thing about it later, it is to think first in comments. I'm trying to point out that a VAT, as utilized by the EU, can be one hell of a trade deficit leveler.

So, people quite attacking me and read the links that I'm using to make the case.

Firstly no, very little is made in the United States. Secondly a VAT can be rebated at the import/export level!

That is the point I am making, not misuderstanding the basics on VAT.

I am going off of various recommendations I have already read and the point is to get this rebate that most other industrialized nations get....on exports and imports...
not the actual VAT itself as a concept.

Now these two articles give some good overview on precisely how other nations use their VAT as a trade leveler.

Economy in Crisis VAT action items.

Another article on VAT.

Now you all are just taking one type of VAT but it is one complex tax and it does NOT, repeat, does NOT have to be implemented by the examples you give. Not by a long shot...

See the key for "rebate" and "incentive", which should also be passed onto consumers as the rest of the VAT is.

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How can a non-discriminatory VAT level the ...

... the trade deficit in this way?

You've got two different VAT's at work here ... the one that is nothing but a disguised tariff and the one that is allowed by the WTO.

A tariff would put a tax on imports that is NOT placed on domestic product. A VAT, if it is the non-discriminatory Value Added Tax allowed by the WTO, would place the same tax on imports that is placed on domestic products.

If we lived in a country where a VAT would replace payroll income taxes, swapping one regressive tax for another, with an eye to simplifying a system for rebating that portion of our total taxes on income on exports ... eliminating the 12%+ income tax on all incomes up to $100,000 and replacing it with a tax where at the very least there would be some marginal tax payment from the multi-million dollar income range, combined with the relative ease of rebating a VAT on exports compared to the greater difficulty of rebating payroll taxes on exports ...

... that would certainly merit discussion.

But false claims to the effect that the total amount of VAT assessed on imports is equal to a protective tariff of that amount, and the total amount of VAT rebated on imports is equal to a subsidy of that amount ... they certainly would not add anything but noise to that discussion.

And, clearly, the proposal of the VAT is with an eye to sheltering corporate incomes and capital gains from tax, by finding more regressive taxation in addition to existing regressive taxes.

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OK, I read those articles

And have two points from them:
1. Both articles are arguing for *elimination* of the VAT, not for enacting a new VAT in the United States. I think there's good reason for this, but that brings me to:
2. Neither article had a good analysis of what happens to consumer prices after a VAT is in place for domestic vs foreign goods- and it's the consumer side that I and others doubt.
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well Seebert

I'm not going to argue with someone who isn't going to do their own research and investigation right now.

When I get to writing up a post, feel free, but in the interim, read the past posts I have using the search and hit de Google on WTO VAT keywords.

I think you are missing the point of their articles. The point is to understand how the EU, China etc. use their own VATS on imports and exports. While yes they are arguing for a VAT being unfair, the point of the references is since one cannot get any VAT ruled illegal or anything done by these nations or the WTO....one needs to play what is good for the goose is good for the gander game.

Also realize each nation has it's own VAT system. It is not uniform globally. So, each nation crafts it's own VAT system.

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The EU and China

Are basically raising the cost to their own consumers, in an effort for the exporting class to get rich.

What is good for the goose is not always good for the gander- and there IS another answer- stop playing the game. Take our ball and go home.
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Look Seebert

If you do not know what you are talking about or not willing to debate the details of this and real cause and effect....on a macro economic (national) level as well as global level...

well, quit while you are ahead. This topic needs to be understood firstly in the specifics and secondly at those levels.

Remember, EP does not do "philosophy" where people just jump on something without first comprehending what it actually is. We leave that to the political blogs.

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I'm trying to comprehend

Why you think the way to equalize trade is to penalize consumption.

That isn't about VAT in specific and it isn't about misunderstanding- because VAT *does* tax consumption.

It's a question about why YOU think that's the way to go.

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EP isn't about "you"

is it about objective analysis on what is the most effective policy, where is the economy going, economic indicators, housing an all of the rest.

Personal anecdote has little insight on macro economics, international tax policy and unfair advantage, incentives to play differing economies and nation-states off of each other, global consumer markets, etc.

