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.
Cost inside Germany are inclusive of VAT. So German manufacturer pays to their supplier price of item + VAT. VAT is send to tax man. And when they then sell it to consumer they get to deduct from VAT they charge the amount they were charged themselves. So in the end consumer pays all of the VAT.
When you ship car to Germany, you have to charge this VAT from consumer too. But now as you did not previously pay any you charge full amount and get nothing back.
In each step inside Germany the intermediate buyer was charged more than outside where there were no VAT.
Well from peer comments and examples it seems like the difficulty is that a car company will have to pay VAT on the full value of the car if it is imported, but only end up in net paying VAT on the portion of value that they added if they didn't import the car. Wouldnt it be more fair to just charge VAT on the value that the importer is adding, rather than the entire value? I suppose they would if they could but its impractical for international trade.
It seems like most people in this thread are just using it as an opportunity to shit on Trump but I have yet to see an explanation for why this argument is dishonest. The effect of the VAT seems pretty tariffy.
>Wouldnt it be more fair to just charge VAT on the value that the importer is adding, rather than the entire value? I suppose they would if they could but its impractical for international trade.
They don't pay anything. They collect the tax paid by consumer which is N percent of the price. If N - 1 was already collected by previous parts of the chain, they only have to collect 1.
"Value added" is bit misleading. As it indicates point where taxation events happen when it is inside market. But in reality it is purely a consumption tax.
And well with imports value add happens at the border, where magically a car for example appears. So value addition of whole car's value is done. From zero to cars value in added value.
They are two separate things. There is a flat VAT on every consumer product in the EU. When I buy something in Denmark from a Danish (or any EU) shop I pay 25% to the government. If I buy something from a non-EU shop I pay 0% to the government until it gets dutied in customs and then I pay the 25%. In America you also pay taxes on goods, the difference is you have to add it on top of your price yourselves... Like that was so crazy shopping in a US store the first time... that the price listed was not the price you had to pay. I don't think it would be particularily unfair for the US to do the same, but the difference is that you don't have the 25% flat vat on your internal goods, so in order for it to be equal we would need to add a tax on US goods to balance it out.
Anyway, taxation on car varies from EU country to EU country. In Denmark you pay a ridiculous amount of money to get a car registrered. To prevent every Danish person from buying a car in Germany we tax imported cars equal to Danish cars. Then on top of that you have various enviromental taxes, which our local car dealers are obviously geared toward, but if you were to import some non-eco friendly car your taxes on it would be silly high. (I say ridiculous and silly but I agree with it). The flip side of this is that some vehicles (like Teslas) have been getting very large tax reductions because they are green. Here is the kicker though, these are for private imports. If a Ford dealership wants to sell American cars, they can do so on equal terms to European car companies. You can argue Trump is at least a little correct on cars, but the reason Danes do not buy American cars is because American cars aren't build for our roads. Somewhat ironically a lot of the countries which have the highest taxes on imports of cars are also the countries which don't produce cars. America can tax the EU sky high on cars and it wouldn't impact Denmark because we produce exactly 0 cars. It would impact Germany, which has much lower import taxes than us and is also where a company like Tesla produces the European cars which are sold in Denmark. Something which would likely be a target for EU retaliation.
The worst part is probably that it'll mainly impact smaller businesses. Our biggest exporter of anything to the US is Novo Nordisk but companies like them have production inside the US and will not be impacted by the tariffs. Mean while some specialist tiny store will likely lose a lot of money. I have a pair of Iron Ranger boots as an example. I guess Red Wing might not be a tiny company, but they don't have EU production so I would find a non-american alternative to these if we enter a trade war and there is another 15-20% added on top of the VAT to balance things out. Not that I'll need a new pair of boots for a while, but you get the point.
The reality is that if we enter a trade war, we will both lose. The Trump administration is gambling that they can pull production back to the US, and maybe they'll succeed better than Australia did back in the day. The US is certainly a big enough economy that it might be capable of doing it. It's far more likely that it'll surrender the global economic leadership to China though. It's tricky of course, because China would already have that if they decided to meet EU regulation on safety standards. The danger to the US is if BRICS manages to pull half of the world away from the dollar. If that happens there will be nothing to carry the massive US deficit, and the US is the first and only nation in the history of the world that has been capable of remaning dominant while also having a deficit. Which is solely thanks to the dollar being the world currency.
>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?
No, probably. It depends on the price of the materials you use. It's a value added tax. It taxes the value that you created.
Lets say you buy €5000 worth of steel and then make it into a car that you sell for €10,000. With a 20% VAT rate the government gets €2000 and you get €8000.
