Trade War Games
Here’s a comment responding to “Trade War Games” and my concerns about rising protectionism.
Much of America’s trade deficit stems from our refusal to adopt a Value Added Tax when virtually all of our trading partners have one. To review, VAT is added to the cost of everything purchased inside a country, including imports, but does not apply to export sales. So, if the total tax burden in two countries is equal and the actual manufacturing cost is equal but one uses VAT and the other does not, you can expect that the total cost to produce, ship, and sell goods in BOTH countries will be lower for the company located in the country with the VAT. Those who wish to challenge this notion are welcome to sit down with paper and work it out.
Companies in the non-VAT country pay both the full tax in their own country plus the VAT when they try to export to the VAT country against competition from the locals who pay only the full tax. Meanwhile, in the non-VAT country, imports enjoy a tax reduction equal to the VAT percentage while local makers pay full tax.
This unfairness has persisted since the 1950s when the VAT was invented. It was, long ago, “justified” in Europe by the need to rebuild their destroyed in World War II economies. I humbly suggest that the need for America to subsidize manufacturing in Europe [and China] via refusing to adopt a VAT is long since past and that using a VAT here, possibly as an exchange for lower or no income taxes, would right our trade situation in multiple industries at once.
And, since most of our trade partners already have a VAT, their “bully pulpit” to complain about the US starting a trade war doesn’t exist ... they started it, as the saying goes, long ago. – Rolf Parta
John: Regular readers know I would like to see a VAT system in the US. I think it could eliminate or greatly reduce both income and payroll taxes. For some reason, though, the politicians who could make this happen refuse to consider the idea. They fear – perhaps reasonably – that we would end with both a VAT and existing taxes on top of it. There are ways to prevent that from happening, but it would take more vision and dedication than the current congressional leadership seems to possess.
And let me make a further point. Today’s deficits will grow even larger because of entitlement programs. The only way to get serious money, and by that I mean the trillions it will take to balance the budget or even come close, is a VAT. Let’s face it: We are going to get a VAT sooner or later – probably under a Democratic Congress and administration, but Democrats are not going to look kindly upon lowering income tax rates. A Republican administration, on the other hand, could use a VAT to completely eliminate Social Security taxes and deeply cut corporate and income taxes.
The Republican leaders in Congress currently believe that they’re going to be able to make cuts in programs and reform entitlement spending such that they can handle future deficits. Yet they can’t pass even a simple tax reform package or healthcare reform. This is the Gang That Can’t Shoot Straight.
At the beginning of the year I was really encouraged that Republicans could act and we would get major tax reform and healthcare reform and bureaucratic reform that would push out a potential business-cycle recession or worse at least three or four years. Now, they are likely to pass something they will call tax reform, but it will actually be just tinkering around the edges. Real change requires real change. Real tax reform requires real tax reform. I will openly admit that “my team” talked a good game but just hasn’t been able to move the ball down the field. I’m extremely disappointed.
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