As far as overall taxes goes, one needs to look at the aggregate, what is the real PPP (standard of living) and what is the real amount of net income (after total taxes income). Not just focusing in on one type of tax and "freaking out" about it. Tax policy does affect multinational corporations and their decisions and also affects small business, not just the individual. They are also the employers, the generators of the real economy.

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Ok, so what is your r*objective* analysis

For consumption taxes?

I've yet to see one that convinces me that they are effective policy, in fact, near as I can tell they hurt the end generators of the real economy. An employer can't employ anybody at all if he doesn't have consumers to sell to- consumption is what drives both small and large businesses to profit. Without consumptionof their goods, there is no reason to create more goods.

Any given corporation worth it's salt is going to pass on any tax overhead to the consumer anyway- so if we tax consumption, who are we really hurting?
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thin ice

Seebert, you have not bothered to read the references or past posts or reference them. Now I am not going to deal with some useless argument and I'm also now brazenly telling you, unless you write up a detailed aggregate analysis in counter to those papers, this is beyond absurd and not within EP rules. I said I would later write up a more detailed analysis but responding to this basically harassment is really on thin ice. EP is about economics and whatever this is, is not that.

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I have read the references

And in fact, I'm working on an aggregate analysis in agreement with those papers that proposes an *ALTERNATIVE* to enacting VAT tax here with a tax that is both indirect *and* specifically hitting *trade* (as opposed to hurting small, in-state non-border businessmen).
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tariffs

Seebert, I cannot even get you to realize that tariffs would be ruled illegal by the WTO. You want some sort of battery as money.

So, be aware, again, we do not allow Economic fiction on the site.

So, the entire reason various groups are examining a VAT is an alternative to get out of the WTO...since they cannot and the unfair trade agreements are killing their business (and workers).

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ITYT isn't a tariff

It's an indirect sales tax on shipping.

Secondly, you failed to understand I want *expiring money* based on energy, not a battery. The battery would just be a wallet.

Third, you have a tendency to label as economic fiction anything you don't understand.

Fourth- there are other indirect taxes than the VAT.
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warning

Not only do I understand your energy money, of which I was poking fun of, I have repeatedly said this is in the land of economic fiction and not appropriate for this site. You are not going to change the international monetary system for energy as a solution, nor does it make a lot of sense from a monetary view point, which I have explained ad nausuem to you and so have others.

If you do another insult like that or personal attack you're out of here.

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I'm still bothered by the very concept of a VAT

The problem with a VAT, near as I can tell, is that even if you refund to domestic producers, you've just added extra overhead that the consumer will eventually have to pay for- the paperwork of doing the VAT.

Worse yet, how will this hit local-only economies whose goods don't cross state borders, let alone national ones? Suddenly every farmer in your local farmer's market is paying VAT to deliver subscription goods to their co-owners? That's a real problem towards rebuilding domestic markets.

I think a lot of people haven't thought this through very well- especially in light of the fact that we could achieve the same effect by simply canceling our stupid trade agreements and not exporting to countries that play the unequal tariffs game.
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amen, seebert

You nailed it. The consumer is already, despite recent released confidence numbers, a wounded animal. You raise prices, you are going to see folks rethink purchases. And like seebert mentioned, this is going to hurt local economies.

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no not really

It would encourage domestic production because there would be no VAT. At least that's Pat Choate's idea. It's not on domestic goods.

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Can you point me to how this gets around

The WTO GATS treaty ban on taxing only foreign goods, if it is not levied against domestic goods as well?

Or better yet, can you explain to me how any consumption tax can avoid taxing domestic goods without being discriminatory?
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the key is to examine other VATs in other nations

I promise I will work up a detailed post with graphs and examples. (it's a real job).

But for now, check out those Economy in crisis articles and buy (go to the library) Pat Choate's book. Now you might like him, he was Ross Perot's VP on the 2nd run but more importantly is an economist and he goes into this concept in multiple book chapters.

