Economic illiteracy on value added taxes is rampant.
Tax Foundation
The European VAT is Not a Discriminatory Tax Against US Exports
When discussing trade with the EU specifically, White House deputy chief of staff, Stephen Miller, added a new policy grievance to the mix: value-added taxes (VAT).
“Did you know when you ship a car from the US to Europe, if they let it in at all because they have many nontariff barriers, between the VAT and duties, that car is taxed at 30%? The German car—or a European car sent the America is taxed at 2.5%—or basically 0.”
His statement assumes that a VAT discriminates against American car exports like a tariff, and conversely, that the VAT rebate provided to European car producers exporting to the US constitutes a subsidy and the car then simply faces a tariff and no VAT. (It is worth noting that both a domestic automobile and a European car sold in the US would face US state sales tax.)
While it may seem like a compelling political argument to justify across-the-board tariffs on the EU, it instead reflects a complete misunderstanding of what a VAT is and how it works. Worse, it misplaces the blame for a lack of US competitiveness on the European VAT instead of reevaluating the flaws of both the US federal and state tax systems.
What is VAT and how does it work for exported goods?
VATs are border-adjusted, meaning they rebate tax on exports and impose tax on imports. Despite the appearance of subsidizing exports and punishing imports, however, a border-adjusted VAT is trade neutral. A border adjusted tax leads to currency appreciation for the imposing country, which would make it cheaper to import goods, more expensive to export goods, and thus would cancel out the apparent benefits of the tax on imports and the rebate on exports.
If there is a complaint to be made about tax policy and implications for US competitiveness in Europe, it is about uncompetitive state sales tax structures in the US system that yield what is known as “tax pyramiding.”
Unlike most countries, the United States does not impose a broad-based consumption tax at the national (federal) level, and state-level consumption taxes are designed as general sales taxes rather than value-added taxes. Whereas a VAT is imposed on the incremental increase in value of a good or service at each stage of production, a sales tax is imposed on the total transaction price of any taxed good or service.
If a sales tax is imposed exclusively on final consumption, then VATs and sales taxes are economically identical. However, when the sales tax is applied to some intermediate transactions (“business inputs”), it results in tax pyramiding, where the tax is embedded in the price multiple times over.
Note that, while a VAT is imposed at every stage of the process, the net effect is to apply the rate one time to the final sales price. The tax is collected in increments (on the “value added” at each stage), but unlike with a pyramiding sales tax, it does not double tax inputs. The VAT and ideal sales tax share an identical tax base and, if imposed at the same rates, yield identical collections.
US sales taxes are typically destination-based, meaning that the tax is owed where the product is received or consumed. If a European resident orders from a US retailer, they do not pay US sales tax, just like a US consumer can obtain a VAT rebate on purchases of European products. Neither is a subsidy. These are simply consumption taxes falling on the consumer.
In practice, however, US sales taxes diverge sharply from the ideal. More than 40 percent of US sales tax revenue comes from intermediate transactions, which impose costs on US producers. This design flaw is not present in VATs, which do not double-tax intermediate transactions. Consequently, the sales tax imposes a penalty on domestic production that a VAT (or a better designed sales tax) would not. European VATs aren’t subsidizing anything—US states are just shooting themselves in the foot.
International Chamber of Commerce
Are value-added taxes a barrier to trade?
- The multi-stage payment mechanism of VAT, where businesses collect and pay VAT throughout the supply chain, ultimately passing the tax burden to the final consumer
- VAT ensures a level playing field for both domestic and foreign businesses by treating all businesses equally, regardless of their location or origin.
- The principle of VAT neutrality, which stipulates that goods are taxed in the country where they are consumed, not where they are produced
- VAT does not create barriers to international trade and ensures that all products competing in the same market face identical tax treatment.
ING
Reciprocal tariffs are on, but VAT is the bigger elephant in the room
In the EU, VAT revenues account for 7.5% of GDP and 18.6% of total tax revenues (as of 2022). The EU-27 average standard VAT rate was 21.5% in 2023, with Luxembourg at 16% and Hungary at 27%. Globally, 175 countries have a VAT system, with the US being one of the few exceptions, using a sales tax system by state varying from 0% to 11.5%, instead. Since VAT is typically applied as a destination-based tax, meaning it is charged based on where the goods or services are consumed rather than where they are produced, it aligns with WTO principles.
Sales Tax Rates
State and Local Sales Tax Rates, Midyear 2025
The five states with the highest average combined state and local sales tax rates are Louisiana (10.11 percent), Tennessee (9.61 percent), Arkansas (9.48 percent), Washington (9.47 percent), and Alabama (9.44 percent). The five states with the lowest average combined rates are Alaska (1.82 percent), Hawaii (4.50 percent), Maine (5.50 percent), Wyoming (5.56 percent), and Wisconsin (5.72 percent).
Nationwide, the population-weighted average sales tax rate is 7.52 percent, up from 7.49 percent in January. Excluding the five states without statewide sales taxes, the weighted average rate has riven from 7.68 to 7.72 percent.
There are a handful of state that don’t have sales taxes, but the average population-adjusted rate is 7.5 percent, so start there.
