The Trump administration has once again floated the idea of “reciprocal” tariffs on foreign countries. While it is unclear what formula the administration will use to determine what is “reciprocal,” the intention of responding to foreign charges—real and perceived—is clear enough.
In the past, the administration has made general assertions about different tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters.
and nontariff barriers that American exporters face that should be rectified by “reciprocal” US tariffs. Trump commonly mentions that the EU charges a 10 percent import taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
on US vehicles while the US only levies a 2.5 percent tariff on European cars coming into the US. Though one can certainly find examples of higher trade barriers abroad, the overall tariff gap between the US and its trading partners is relatively minor—and any increase in US tariffs will ultimately be paid by US businesses and consumers.
However, when discussing trade with the EU specifically, White House deputy chief of staff, Stephen Miller, added a new policy grievance to the mix: value-added taxes (VAT).
“Did you know when you ship a car from the US to Europe, if they let it in at all because they have many nontariff barriers, between the VAT and duties, that car is taxed at 30%? The German car—or a European car sent the America is taxed at 2.5%—or basically 0.”
His statement assumes that a VAT discriminates against American car exports like a tariff, and conversely, that the VAT rebate provided to European car producers exporting to the US constitutes a subsidy and the car then simply faces a tariff and no VAT. (It is worth noting that both a domestic automobile and a European car sold in the US would face US state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
.)
While it may seem like a compelling political argument to justify across-the-board tariffs on the EU, it instead reflects a complete misunderstanding of what a VAT is and how it works. Worse, it misplaces the blame for a lack of US competitiveness on the European VAT instead of reevaluating the flaws of both the US federal and state tax systems.
What is VAT and how does it work for exported goods?
VATs are border-adjusted, meaning they rebate tax on exports and impose tax on imports. Despite the appearance of subsidizing exports and punishing imports, however, a border-adjusted VAT is trade neutral. A border adjusted tax leads to currency appreciation for the imposing country, which would make it cheaper to import goods, more expensive to export goods, and thus would cancel out the apparent benefits of the tax on imports and the rebate on exports.
If there is a complaint to be made about tax policy and implications for US competitiveness in Europe, it is about uncompetitive state sales tax structures in the US system that yield what is known as “tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly differen
30 Comments
surfmike
Well, because we don’t have a VAT, it is, isn’t it? The article puts the blame on the US sales tax system. But regardless, US exporters to the EU end up paying more taxes than domestic EU producers.
> Europe’s VATs are not tariffs and are not subsidizing European exports. Instead, US states’ poorly-designed sales taxes are harming their own businesses’ competitiveness—whether they’re selling down the street, across state lines, or around the world.
vages
I really liked the critique of the US sales tax. I did not know such taxes still existed.
cjs_ac
> Note that, while a VAT is imposed at every stage of the process, the net effect is to apply the rate one time to the final sales price. The tax is collected in increments (on the “value added” at each stage), but unlike with a pyramiding sales tax, it does not double tax inputs. The VAT and ideal sales tax share an identical tax base and, if imposed at the same rates, yield identical collections.
The VAT is important in Europe, because if a product is manufactured in many countries, each of those countries gets a share of the tax revenue.
devuo
Comparing VAT to an Import Tax is unbelievably stupid.
seydor
Of course it's not.
In fact the complexity of vat in europe is a disadvantage when dealing with things like small transactions. We have resorted to using an American company as a merchant of record to manage the complex invoicing for us, even if they keep a percentage of the sales.
coolgoose
I find it funny that a lot of people can't read the article, so here's an ELI5 case on why VAT isn't discriminatory from our lovely Franch LeChat.
Going to add TLDR for people: Vat applies to all shit on the market, regardless of where the fuck you produced it.
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The Value Added Tax (VAT) in Europe is designed to be a consumption tax that applies equally to both domestically produced goods and imports. This means that whether a product is made locally or imported from another country, the same VAT rate is applied when the product is sold to the end consumer. This approach is intended to create a level playing field, ensuring that local producers do not have an unfair advantage over importers, and vice versa.
The reason VAT is not considered discriminatory against imports is that it is applied at the point of consumption rather than production. When goods are imported into the EU, they are subject to VAT at the same rate as similar goods produced within the EU. This ensures that the tax burden is the same for both local and imported products, promoting fair competition. Additionally, businesses can often reclaim the VAT they pay on purchases, including imports, which further neutralizes any potential disadvantage.