I know it sounds ridiculous but in the case of a VAT it's all legal via the WTO.

tax foundation has a good post w.r.t. the FTC which is what I think you believe is illegal (and it was ruled illegal by the WTO)

n part, the U.S. adopted the FSC to offset a competitive advantage enjoyed by our European trading partners, an advantage that stems from their tax system. They levy a value-added tax (VAT) on imports but not on exports. This boost to European exporters is something we can’t match because we don’t have a VAT. As a substitute, the FSC reduces the U.S. tax so that the combined U.S. income and European VATs do not render U.S. exports uncompetitive, whether they are bound for Europe or other countries.

This worked until the World Trade Organization (WTO), responding to a complaint from the European Union, ruled that the FSC violates international law. The U.S. has until October 1, 2000 to repeal the FSC or suffer WTO-sanctioned retaliation.

Taking a step back, the FSC dispute highlights an unfortunate fiction defended with gusto in Europe, elsewhere around the world, and even in some quarters in the United States. When the original articles of the General Agreement on Tariffs and Trade (GATT), the WTO’s precursor, were written, it was popular in academic circles to make much of the distinction between “direct” taxes – those paid directly to the tax administrator, such as an income tax – and “indirect” taxes – those paid to the administrator indirectly when making a purchase, such as a sales tax or a VAT. Under the GATT, and now under the WTO, a country may employ border tax adjustments – export rebates and import levies – to reflect indirect taxes, but it may not employ these devices to reflect direct taxes. Upon this economically irrelevant distinction the WTO hangs its discrimination charge against the U.S. income tax, much to the detriment of U.S. trade.

Business taxes furnish an example of how silly this is. Under the WTO definition of the term, a sales tax is an indirect tax, as is an European-style VAT. The economic equivalence of an European-style VAT and a subtraction-method VAT is well-established. A subtraction-method VAT is essentially identical to a business income tax except that all purchases of plant and equipment may be expensed, rather than depreciated as under current U.S. law.

Also, I believe you mean GATT, not GATS. GATS is trade and services, different side treaty. GATS is where they are trying to dump in guest workers (i.e. people, but keeping and assuming their national origin loyalty, as something to trade).

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I finally get why this is legal

It's because the WTO is hopelessly biased against cultures like mine here in Oregon, where we don't like indirect taxes.

Yet another reason to dump the WTO, rather than accept their bigotry and force us to change our culture.

Now off to read Pat Choate's book and see if he's got a reason for being bigoted against direct taxes beyond mere philosophy.
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I'm not presenting the case well

But you are right, the WTO sucks and rules against the U.S. continually. This would make another great post, what if the U.S. said "screw you WTO" and plain pulled out? What are the economic ramifications to the United States? I'm not big on hurting people, esp. working people from making a buck but I do not believe I have seen such an analysis, objectively.

Anyway, that's why I'm paying attention to the VAT, it's all about the "at the border" tax and the WTO.

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Here's the rational real problem with pulling out of the WTO

And you've stated it elsewhere.

We're damn good at having enough natural resources to feed, clothe, and shelter our people.

But in the last 40 years, we've almost entirely given up on the ability to turn those natural resources into finished products. Our industrial capacity is shrinking every year- and every year we make fewer end-user products.

I think this depression gives us a chance to reset- but any way we do it is going to be hard.

That's why the WTO has us by the balls- we'd lose our market for Natural Resources, and we don't have the capability any more to use those natural resources domestically.
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Here's an equally effective trade promotion tax ...

... don't tax the product in the first place.

That would be the same as taxing the product at every stage in the production from raw material to finished product and then rebating the exports, wouldn't it?

We already have a wide range of sales taxes, and already make exports sales tax free.

Regarding domestic production, the reason VAT was so strongly favored in placed with rampant tax evasion like Italy was that when someone evades the VAT tax system, they only evade the tax due on their value added ... they still paid VAT on the materials / products they used.

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the tax is on imports

I think people aren't getting this, a VAT is really a tax on imports. It's a glorified hidden tariff that is legal under the WTO. It's not on domestic or should not be.

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Of course its on domestic product.

Its on imported and domestic product impartially, except of course that it magnifies cost differentials.