From the lead image, tax pyramiding makes sales taxes even higher.
Chicago has a combined sales tax rate of 10.25%. So does Cook County.
The Illinois Policy Institute notes that Illinois has an amazing 6,963 taxing body, and the second-highest property tax rate in the nation.
Fortune
“A VAT tax is a tariff,” Trump told reporters Thursday.
That’s not true. A tariff is a tax on imports, while the VAT is simply a tax on all domestic consumption, regardless of where the good or service is produced. In the end, the only major difference between a value-added tax and a sales tax is the way in which it’s collected.
Ultimately, the final cost—or economic burden, to be more precise—is borne by the consumer. Value-added taxes are generally considered administratively superior, however, because they create a natural audit trail that discourages tax evasion. Most countries have found a sales tax is practically unenforceable above 10% [What About Chicago?], according to the Tax Foundation, as both buyers and retailers have greater incentive to avoid the tax or keep revenues, respectively.
The United Kingdom, no longer a member of the EU, has a value-added tax of 20%. The U.S. still maintains an $11 billion trade surplus with Britain, according to the Census Bureau.
Wall Street Journal
What Is VAT? The Tax Fueling Trump’s Latest Trade Fight
Critics say VATs disadvantage U.S. exporters, contributing to a widening trade deficit, due to their size and how they are applied. Europe’s average VAT, 20%, is far higher than the average U.S. sales tax, 6.6%, according to the Tax Foundation.
Are VATs really unfair?
Some tax experts don’t think so. While European countries give exporters a VAT rebate, the U.S. does something similar by exempting its own exporters from sales taxes, said Sean Bray, vice president of global projects at the Tax Foundation.
Let’s Add It Up
- Weighted Sales in the US: 7.52 percent
- Sales Tax Not Collected on US Exports: 7.52 percent
- Intermediate sales taxes collected in the US: Unknown but consult lead chart for how this works.
There’s your “VAT is a tariff” nonsense in a nutshell.
But if you choose to be a Trump parrot or an economic illiterate, then I can’t stop you.
Amusing Aspect of Reciprocal Tariffs
Trump says, “We do to them what they do to us.” What a hoot.
If we want to do to them what they do to us, we would have VATs.
Alternately, the administration could subtract US sales taxes, intermediate sales taxes, and taxes not collected on exports from its idiotic calculation of reciprocal.
Non-Tariff Barriers
Q: Do countries have non-tariff barriers?
A: Yes and China is among the worst
China’s mode of operation is to encourage production in China, learn what it can, steal what it can, then kiss the relationship goodbye.
I believe Tesla will soon find this out. In contrast, Apple was clever not to produce anything in China. It only assembles its products there, now headed to India. Wait a second – now headed back to China (See Trump Increases Tariffs on India, Demands India Stop Buying Russian Oil)
China also has massive subsidies on production.
The EU has rules against GMO agriculture and chlorinated chicken. That’s relatively minor stuff.
The WTO also ruled the EU had unfair subsidies for Airbus, which of course Trump touted.
The WTO then ruled the US had unfair subsidies for Boeing, which of course Trump and the Cult ignored.
Change in My Stance
Six years ago I would have said the US should have no tariffs or subsidies ever.
I have changed my stance. The US cannot be held slave to China’s rare earth monopoly.
The US needs to develop rare earths and if that takes subsidies I am OK with that.
Strategic Items
- Rare earth minerals and processing
- Advanced microchips
- AI
There might be more, but copper, aluminum, and steel are not on the list. Numerous allies produce them, and there is plenty of supply and competition.
Thanks to Nvdia, the US has the lead in chips. Production in Taiwan is a huge concern. One of the few things Biden did correctly was give Nvdia subsidies to produce here. Trump complained.
It is probably not in Taiwan’s best interest to move its best production facilities here. If the US no longer needs Taiwan, Trump will throw Taiwan under the bus and brag about it.
The AI lead is debatable but the US needs to do whatever necessary to stay in the lead.
Rare earths are a huge problem. China has a near monopoly, globally.
Trump’s Counterproductive Actions
Trump should be making rare earth production deals with Canada and Mexico. To keep costs low, let Mexican labor should do the processing.
To prevent China undercutting, I would OK production price guarantees. And if China tries to suppress prices to kill competition, the US would simply buy a 10-year reserve.
Instead, Canada is building a pipeline to its west coast, to export oil to Asia. And is looking for more reliable trading partners elsewhere. Mexico is doing the same.
The US had an amazing deal with Canada and Mexico. Despite being signed by the US Senate, trump unilaterally broke the treaty.
Reciprocal Tariffs Are Dead, but Trump Has 7 Other Options to Discuss
On June 6, I posted Reciprocal Tariffs Are Dead, but Trump Has 7 Other Options to Discuss
Trump wants to maneuver around the court’s tariff crackdown. His success will be limited.
On July 31, the en banc US Court of Appeals will hear arguments on reciprocal tariffs.
En banc means a full 11-panel hearing instead of a 3-judge random selection. I expect this will not be close.
11-0 against Trump would not be surprising. But I would be shocked to see any ruling in favor of Trump. Case law is not even close.
