POST-GAZETTE - Res Publica

The Most Boring Topic in the World

by David Trumbull

April 6, 2007

News item:

The oldest manufacturing company in the United States, created by the legendary Paul Revere in 1801, is in trouble. Revere Copper has announced plans to close its New Bedford, Mass., copper plate and sheet mill, laying off 85 workers at a facility that has been fabricating copper continuously since 1862.

Revere can no longer compete because of health care and energy costs, foreign currency manipulation, and value-added taxes adopted by virtually every one of America's competitors, said Revere Copper chairman, president and CEO Brian O'Shaughnessy in a recent press interview.

We hear daily about health care and energy costs. And Chinese currency manipulation has gotten a lot of coverage in the financial press. But what's the value-added tax got to do with it?

When, as at a recent industry association meeting, someone suggests we talk about the value-added tax, I prepare for my eyes to glaze over. I've known few men who could get excited other the minutia of tax policy --they don't make for good company.

Image my surprise at finding that the subject is fascinating. I had no idea how much tax policy cripples our American manufacturing competitiveness. The "VAT Disadvantage" works out to about $300 billion annually of penalty on U.S. manufacturers.

It all has to do with the international trade rules put in place by the World Trade Organization (WTO). The value-added tax is a broad-based consumption tax on goods and services. The WTO rules permit the 137 nations that employ an indirect tax, such as the VAT, to rebate those taxes on exports, while also levying them on imports. The U.S. uses a direct tax system --taxes on income or on owning property. Under the WTO rules, no portion of these taxes may be rebated. And the U.S. does not impose on imports a fee equivalent to these direct taxes.

The result: a U.S. company, such as Revere Copper, pays corporate income tax and property tax in the U.S. If Revere exports its product to, say France, they will pay a 19.6% French VAT in addition to any import duties. In other words, Revere will pay the full amount of both the U.S. and the French taxes. On the other hand, when a company in France sends its products to the U.S., they are not subject to any U.S. taxes in addition to our relatively low (typically not above 10%) import duties. Additionally, the government of France will rebate to the exporter the French VAT. Net result, the French company pays neither U.S. nor French tax.

Every country the U.S. does significant trading with has the VAT. The amount of VAT refund --government subsidization of exports-- is $201 billion a year. The VAT imposed on U.S. exports to those countries is $93 billion a year.

This is a tremendous disadvantage placed on American companies. Tax policy, dull as it may be, may also be at the center of many of our economic problems. Of the magnitude of the VAT disadvantage, O'Shaughnessy said: "The surprising thing is that the benefit of VAT taxes extends to health care. The irony is that the American workers are not only carrying the burden of having their own medical costs embedded in the work they produce, but in other countries as well because part of the VAT tax goes to pay for the health care of the worker they're competing with. Think of the irony of that!"

Next time: The Border Tax Equity Act.