Where did you get the impression that a VAT is only on imported products? What country in the world has a VAT that is not actually a Value Added Tax but is, instead, a hidden tariff?

And why hide the tariff? If the US wants to impose a non-discriminatory across the board tariff, because of our structural and unsustainable trade deficit, we are well within our rights under the WTO to do so.

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read Choate or any of my past posts

if you bothered to read any of my many posts at all, not only have I written in detail on a VAT but I also have lived abroad and I am frankly not in the mood with this tone.

I am pointing out it's overall effects by reducing the complexity because people do not understand how a VAT helps the U.S. trade deficit.

VAT 101.

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VATS and Oranges, my friend.

I read the Choate stuff and am familiar with some of the other VAT (or GST) out there. But, my Patrion Saint of Populism, you aren't seeing the forest from the trees. You're looking at the import goods aspect still and manufacturing jobs. What we're saying is that an implementation of a Value Added Tax on imports will turn out to be the key that opens up Pandora's Box. They give the rah rah speech on "protecting jobs" or domestic industries against "dumping," in the guise of that VAT. But that will be a ruse, and you know the biggest liars in the world are government officials (well after fund managers on CNBC).

It starts with imports, then it will spread to other items. Next thing you know, after the plumber has fixed a leaky pipe (assuming you get one instead of doing it yourself) and on his bill is a VAT portion!

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it is a case by case implementation and calculation

that's true and it's also true if corporate lobbyists can fiddle with any area of policy....is it tax policy most of all.

On the other hand, the United States needs a major leveler on trade and this is one sure fire way to get it.

The WTO rules against the US and will assuredly not rule against all of these other industrialized nations with VATS (including India).

There is no way by "worker and environmental rights" one is going to really eradicate the wage differential around the globe but this could be quite the tool to help that out.

But firstly is to understand the rebate game (which should also be passed onto consumers btw).

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The rebate game isn't 100%

You need to deduct the cost of processing the rebate as well.

So while this may be a "trade leveler", the real person that will get hurt is the consumer.
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that's trivial

about the same as processing any state sales tax, all done at the register, automatic.

Look, you are in a mind set and you need to empty your brain and listen to what these people are telling you and think this through.

I am not for a regressive tax, of course I am not. Anything that dumps even more burden on the U.S. middle class and poor is a very bad idea.

But this is all about meeting the WTO rules and if there is anything regressive going on these days....it is displacing U.S. workers with guest workers and offshore outsourcing their jobs and lowering their wages...

i.e. a completely unfair situation where Americans are directly competing with overall labor costs of other nations that are on a ratio of 12:1, 6:1 even 100:1.

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In Oregon

We don't process state sales tax, because we don't have one. We've voted on it 13 times now, and it's gone down in defeat every time, because we in Oregon oppose *ANY* consumption taxes.

It can't be all done at the register- at some point, the company has to read the registers, total up the tax collected, and send off a check to the state. That takes at least *some* time. It may be trivial, but it's overhead.

I agree we are in an unfair situation- but to me, the solution is staring us in the face- isolationism. Get the hell out of the WTO, tell the international corporations to go elsewhere, stop exporting and importing altogether, and let the world fend for itself for a few years.
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ok, now that all of you have pissed me off

I promise to write out a detailed analysis of my points. I am frankly too tired today to make them but I honestly don't think you are realizing all of the VAT manipulations and methods I've read about in other nations and this is where I am coming from. So I will make the case in a later post to hopefully be Q.E.D.

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Trade Deficit

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today's recession is the answer.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"

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I have not read the book

but I can tell you that population density w.r.t. optimal productivity and economic growth is not a new theory. It's a huge part of labor economics as well as general economics.

It's more that it's not "cool" these days to mention it, i.e. special interests, special agendas trump economic realities and theory.

If you want to add your blog to your signature on EP, that's fine by us as well as mention your book. But I wouldn't claim this is a "new economic theory" for population has been a factor for a long time in economics, especially labor, productivity, wages.

