Part I: The Foreign Value Added Tax

The value-added tax, or VAT, is the most widespread and successful taxation system in use around the world today. More than 140 nations utilize the value-added tax system as a means of building government revenue.

Unfortunately, the foreign VAT also acts as a means of blockading American exported goods to these nations. The value-added tax is plugged on to every good and service inside their economy, making their own domestic goods cheaper.

Every time a foreign nation joins the World Trade Organization it almost always replaces their old import tariffs with a consumption tax – almost always in the form of a VAT. Their foreign consumption tax acts just like a tariff, but it does so within the legal confines of the WTO and other international accords.

The only developed economy to have completely missed the bandwagon is the United States. Even Canada and Mexico maintain and operate VAT systems, all while still being full members of the free trade zone created by the North American Free Trade Agreement. Canada charges U.S. producers an access fee for their economy. Mexico charges U.S. producers an access fee for their economy. The United States has nothing of the sort.

This lack of border-adjustment is a major part of an overall system that keeps America uncompetitive in the international marketplace.

In 2009, each of the top trading “partners” of the U.S. utilized the value-added tax. Canada (5 percent), China (17 percent), Mexico (16 percent), Japan (5 percent), Germany (19 percent), the United Kingdom (17.5 percent), South Korea (10 percent), France (19.6 percent), Taiwan (5 percent), and Brazil (ranges from 5-25 percent) each carry a VAT.

When an American good is sold in those countries the cost of the good is marked up by whatever the VAT demands. After paying to produce and ship the good, we must then pay to simply get the good through customs and into the hands of our buyers. At the same time, those same nations can easily export goods to the United States with zero additional charges at the border.

The value-added tax allows nations to build revenue through taxation, and thus guarantees their financial stability, but it builds revenue on foreigners as well as domestic residents. In the U.S. we tax our own citizens and then ask foreign countries to loan us the difference. Everywhere else in the world they tax their own citizens and then charge foreign corporations for entry access to their market.

U.S. companies annually pay an accumulative average of more than $550 billion to these foreign VAT systems. This money goes into the coffers of foreign governments; it pays for their bullet trains, alternative energy plants, universal health care, and free/subsidized access to a university education. Every year we in America continue to ignore our own needs in these areas due to lack of funding.

For the United States had 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 in the economy. You then replace those lost taxes with a national consumption tax and build revenue on the things that people buy. In 2009 the United States imported $1.9 trillion worth of goods and products. If we had in place just a 10 percent VAT we could have raised $190 billion from those imports.

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Part II: America Needs a Domestic VAT

It is self-evident that America’s tax system is inherently unfair. We have a system of so-called “progressive” income taxes that make people pay different amounts according to their wealth and earnings. Based on our current system, the marginal tax rate increases from 10 percent for the lowest earners, and reaches 35 percent for the top income bracket.

After accounting for deductions, subsidies and rebates many of the lowest earning individuals pay very little or virtually nothing. At the same time, after accounting for particular tax loopholes many of the top earners pay very little as well. The people in the middle are often left shouldering the burden without much assistance.

A nation needs taxes to survive; their revenue is a resource that we simply cannot live without. Taxes pay for schools, roads, police, national defense and any number of other programs which modern society depends on for survival.

Perhaps the best example in use anywhere today is the value-added tax system (VAT).

Instead of taxing individuals before they consume, we could shift some of that income burden into another area. The value-added tax, or VAT, taxes consumption rather than income. The value added tax, without a national income tax, would leave more money in citizen’s paychecks, thereby allowing more money to be efficiently distributed throughout the economy.

Under our current income tax structure, illegal workers pay nothing, while receiving many of the benefits that others’ income taxes pay for. Under a VAT system everyone would pay into the collective pool with every purchase. Whether buying a mansion, a football, a car or a computer, the VAT would be collected.

Currently over 150 nations utilize some form of a value-added tax system to the detriment of the U.S. A VAT works like an export subsidy for foreign exporters and an import tariff at the same time, which places the U.S. in a comparatively most uncompetitive situation due to the fact that we do not utilize the VAT or any countervailing measures.

In 2006, foreign nations collected VAT rebates totaling $218.2 billion while American companies were forced to pay $122.4 billion in taxes due to the VAT. Each year the VAT imposes an average of $290 billion burden on our goods exported and another $85 billion on services. This encourages outsourcing as our companies move offshore in order to circumvent the foreign VAT and reap the same benefits as the companies producing in those nations.

In 2005, the tax was applied to 94 percent of our imports and exports. In EU countries alone in 2001, the average foreign VAT rate applied was 19.4 percent, coupled with a tariff average of 4.4 percent- this levies a total tax of 23.8 percent on American goods and services.

Until the problem is remedied, American businesses and American tax payers will continue to compete on an uneven playing field.

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Part III: U.S. VAT Gaining Domestic Appeal

In the fourth quarter of 2009, two prominent figures with very close ties to the White House have came out and publicly endorsed the idea of instituting a domestic value-added tax to rein in the long-term budget deficit.

During an interview on Bloomberg Television’s “Political Capital with Al Hunt,” John Podesta, former White House chief of staff under Bill Clinton and co-chairman of President Obama’s transition team, floated the idea of a VAT, saying that raising taxes on the wealthy and cutting spending would not be enough to rein in the deficit.

“There’s going to have to be revenue in this budget,” he said.

Podesta said that not only would the VAT raise the necessary revenues to bring the budget under control, but it would also encourage savings, level the playing field with America’s trading partners and increase the competitiveness of our industries.

He did acknowledge that due to the fact that the tax is regressive, it would have to be tweaked to ensure that it did not unduly burden lower and middle-class tax payers. He said that could easily be done by exempting certain products and using some of the revenues gained through it to help support low-wage workers.

The former White House chief of staff is also the head of the Center for American Progress, a liberal think tank with close ties to the Obama administration. On Wednesday, the group held a forum on tax policy attended by dozens of economic policy experts. There, the idea of a VAT was discussed as well.

In addition, the liberal think tank also released a report detailing the need to raise taxes in order to restore balance to the ballooning budget deficits.

“In all seriousness, responsible people know that additional revenue has to be part of the mix even if they believe in lower taxes in general,” the report states. “And those who believe that government investments and spending are critical to our economic and social well-being, and favor progressive taxation, recognize that tax increases on the wealthiest and corporations are not going to solve the whole problem.”

Separately, in an interview with PBS’s Charlie Rose, former Federal Reserve Chairman and member of President Obama’s Economic Recovery Advisory Board, Paul Volcker also suggested that a VAT may indeed be necessary. Members of the Economic Recovery Advisory Board will present the president with a list of options to change the tax code in early December.

“My tax philosophy would be if we can’t deal with our expenditure loan with the present tax system, we’ve got to think about changing the tax system,” Volcker said. “When you think about changing the tax system, given the problem that we started out talking about, you’ve got to talk about some tax that hits consumption.”

“As progressives we need to debate the policy merits and likelihood of enacting a range of options — including designing a small and more progressive value-added tax, changes to the corporate tax code, and taxing upper income earners beyond reversing the Bush tax cuts,” Podesta said.

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