The Border Tax Equity Act

VAT - The Solution

Congress has on three occasions (1974, 1988 and 2002) instructed U.S. negotiators as part of granting fast track authorization for trade negotiations to address the distortion through changes to the GATT (and now WTO) rules. These Congressional mandates arose after President Johnson’s efforts to gain agreement with our trading partners for changes to the discrimination against the U.S. were unsuccessful in the late 1960s. No changes have been achieved in any of the negotiations and the U.S. has agreed to packages which have left the distortions adverse to U.S. manufacturing and agriculture intact. At the same time, certain trading partners (the EU) have repeatedly attacked certain aspects of the U.S. tax system designed to reduce some of the distortions on the export side of the equation. On services, the WTO GATS does not presently contain any rules on subsidies.

With the U.S. running an ever-growing trade deficit, the country needs to have the distortions created in the rules of the trading system eliminated where identified. The United States can and should obtain the neutralization of both the taxation on U.S. exports and the massive and presently unchallengeable subsidization of exports from 137 trading partners to the U.S. as part of negotiations in the WTO (either as part of the Doha Development Agenda or separately). At the same time, the U.S. should ensure that U.S. service providers do not face the type of discrimination that has been allowed to exist against U.S. goods producers for the last fifty-one years.

But the time for achieving a rebalancing of the rules of trade should not be open ended. The U.S. has tried for some forty years to have a critical imbalance corrected. Our trading partners must understand that these types of distortions are simply unacceptable and must be addressed expeditiously. A date certain for agreement should be set. If agreement cannot be reached by that time, legislation should call for the neutralization through the imposition of a charge on imports equal to the amount of the rebate received from the trading partner on exportation and the provision to U.S. exporters of a rebate equal to the amount of value added tax that is imposed on importation into a trading partner. The tax assessed and the rebate provided should be adjusted to account for any state or local taxes that are added on importation into the U.S. or rebated on exportation from the U.S.

The global trading system is intended to reduce or eliminate trade distortions and trade barriers. Over time, tariff rates applied by many countries in the trading system have been dramatically cut. Export subsidies were banned on industrial goods by 1955 and in more recent years have been capped, reduced and in the future will be banned on agricultural goods. Yet, the total costs on imports in many countries, including the European Union, today are as high or higher than they were at the beginning of the GATT in the late 1940s. This remarkable result flows from three facts: (1) the ability of trading nations to impose indirect taxes that are imposed on domestically produced goods on imports at the border; (2) the increase in the number of countries using indirect tax systems; and (3) the increase in the rates of such indirect taxes for some countries, including those of the European Union, at a level in important cases roughly comparable to the tariff reduction commitments undertaken within the GATT and now WTO. The U.S., alone among major industrial countries, has no national indirect tax system in place. One hundred thirty-seven countries, accounting for 94% of U.S. imports and taking 94% of U.S. exports of goods in 2005, used a value added tax (VAT) with rates ranging up to 25%.

At the same time, countries that use indirect taxes are able to rebate such taxes on exportation without such rebates being viewed as subsidies under the GATT and now WTO. This result flows from a discriminatory distinction added in 1955 – 1960 in the GATT which first prohibited export subsidies on most non-agricultural goods, then defined export subsidies as including the rebate of direct taxes while at the same time stating that rebates of indirect taxes were not only not export subsidies but not subsidies at all! At the time of the GATT’s consideration of these issues, various European countries with indirect tax systems appear to have pushed for the distinction. Rates of border tax adjustment were reportedly quite low in the late 1940s, as little as 2 – 4% according to some information. Today, 137 nations have adopted VAT-type systems with standard VAT rates that range up to 25% on the landed cost, duty paid price on imports into their markets.

The combined disadvantages to U.S. producers, farmers and service providers (exports face a tax upon importation into 137 countries; import competition from 137 countries is relieved of some of the tax obligations through rebate upon export) are estimated at around $380 billion each year (and growing), with a nearly $300 billion disadvantage for U.S. manufacturing and agriculture. This is an enormous problem for which no solution has been found for four decades.

Businesses, prior Administrations and the Congress have repeatedly recognized the disadvantage that the rules agreed to by the United States as part of the GATT impose on U.S. companies and their workers. While prior Congresses have explored whether the U.S. should itself adopt a value added tax-type system to reduce or cancel out the distortions created by the U.S. being the major trading nation without such a system, adoption of a VAT in the U.S. has been opposed by large numbers of members from both parties either because of the concern of increasing taxes or because of the perceived regressive nature of VAT systems. Thus, offsetting the problem through U.S. adoption of a VAT has proven not to be practicable and should not be viewed as a viable option at the present time.