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First, a VAT is a tax on all

First, a VAT is a tax on all goods sold, whether imported or domestically produced. The WTO rule is that you cannot tax imports at a higher rate than the comparable domestic good.

Second, the best route to a VAT would be a comprehensive tax reform. That would remove some of the burden of current taxes (corporate income, excise, real estate, etc.) that currently is hidden in the cost of the goods. On the household side, presumably there would be a substantial reduction in the incidence of income and payroll taxes on lower-income folks. That plus a refundable tax credit for VAT paid (based on the current EIT) would be enough to minimize any regressivity.

Third, a border adjustable VAT would be the single most potent stimulus to exports possible. Unlike the traditional subsidy route, it requires no expenditure of public funds and avoids selective (usually politically inspired) support of favored industries.

Our trading partners are openly amused by Americans' short-sighted preoccupation with taxes. I've been asked by Canadians: "Why are you so stupid about this?" Sorry to disappoint the "anti-tax" crowd, but we currently are relatively low taxed. At the same time, we are badly taxed. Imports do not pay their fair share; exports are double taxed. Most corporations spend a lot of money to avoid paying anything in corporate income tax. The underground economy pays nothing in income tax. And yet some people want to defend this as a functional system!!!

America needs to grow up, get its spending under control, incentivize real production in this country, pay down its debt and regain its financial strength. This can't be accomplished by endless borrowing from our trading partners. Nor can it be be accomplished in a world in which everyone but the USA enjoys the advantages of a border-adjustable consumption tax.

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I don't want to stimulate exports

I want to stop imports and have a "domestic manufacture first" mentality- create the goods as close to the end consumer as possible, end the waste of hundreds of thousands of barrels of oil for shipping, send information instead because it is cheaper, create jobs as close to the consumer as possible.

DECENTRALIZE, not RECENTRALIZE!

I'm all for exiting the WTO altogether and creating a $1/mile shipping tax, on all goods domestic and foreign.

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VAT is a good thing.

A VAT would be a good thing - if it means that the vast majority of America tax payers need not file income tax returns or deal with the increasingly incomprehensible Federal tax code. If combined with a progressive income tax on the top 5 to 10% of earners, the VAT stands to be of great benefit. It is something we need to do.

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I am surprised

I am surprised the anti- tax crowd hasn't siezed on the idea of the VAT or tariff as a possible replacement for the income tax

Afterall, prior to the income tax the US govt got most of its revenue from tariffs

Personally I would like to see a tariff on imports implemented - the proceeds could be used to bolster the social safety net for those harmed by unfair trade, used for increased border security and safety inspection of imported goods, and most importantly used to pay down the national debt, and make us less beholden to foreign creditors

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they are into the flat tax

which is seriously regressive and doesn't address reducing the import/export imbalance.

But the flat tax does tax the underground economy, which is massive in the United States.

Considering we have a society which loves cheap labor, including cash under the table, plus all of the drug money and all of the rest of the underground economy that's under the table, capturing their "fair share" isn't such bad idea...
i.e.. employers can use illegal labor and pay them cash under the table to avoid various payroll taxes as well as income taxes (more FICA, SS).

The anti-tax crowd I think is driven by lobbyists and misinformation too. Like the focus on the estate tax instead of a focus on FICA or Social Security/Medicare..which are regressive.

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VAT example

I work for a mfg company that makes automation components.

Here is a real life example of how foreign VATs and the lack of a US VAT hurts exporting US based companies and help iporting foreign based companies.

We make a type of clamp used in auto assembly. Lets assume we have the same material and shipping costs as our chinese "competitors" now of coure we know this to not be entirely coreect but will assume so for the sake of the exercise. Now of course their labor is much less than ours, and we have the engineering and development costs that they didn't have because they simply knocked off existing designs.

We try to xport to china - we get hit with a VAT in china that almost doubles our landed cost . this tax is then rebated to the exporting competitior, whose landed cost in the US is half our cost since we are not charging a reciporical VAT or tariff.

