Germany Uses VAT for Export Competetiveness. We Don’t.


The debate over potential U.S. consumption taxes is still immature.  Its a high vs. low tax debate.  Its a regressive vs. progressive debate.  Those are important points, but have long been resolved in the 150+ other countries that include a VAT in their tax mix.  The proper use of a VAT does not mean a net tax hike, does mean a net progressivity change, BUT does allow very positive trade competitiveness results.

Germany is an EU country with a progressive tax system.  They rely heavily on the VAT in their tax mix.  Germany is the biggest net exporter in the world in relation to its GDP.

They consistently raise the VAT.  Why?  To gain export competitiveness.

Germany raised its standard VAT rate in 2007 to 19%, with is now over 2% below the EU average VAT rate. This rise was used to finance a cut in employer taxes and help Germany gain export competitiveness.  Since then, many other EU countries have followed suite, including the UK, Italy and Spain.  France recently announced similar plans, although its planed VAT rise was only from 19.6% to 20%.

An increased VAT does several things.

* imports are part of the tax base, i.e. imports fund the domestic government;

* exports receive VAT refunds, so they are cheaper;

* allows reduction of other taxes, which is why other countries’ corporate tax rates, for example, are lower than the in the U.S.

Twenty one percent of China’s national government revenue is from border taxes.  When imports pay over one-fifth of the taxes, the reduces the burden on domestic citizens and businesses, and enables them to subsidize exports in several ways including VAT rebates and other means.

The bottom line is that a VAT is a powerful tool to use for trade competitiveness.  It is a tool the U.S. has thus far chosen not to use, because we think too simply about trade.  We need to think strategically.  Other countries have a strategy… we don’t because we’re dominated by free trade utopians as well as the elementary school high vs. low tax debate.

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