However, it's important to note that while VAT itself is not discriminatory, other factors such as customs duties and regulatory standards can still affect the competitiveness of imports versus local produce. These factors are typically addressed through separate trade policies and agreements rather than through the VAT system.
grg0
Is Stephen Miller really that stupid, or does he have an agenda to gut American business? One really has to wonder if he's actually a spy from an adversarial nation.
markhahn
egads. stephen miller is another festering embarrassment to the country.
lucasyvas
This is going to be used as the basis of the tariff. It doesn’t matter if the Trump administration is correct. Take it from a fentanyl-slinging Canadian – they’re either dumb or grasping for straws / full of shit.
They are telling you tariffs are coming and they have identified the scapegoat to communicate to their voter base.
That’s all you need to know. I’m honestly not sure why anyone is bothering discussing it since it’s a waste of time.
If you are debating it, it means you are already behind the curve of understanding of where it’s going.
loxodrome
The VAT is France is applied to just about everything, not just imports, and is typically 20 fucking percent. You’re right, it’s not discriminatory. It’s confiscatory.
bikson
Let's wait until they learn about public health care.
alexey-salmin
> Despite the appearance of subsidizing exports and punishing imports, however, a border-adjusted VAT is trade neutral. A border adjusted tax leads to currency appreciation for the imposing country, which would make it cheaper to import goods, more expensive to export goods, and thus would cancel out the apparent benefits of the tax on imports and the rebate on exports.
This isn't even remotely true
ReptileMan
From the point of view of a US company VAT and Tarif are indistinguishable – they make exports 20% more expensive, so US company export less.
Taniwha
If you're going to start equating VAT (essentially sales tax) with tariffs you open the whole nightmare can of worms that is US sales tax to the rest of the world – for those not living in the US every state, and in some cases every county has its own sales tax rate ….
MaxGripe
It's important to understand that (in simple terms) businesses do not actually pay VAT. VAT is a tax that ultimately burdens consumers, not companies. When a business purchases a product that includes VAT, it initially pays the VAT amount. However, when the same business later issues invoices for its own products or services (also including VAT), it is required to remit the VAT to the tax authorities minus the VAT it has already paid on its own purchases.
In practice, this means that if you sell something with VAT to a company, the VAT component is irrelevant to that company. This is, of course, a simplified explanation, but fundamentally, that's how the system works.
4ndrewl
Logic doesn't matter, these are all power plays. Truth be damned.
Just like Trump exclaiming that it's "unfair" that Europeans don't buy American cars – we don't have big enough streets and fuel is 4 x as expensive.
Alcatros552
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jujube3
Even if the VAT tax ends up being the same for imported goods versus domestically produced goods, that is still a discriminatory tax against the import. The reason is because the imported good already paid taxes in the country it was produced in.
It makes sense for a German car manufacturer to pay taxes to Germany, since the German state provides it with services (roads, police, infrastructure.) It makes no sense for an American car manufacturer to pay taxes to Germany since it gets no services from Germany. (And no, earning the "privilege" of unloading the car from the boat isn't worth 20%.)
If the EU has an interest in making this fair, they can remit the sales tax they collected to the US government. Or they can just accept that this is a discriminatory tax and may incite another discriminatory tax on the US side.
gotoeleven
Unless I missed something, this is the entire explanation of why the VAT isn't like a tariff:
>>>VATs are border-adjusted, meaning they rebate tax on exports and impose tax on imports. Despite the appearance of subsidizing exports and punishing imports, however, a border-adjusted VAT is trade neutral. A border adjusted tax leads to currency appreciation for the imposing country, which would make it cheaper to import goods, more expensive to export goods, and thus would cancel out the apparent benefits of the tax on imports and the rebate on exports.
The rest of the article is just about how US sales tax sucks. So VATs are not like a tariff because they put pressure on currencies to adjust in value? Huh? Can someone explain what taxfoundation is talking about?
If I make two ford fiestas, one in the US and one in Germany and they are otherwise identical–identical labor costs, identical shipping costs, etc etc–do I have to sell each ford fiesta in germany at a different cost to the consumer (so including all taxes levied on the consumer) for me to make the same profit on each fiesta? If so, then I dont see what is dishonest about likening the VAT to a tariff.
bigbacaloa
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rayiner
> Trump commonly mentions that the EU charges a 10 percent import tax on US vehicles while the US only levies a 2.5 percent tariff on European cars coming into the US
That seems pretty significant no? Why do we need German cars anyway?
diegocg
The Trump team is not stupid and understands that the Vat tax is not discriminatory. The problem is in their logic and propaganda – "USA has a trade deficit because everyone is taking advantage of us".
