Is VAT a villain?

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Tom Wheelwright does not like tariffs. But he sees the current interest in tariffs on the part of the Trump administration partly as an attempt to correct the imbalance caused by value-added taxes imposed by our trading partners.

“The reason there is a tariff war is because the way the U.S. tax law is structured, imports are heavily favored compared to our exports,” said Wheelwright, a CPA and CEO of WealthAbility. “All of our trading partners have a value-added tax — think general sales tax — that applies to imports and not to exports. So when we export something to them, they tax that import with a value-added tax in addition to an income tax. We have an income tax but no value-added tax.”

“Although we do have state sales taxes, until recently companies from outside the U.S. have not been required to pay even that. But the Supreme Court decision in Wayfair will change that,” he observed.

“So there is a basic inconsistency between the way we tax imports and the way the rest of the world taxes imports,” he said.

“Also consider that goods in the U.S. are fairly inexpensive compared to the same products you purchase in Europe or China. The exact same goods — same brand, same model, etc. — are typically more expensive in China or Europe than they are in the U.S.,” he said. “Keeping prices low has been a priority of U.S. economic policy. Obviously, this changes with tariffs in the picture. The alternative of a VAT would mean higher prices on both imports and U.S.-produced goods, which is not necessarily a bad idea.”

“A value-added tax would never start a trade war and could end the current trade wars because the countries receiving the tariffs have value-added taxes of their own,” he continued. “China is currently at 16 percent, but is scheduled to go down to 13 percent this year. Europe’s value-added taxes are even higher.”

The VAT is a consumption tax, but we’re already moving in a direction away from income tax and toward taxing consumption, according to Wheelwright.

“If you look at all the deductions that were eliminated in the Tax Cuts and Jobs Act, and then look at bonus depreciation and Opportunity Zones for investors, the result is that as long as your income is reinvested into business it’s not taxed,” he said. “The only income that ends up subject to income tax is that portion used for personal consumption, so VAT is not that big a difference.”

Of course, one of the problems with new taxes is they keep piling on top of the existing taxes, and never go away. “Europe just kept adding tax after tax, to the end that most countries have a total rate around 70 percent,” he expanded. “That’s why there are so many tax cheats there — once the rate is above 40 percent, it creates a tremendous incentive to do something about it.”

“I’m not advocating a VAT,” Wheelwright said. “But a VAT and a tariff are essentially the same thing. A tariff is more tactical because it is directed at a particular industry or country, while a VAT is more strategic.”

“There is a whole list of good reasons not to have a VAT, but it can’t be ignored that the consequence of not having a VAT creates the potential for tariff and trade wars,” Wheelwright said.

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Tariffs Sales tax International taxes