You can see now how this unilateral "free" trade arangement. hurts US based companies and favors foreing imports thus increasing the trade deficit

if we had reciporical VATS on imported goods that we then rebated to US exporters it should not take long to reduce the trade deficit significantly

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tax rebates on VAT countries for exports

This is precisely what I am trying to amplify and why a "consumption tax" should not necessarily be the label on VATs.

VAT countries, via a WTO ruling, get a rebate on all VAT when they export that good.

That good comes into the United States untaxed because we do not have a VAT on imports. That gives the total price of the import an unfair advantage over US goods where our taxes are distributed already onto that particular competitive item.

In addition, the United States, when exporting, is levied the VAT of the importing country. That makes the US goods much higher in price, beyond the production costs and is a under the table tariff in so many words on U.S. goods.

The United States taxes get no WTO sanctioned rebate on anything. So that added cost makes goods produced in the U.S. and exported non-competitive.

Never mind the U.S. is not collecting any taxes on imports....something the EU and China as I understand it ....love.

This is under WTO GATT.

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But why restructure our tax system ...

... to address this:

That good comes into the United States untaxed because we do not have a VAT on imports. That gives the total price of the import an unfair advantage over US goods where our taxes are distributed already onto that particular competitive item.

There is no such thing as "a VAT on imports". There is a VAT, which applies to all sales that are not exempt, and so it applies to imports as well.

The name for a "tax placed on imports" is "tariff". So addressing the fact that production in the US has a 12%+ flat rate income tax imposed on all labor under $100,000 per year while the import has been exported tax free would be a 12% across the board non-discriminatory tariff on the product.

Its specific discriminatory tariffs that are regulated by the WTO. A non-discriminatory tariff is allowed for a country in serious deep water on its current account, like the US, and is much simpler to put in place than a VAT.

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it's in the details Bruce

The key here, which I keep trying to pound on, is how other nations give rebates on VAT for all exports. That is the key element and why it is a "tax on imports" de facto even though yes, VAT is across the board. It has to do with the WTO ruling on VAT and how other nations are using their VATs. I've posting this information now 3x in links, in comments.

So, by enabling the US to impose taxes on imports plus give a rebate on domestic goods exported is how it is a trade tool.

It's also not 12% across the board. One can have different treatment per category, different tax levels per category.

Of course it would have to be significant offset in order for it not to be regressive and "yet more taxes" but it's about the only thing the WTO will allow to fly. They will not allow tariffs and ruled against other US taxes which were in essence trying to balance for how other nations give tax rebates (de facto) for their national exports (which I posted a link on).

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I read that link

And disagree with your interpretation of the WTO's ruling.

Specifically, the WTO ruling was on INDIRECT taxes, not the VAT in particular. There are other forms of indirect taxes we can use to do effectively the same thing, while addressing the trade situation more directly.

One of these is the ITYT- the Intermodal Transfer Yard Tax. I propose we add a tax, at *all* domestic and international ports, of $1/3200 cu ft/mile from originating address on shipping label.

This is an indirect tax (it's assessed by the port as a part of their fees for moving standard cargo containers around, that's why the 3200 cubic feet, a standard 40' cargo container). Because it's on VOLUME instead of WEIGHT, it affects smaller, cheaper items less per item. Because it is on DISTANCE- it encourages and gives a boost to local manufacturers, and hits foreign trade (intercity, interstate, or international) harder than the local business serving local customers with their own trucks that never hit an intermodal transfer yard.

And thus, in the end analysis- it's progressive because it supports local jobs for local communities, which is where progressive is supposed to be at.

More on this once I find a proposed VAT to compare to, and try to figure out why these rebates aren't called what they really are: subsidies.
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good luck with that

The WTO already ruled against the ETI in 2002.

Then, they ruled against FSC clause in the (joke title) American jobs act of 2004 too.

By creating a tax at the port, based on mileage, I would imagine that would be immediately challenged at the WTO based on unfair taxes against trading partners and seen as a subsidy.

I mean you can try it but another reason the VAT is being looked at is because since the WTO has already ruled in favor of the EU and yes, it is VAT taxes specifically, the U.S. could do the same thing and if the WTO ruled against the U.S. this time, they would have to invalidate the entire ruling for every other country at the same time.