Then they look here at the EU and it turns that it has very low tariffs for the US, and the trade still has a large deficit. That goes against everything they say, so what excuse are they going to use against Europe?
They are not going to admit that their logic doesn't follow problem is elsewhere. And they know perfectly well that because the Vat tax is not a tariff, and because EU governments depend on the revenue they get from it, it is impossible for them to get rid of it. They really want these tariffs just because that's what they believe, that tariffs are 100% good, the reasoning doesn't matter
bitshiftfaced
> If there is a complaint to be made about tax policy and implications for US competitiveness in Europe, it is about uncompetitive state sales tax structures in the US system that yield what is known as “tax pyramiding.”
The average state sales tax is probably less than half the average European VAT, so even when you double tax, state taxes are likely still more competitive.
> If a European resident orders from a US retailer, they do not pay US sales tax, just like a US consumer can obtain a VAT rebate on purchases of European products. Neither is a subsidy. These are simply consumption taxes falling on the consumer.
I wonder how often the US consumer actually gets a VAT rebate on their imported purchases, or how many US consumers are even aware of this.
surfingdino
VAT is a complex system that encourages fraud, which encourages expansion of tax collection and investigation forces. It is also treated differently from income tax. As any tax advisor in Europe will tell you, disparities in VAT reporting and payments/claims are treated with more suspicion by the tax authorities than similar issues with income tax. It is sometimes called a 'punitive tax', because the default behaviour of tax authorities is to fine you.
The cost of compliance is also prohibitively high, even if you find an agent who will deal with various EU members' tax authorities, some (hello, France and Germany!) require suppliers to register and report/pay directly. It is a Byzantine system that's designed to stop growth, exclude small businesses, and entrap taxpayers.
As a European, I would love for it to go to hell and never come back.
rattlesnakedave
When EU manufacturers sell products to other EU countries, they get their domestic VAT rebated, pay no tariffs, and then charge the destination country's VAT. When US manufacturers sell to EU countries, we have no VAT to get rebated, must pay significant tariffs (often 10%), and then charge the destination country's VAT. The end result is US products face a significantly higher total tax burden in EU markets compared to EU-made products, while EU products entering the US face much lower tariffs (often just 2.5%). You can explain the technical mechanics of VAT all day long, but it doesn't change this basic mathematical disadvantage for US exporters. Telling us we "just don't understand how VAT works" is condescending and deflects from addressing this real competitive imbalance.
Ekaros
VAT is paid by consumers. If I buy locally I am charged the VAT, as we are sensible place it is included in to the price. So I don't have to do mental math every time what is 25.5% on top of 13.37€…
But if I import something myself I need to pay the VAT (and possible tariffs) on the price I paid and shipping. And the handling that posti here charges… So in the end I am paying it.
Ofc, making your customs to handle each package separately each time is sub-optimal so with large enough entities there is more automation and rules. But still I am one that pays for it as consumer.
dboreham
If you're american just perform a global replace of "VAT" with "sales tax" and move on. VAT is a bit better than a sales tax because businesses get to "deduct", logically, the tax they pay on goods they buy (mostly) from the sales tax they collect from their customers.
ltbarcly3
I love that the example VAT is 5% in this article to show that 'sales tax with pyramiding' can actually be higher, as much as 6.5% in the example. The sales tax where I live is actually 5%. The standard VAT in the UK is 20%!
firesteelrain
Here is the US viewpoint.
VATs offer an unfair competitor disadvantage for US companies engaged in international trade.
US relies primarily on corporate and income taxes. This creates an asymmetry in taxation that affects trade. When US companies sell goods abroad, they don’t get a tax refund because the US has no VAT.
Trump is partially right that US companies face an additional tax burden that foreign companies avoid which he essentially equates to a hidden tariff.
But because the US does not have a similar VAT system then it puts the US at a disadvantage.
We can debate the wisdom of reciprocal tariffs but he clearly wants production brought back here and for Europe and other countries to stop taking advantage of the US. So he is taking measures he believes will address that.
jimnotgym
For a bunch of supposedly smart people there is some really profound misunderstanding of European VAT on this thread. I was going to put it right but I can't be bothered with the pedantic armchair experts. I'm in Finance at a large multinational, and I'm responsible for over $100m of trade in goods across the world. I'm going to state the facts and armchair pedants be damned. My business pays no VAT. I reclaim all import VAT and any other purchase VAT. I can't reclaim import duties (tariffs). Therefore VAT is not a tariff. The end.