U.S. Left High and Dry Without REAL Tax Reform

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One of the main reasons our Free Trade Agreements (FTAs) do not work is due to the fact that other countries immediately implement a value-added tax system after joining the World Trade Organization (WTO), while the U.S. still has not implemented a VAT. Free Trade Agreements either eliminate all or most of the tariffs between two countries. Once a country joins the World Trade Organization (WTO) that country then almost immediately implements a VAT system or raises their VAT to replace their tariffs. The VAT acts just like a tariff but is entirely in line with WTO standards. The result of this system is that American exports are essentially economically blocked by other nations.

As the image below shows, the number of countries that use a value-added tax (shown in red) is overwhelming.

121220-VAT-map

(Image by the Coalition for a Prosperous America)

 

More than 140 nations utilize the value-added tax system as a means of building government revenue. The value-added tax is plugged on to every good and service inside a country’s economy, making the country’s own domestic goods cheaper and discouraging imports.

Foreign companies can export to our country tariff-free, but with a VAT system in place they essentially charge U.S. companies a backdoor tariff. U.S. companies annually pay an accumulative average of more than $550 billion to these foreign VAT systems. This money goes into the reserves of foreign governments: it pays for their bullet trains, alternative energy plants, universal health care and free/subsidized access to university education. Every year in America we continue to ignore our own needs in these areas due to lack of funding.

For the United States to have a value-added tax, we would first need to lower income taxes and corporate taxes, leaving more money in the pockets of companies and individuals who can then go out and buy things, stimulating the economy. Replacing that tax with a VAT enables a national consumption tax that builds revenue on both domestic consumption and foreign imports.

With a VAT in place we could drop the corporate tax to 12%, not collect an income tax on the first $100,000 earned (eliminating the income tax for 125 million Americans) and still bring in the same revenue annually the government is receiving now while offering rebates to American exporters.

The VAT is less harmful to the natural order of the economy. As a broad-based tax on consumption it creates less economic distortion per dollar of revenue than any other tax—certainly much less than the income tax. Given our current deficit and debt, either income taxes need to be raised or we must re-hash our system. An increase in income taxes would be far more detrimental than the implementation of a value-added tax. A VAT should not be placed on food, children’s clothing or housing, or it could be rebated on the items for the poorer classes. However, an increase to the income tax would raise the cost of living at every income level and this is something Americans just can’t afford.

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