I think the key here is to get around the WTO....and then work backwards to make the tax actually progressive and not regressive or an actual additional tax burden.

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At which point

"By creating a tax at the port, based on mileage, I would imagine that would be immediately challenged at the WTO based on unfair taxes against trading partners and seen as a subsidy."

I hope so, at which point we attack VAT rebates as a subsidy.

"I mean you can try it but another reason the VAT is being looked at is because since the WTO has already ruled in favor of the EU and yes, it is VAT taxes specifically, the U.S. could do the same thing and if the WTO ruled against the U.S. this time, they would have to invalidate the entire ruling for every other country at the same time."

Same with an ITYT- because if they call that a subsidy, then certainly a VAT rebate is.

"I think the key here is to get around the WTO....and then work backwards to make the tax actually progressive and not regressive or an actual additional tax burden."

A VAT can't be a VAT if it isn't regressive, because then it wouldn't be a value added tax.

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a rose by any other name

would still smell as sweet. Again, and at this point I am repeating myself so I am about to lock out this thread, this is just one aspect of OVERALL taxes! One needs to take adjustments in other taxes, such as FICA, SS, which are also regressive to balance out the negative aspects.

You have so many tax categories in the U.S., you need to look at the aggregate, not just one type of tax or one policy change.

This is all about trade and getting around the WTO, which if one wants to argue to plain withdraw from the WTO, this is just one of many reasons why so many advocate doing just that.

If I see one more comment in this thread that is basically a repeat where information is in another comment or in the post itself, I'm locking it. It's useless to have the same comments over and over again, it's like spam and a disservice to those trying to read this post.

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Why not simply avoid the problem

By not exporting and denying the Chinese the ability to rebate money to their manufacturers?
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what are exports

So, you want to deny all U.S. manufacturers the ability to export.

Exports mean out of the country.

So, what do you think will happen to the United States economy and businesses if they are 100% denied to export their goods and services?

China is an import.

That is the reason for the VAT. The WTO has ruled that what the EU, China, India do with their rebates to their manufacturers on VAT is legal. So, one cannot deny the Chinese their VAT practices.

I'm not endorsing the WTO, I'm describing why various economists would be looking at a VAT as a method to level the trade deficit and how the VAT is simply not just a "consumption" tax for these reasons.

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Exactly no one is suggesting

Exactly

no one is suggesting we not trade, what mfrs like mself are asking for is the ability compete on a level playing field

o that as an example above my exports are priced competively, and competitve imports do not have an unfair cost advantage - precisely because they get a rebate and I pay VAT tax

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I think the threading got a bit mixed up

I am actually suggesting we not trade.

I'm saying that if we're not on a level playing field, then we should not be trading with that country *at all*- we should neither accept their imports nor export to them, and develop domestic markets instead.

THAT is the ultimate answer to this VAT nonsense that they're pulling. And if the WTO doesn't like it, we shouldn't be trading with them either.

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Market to the workers.

"So, you want to deny all U.S. manufacturers the ability to export."

Every export is somebody else's import problem.

"Exports mean out of the country."

Yes. So if we stop exporting *and* importing, we suddenly free up a market of 300 million people to sell to.

"So, what do you think will happen to the United States economy and businesses if they are 100% denied to export their goods and services?"

They'll have to turn to local manufacturing for local retail. Businesses that are small enough to succeed, rather than too big to succeed.

"China is an import."

Yep. And I'd like to see them cut off entirely as well.

"That is the reason for the VAT. The WTO has ruled that what the EU, China, India do with their rebates to their manufacturers on VAT is legal. So, one cannot deny the Chinese their VAT practices."

One can deny to do business with them at all- tax their imports $12000/container, and stop exporting to them, completely. And if the WTO doesn't like it- then raise tariffs against countries that do business with the WTO.

"I'm not endorsing the WTO, I'm describing why various economists would be looking at a VAT as a method to level the trade deficit and how the VAT is simply not just a "consumption" tax for these reasons."

What I don't understand is why those economists aren't looking at the progressive distributionist option.

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