Then what?
The Supreme Court is not as easy, but count the three liberals and find two more. It should be unanimous but won’t be. My guess is 6-3 or 5-4 against Trump.
However, the Supreme Court may not even hear the case if the appeals court ruling is a lopsided as I suspect.
For discussion of the lopsided case against Trump, click on the above link.
USMCA Was the Best Trade Deal in History
Please note that USMCA was the best trade deal in history.
But don’t take my word for it. Take Trump’s word.
Trump Statements on USMCA
- August 21, 2023: The highly anticipated Des Moines Register Poll of Iowa Voters is just out: “DONALD TRUMP HOLDS COMMANDING LEAD In First Test of 2024 Republican Caucus Field.” Remember, I got the Farmers 28 Billion Dollars from China, the USMCA Trade Deal (& many others!), saved Ethanol, Social Security, and MediCare, & got Iowa “First In the Nation” status. Nobody else could have done this. Anyway, I’m at 51%, a 31 Point lead over “farmer hating” DeSanctimonious, with the others gaining on him, but not on me!
- February 15, 2020: RT @WhiteHouse: President @realDonaldTrump’s USMCA will have a tremendous effect on GDP!
- January 30, 2020: BIGGEST TRADE DEAL EVER MADE, the USMCA, was signed yesterday and the Fake News Media barely mentioned it. They never thought it could be done. They have zero credibility!
- January 29, 2020: USMCA is a cutting edge state of the art agreement that protects, defends and serves the great people of our Country. Promises Made, Promises Kept!
- January 29, 2020: USMCA is a massive win for American manufacturers and auto workers!
- January 16, 2020: One of the greatest trade deals ever made! Also good for China and our long term relationship. 250 Billion Dollars will be coming back to our Country, and we are now in a great position for a Phase Two start. There has never been anything like this in U.S. history!
- December 10, 2019: America’s great USMCA Trade Bill is looking good. It will be the best and most important trade deal ever made by the USA. Good for everybody – Farmers, Manufacturers, Energy, Unions – tremendous support. Importantly, we will finally end our Country’s worst Trade Deal, NAFTA!
- December 19, 2018: Mexico is paying (indirectly) for the Wall through the new USMCA, the replacement for NAFTA! Far more money coming to the U.S. Because of the tremendous dangers at the Border, including large scale criminal and drug inflow, the United States Military will build the Wall!
- December 13, 2018: I often stated, “One way or the other, Mexico is going to pay for the Wall.” This has never changed. Our new deal with Mexico (and Canada), the USMCA, is so much better than the old, very costly &, anti-USA NAFTA deal, that just by the money we save, MEXICO IS PAYING FOR THE WALL!
- November 30, 2018: Just signed one of the most important, and largest, Trade Deals in U.S. and World History. The United States, Mexico and Canada worked so well together in crafting this great document. The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!
- October 3, 2018: Mexico, Canada and the United States are a great partnership and will be a very formidable trading force. We will now, because of the USMCA, work very well together. Great Spirit!
- October 2, 2018: “USMCA Wins Praise as a Victory for American Industries and Workers”
People who believe all Trumpian BS think Canada has 250% tariffs on US cheese.
I discussed this on March 9, in Cheese Was a “Key Achievement” of Trump’s USMCA Trade Agreement
Trump is complaining about Canada’s cheese tariffs. In 2018, he was bragging about cheese.
Q&A on the Greatness of USMCA
Q: Is 250 percent on cheese fair?
A: It’s not 250 percent. It’s tiered, and embedded into USMCA.
Q: Who signed USMCA?
A: Trump
Q: Who is responsible for this arrangement?
A: Trump
Q: Didn’t Trump brag that USMCA was the best trade deal in history?
A: Yes
Q: Didn’t Trump brag about cheese?
A: Yes
Q: Is Trump a good deal maker?
A: Apparently not, by his own admission
Q: Will Trump honor the USMCA deal ratified 89-10 by the Senate and signed by himself?
A: No
Q: Will Trump honor any deal he signs?
A: You tell me, but no one can expect that
Q: Is there a massive lost in trust that Trump will honor any deals he signs
A: Yes
It is foolish to expect Trump to honor any deal he makes. That is the bottom line.
Meanwhile China Again Chokes Off Critical Rare Earths Needed for Defense
Trump threatened China with tariffs for doing business with Russia. Guess what?
The EU pretended to make a deal and Trump bragged about it.
China pretended to make a deal and and Trump bragged about it.
Japan pretended to make a deal and and Trump bragged about it.
Wake me up when there are actual signed details.
Addendum
A reader accurately noted that VATs and Tariffs are both tax hikes.
But VATs always fall on the end consumer. Tariffs and sales taxes can hit intermediate producers.
Finally, VATs are not trade barriers but tariffs are.
It is for these differences VATs do not act like Tariffs despite both of them being tax hikes.
Finally, my reader is correct in that both are taxes and taxes discourage consumption.
But as a tax collection mechanism, a properly constructed VAT (no tax on food, medicine and essentials, higher on luxury items like boats) is far superior to this nonsense from Trump.