However, that steel you bought also included 20% VAT in its price (€1000). You get this money back from the government. The steel actually cost €4000 for you.
In total your profit would be €4000. Effectively, the 20% VAT applies to the €5000 of value that you created.
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If you built that Ford Fiesta outside of the EU then the "value add" is the entire price of the vehicle. But you don't have to pay VAT for the raw materials you buy, so theoretically it should end up being the same amount of profit.
You are missing the fact that the US manufacturer is paying more because the US tax system applies sales tax multiple times on inputs as they move through manufacturing steps. Raw materials like steel are often exempt even in the US, but many other business expenses are not. This is outdated approach to taxation. The entire world has moved on to VAT, which taxes only the final sale to the consumer. Foreign countries are not being unfair, as it is not their responsibility to manage the US tax system and keep it efficient - that's the job of the US government.
So let me get this straight: because the US wont let you get the sales tax you paid back like you would with a VAT, you blame the "sane" system for effectively imposing an import tax, even though there is no way for the that receiving system to know how much sales tax was paid already and deduct it properly?
I'll gladly flip that argument on its head: the US is imposing an export tariff, since everything sold from the US to Europe includes US sales tax in the process, while in the inverse, any EU company charges 0% VAT to the US.
> buy $5000 worth of steel in the US, inclusive of sales tax
Sales tax is only charged on retail sales to consumers, there is no sales tax on raw materials for production. So if material costs are the same, and sales tax and VAT rates are the same, the steel will be less in the USA, because there will be no sales tax. In your example, the steel would only be $4k in the US.
You are calling the US tax sales tax but acting like it was applied like a VAT.
Exactly. So in reality the US car was produced for less than 5k* worth of steel because the steel price in Europe includes VAT, and in the US it does not. End of story.
*This is true if the price of steel is the same in Europe and the US. It might not be, and a country or a region might have a competitive advantage. For instance a country might add tariffs on steel imports and increase the costs of manufacturing.
What you're missing would be obvious if you looked at where the money ended up, and didn't play the sleight of hand with pretending that there was just one government involved.
In the second case, a EU government has $2k, the steel producer has $4k, and the EU-based car producer has $4k.
In the first case, a EU government has $2k, the steel producer has $4k, the US-based car producer has $3k, and the US government has $1k.
It was the US government that took the money from the US-based company! That's not at all like a tariff imposed by the EU. If you don't like the US taxing US companies, the entity that can fix it is the US government. Not the EU.
Sorry Im not trying to play sleight of hand. As far as tariffs and business competitiveness are concerned, the things that matter are the price to the consumer and the profit to the company.
You seem to be saying that it is self-evidently fair that the EU end up with 2k in taxes in both cases, where in the case where it was imported there was far less happening in the EU. Why do they deserve 2k in tax revenue when the steel was rolled in the US ?
The VAT is a consumption tax, not a production tax. It's totally agnostic to where the production happened. If you want to sell something to a EU-based consumer, that money has to be paid no matter where you're from. What could be more fair than that?
Again: the difference is coming purely from the US government choosing to tax a US company. Just why is that a problem that should be solved by the EU?
You can’t equate VAT and sales tax, as the article explains. It’s an inherent property of US sales tax that it pyramids (multiplies on each intermediary sale). You would have the analogous effect if you sell the US-produced car to a US-based reseller: The sales tax on the steel is lost to you as well then, you don’t get it refunded from the sales tax paid by the US end consumer who buys the car from the reseller.
So if anything, the sales-tax system should be critized, not the VAT.
The EU import VAT has the purpose of treating EU producers and foreign producers equally, by subjecting both to the same tax rate. But you can’t blame the EU for steel being effectively more expensive in the US (if that is actually the case), similar to how you can’t blame the EU for labor costs being higher (or lower) in the US.
You seem to be saying that its fair that the EU end up with 2k in taxes in both cases, where in the case where it was imported there was far less happening in the EU.
Yes. It is. Because it is government stealing my money. After I already paid income tax. VAT is charged from me not the seller, the seller just has to move the money from me to tax authorities.
VAT is tax on my consumption. It is in essence extra tax on anything and everything I buy. Thus it is really not taking any money from the seller, but me a EU citizen.
Basically money for USA here should come from income taxes paid by workers and the corporate taxes paid on profits. And then well capital gain taxes paid for profits paid out.
> 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?
No. In both cases, the German consumer is paying the VAT on top of whatever net price you set, and that VAT goes to the German state.
>>>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.