Could VAT trade zones boost American manufacturing?
The New America Foundation recently proposed an interesting means of revitalizing American manufacturing— adding Value-Added Tax (“VAT”) rebates to U.S. exports. International trade experts Gilbert B. Kaplan and John C. Taylor explain that “exporters of goods from the United States face an enormous disadvantage every time a U.S. product leaves our shores” because unlike other countries, U.S. manufacturers do not receive a rebate for VATs (the income tax paid with respect to that product) when they export goods.
The U.S. is unable to collect VAT rebates because of a provision included in the General Agreement on Tarriffs and Trade (the “GATT”) which is also recognized by the WTO. Kaplan and Taylor argue that this provision has been extremely detrimental to the U.S. economy:
“The economic effect of this divergence is enormous. It means, for example, that when a U.S. pipe company ships a ton of pipe to Europe it gets no tax rebate. In order to be profitable, the U.S. company must price its pipe at a level sufficient to pay the tax on the income generated from the sale. In contrast, when a Brazilian pipe company sells the same ton of pipe to Europe it is granted a 17% rebate upon export of that pipe as it leaves Brazil. It can therefore be sold at a much more competitive price in the EU (or any other export destination, including the United States), undercutting U.S. manufacturers."
Since the issue has been raised repeatedly in the GATT and in the WTO with little success and “has hastened the migration of manufacturing out of the U.S. to foreign locations,” the New America Foundation proposes a solution in the form of an initiative known as the American Manufacturing VAT Trade Zone ( AMVATTZ) Program. This program would “create VAT Trade Zones, where manufacturers could choose to locate and, in these Trade Zones, would be required to pay a value-added tax in lieu of income tax.”
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