An Overlooked Cause of Our Trade Imbalances

If other countries were competing with us on level playing field, I think that we could count on the quality of American innovation, management and labor to produce competitive products in any and all areas. We would not be concerned about protecting our industries and jobs. However, we are not competing on a level playing field. In fact our competitors have financial and tax advantages over our companies that range from 15% to 30%. Our quality and cost efficiency cannot overcome the built-in advantages that Japanese, Chinese, European, even Mexican and Chilean governments have designed for their companies.

Our corporate taxes are assessed on income; all income and all expenses are taken into account in order to calculate the tax due to the federal government as well as to State governments.
Our competitors may have some corporate income tax, but the rates are lower than we apply and the systems are often easy to abuse, so that few successful foreign companies actually pay taxes on income. Instead of relying on income tax, their governments collect Value Added Tax. The VAT taxes vary from 16% to over 20% depending on the country, calculated on the sale price of goods. Companies get a credit for all VAT paid on purchased goods that they then use to lower the tax owed. Where this impinges on American business and therefore on American labour is when the companies in countries with VAT, export to us here in the USA. They get a credit for all taxes paid from their governments in cash. So their products (having no tax load at all) come here and compete against ours, which do have a tax load. In fact, the more successful the US company is, the higher the tax load carried by its products. So, we are giving an advantage to our competition, which has nothing to do with free trade.

Something similar happens when American companies export. Our products carry a full tax load; there is no tax refund for exporters. OK, that is fair, but when our products arrive in Japan, China, Europe, etc, the full local VAT must be added to their price. Therefore our products carry income tax and VAT load, while the local competitor carries only the VAT load. We have a large disadvantage in both cases, import and export.

Solving this problem will be a big step towards solving the current trade imbalance. American labour will be more secure and our economy will be healthier as it returns to producing goods more than being a service economy. So how to solve the VAT vs. Corporate Income Tax problem?

One way to do so is to play by our competitors’ rules. Drastically reduce (or eliminate) corporate income tax and apply VAT tax nationally. If we play the game the same way that our competitors do we will have eliminated the 15 to 20% advantage that they have and we will again be competitive, especially given how weak the dollar is.

The problem is that VAT is a regressive tax that is most felt among the poor. If we give the poor credits the system will become tremendously complex and will cost a fortune to administer. The revenue that it generates will be limited as well if we give credits to the poor, and worst of all this tax will breed illegal activity. Everywhere that there is VAT, there is also a parallel black market of undeclared sales to avoid the tax.

A better to even the playing field is for us to get out of all of our "free trade" agreements and establish 12% across the board tariffs on everything from everywhere. This is almost anathema in today’s America. We have been trained to bark on cue that “free trade” is good for everyone. Well, look at how all the manufacturing jobs have migrated from the Midwest to China, look how Wal-Mart went from selling American products to selling out America. “Free trade” is beneficial to the very rich and not to you. The global economy helps 1% of Americans, and they have grabbed the reins of all the news media to make people believe that "free trade" is good for us all. It isn't

If we establish 12% across the board tariffs we can overcome the advantage accrued by our competitors’ VAT based tax system. We would need to make certain that no special interests could manage the system to their advantage (which always means against the average guy’s interests). So the law would have to be bulletproof to charge 12% on EVERYTHING imported from EVERYWHERE. Tariffs are immanently fair because it is a tax that people pay voluntarily. No one must pay tariffs if they buy products and services made or performed in America.

If we go back to this most traditional American form of taxation we will prosper.