Tuesday, February 28, 2017

A brand-new bad idea?

According to both Treasury Secretary Mnuchin and a White House spokesperson, the Administration is considering a "reciprocal tax on countries that tax American imports." This appears to mean retaliation against the use of a VAT that taxes domestic consumption, insofar as such consumption is of imported goods from the US.

So, the use of a tax system (the VAT) that is trade-neutral would trigger "retaliation"? How exactly? Via tariffs on countries with VATs, with the tariff level pegged to their US imports and/or their VAT rates and/or their US trade balance?  After all, we can't "retaliate" just by having our own VAT if the tax level on domestic consumption depends on (a) whether it's an import and (b) the country of origin.

I would like to hear anyone with even a rudimentary understanding of economics try to defend such a proposal. (Might this be in Kevin Hassett's future?! Suppose he is unable to talk them out of it.)


Stuart Levine said...

I can't figure out whether the Trump people don't know how the economics of a VAT works or whether they are simply lying about VAT? (Of course, this same question could be asked about virtually every policy issue that the government is presented with.)

GSo said...

One reason could be that the name "Value Added Tax" is one of the most clever deceptions created in the tax world. Even among people working full time with VAT I find quite a few who believe it is a tax on value added and that it is paid by businesses. They do not understand that businesses are only step by step collectors of a consumption tax paid by you and me. If you take "VAT" literally, the states outside the US add a tax on value added by US businesses when the goods are imported. You know better and I do - but those who named it "VAT" should take most of the blame for the confusion we see. (was it the French who came up with it?)