Comment by Aerroon | Hacker News Reader

Comment by Aerroon | Hacker News Reader

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>If I make two ford fiestas, one in the US and one in Germany and they are otherwise identical--identical labor costs, identical shipping costs, etc etc--do I have to sell each ford fiesta in germany at a different cost to the consumer (so including all taxes levied on the consumer) for me to make the same profit on each fiesta?

No, probably. It depends on the price of the materials you use. It's a value added tax. It taxes the value that you created.

Lets say you buy €5000 worth of steel and then make it into a car that you sell for €10,000. With a 20% VAT rate the government gets €2000 and you get €8000.

However, that steel you bought also included 20% VAT in its price (€1000). You get this money back from the government. The steel actually cost €4000 for you.

In total your profit would be €4000. Effectively, the 20% VAT applies to the €5000 of value that you created.

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If you built that Ford Fiesta outside of the EU then the "value add" is the entire price of the vehicle. But you don't have to pay VAT for the raw materials you buy, so theoretically it should end up being the same amount of profit.

(I dont have a euro key so I'm going to use dollars but the same numbers)

Ok so the chain for producing the car in the US is:

1 buy $5000 worth of steel in the US, inclusive of sales tax (lets suppose sales tax and VAT are the same pct)

2 build a car that I sell for $10k in germany, inclusive of VAT

3 give $2k to the government for the VAT

4 I make $10k - $5k - $2k = $3k

In the EU

1 I buy $5000 worth of steel in the EU inclusive of VAT

2 I build a car and sell it for $10k in germany

3 I give $2k to the government for the VAT, but I get back $1k for the VAT I paid on the steel

4 So I make $10k - $5k -$2k + $1k = $4k

$3k and $4k are different amounts. So this seems like, if not a tariff, fairly tariffy. What am I missing?

What you're missing would be obvious if you looked at where the money ended up, and didn't play the sleight of hand with pretending that there was just one government involved.

In the second case, a EU government has $2k, the steel producer has $4k, and the EU-based car producer has $4k.

In the first case, a EU government has $2k, the steel producer has $4k, the US-based car producer has $3k, and the US government has $1k.

It was the US government that took the money from the US-based company! That's not at all like a tariff imposed by the EU. If you don't like the US taxing US companies, the entity that can fix it is the US government. Not the EU.

Sorry Im not trying to play sleight of hand. As far as tariffs and business competitiveness are concerned, the things that matter are the price to the consumer and the profit to the company.

You seem to be saying that it is self-evidently fair that the EU end up with 2k in taxes in both cases, where in the case where it was imported there was far less happening in the EU. Why do they deserve 2k in tax revenue when the steel was rolled in the US ?

The VAT is a consumption tax, not a production tax. It's totally agnostic to where the production happened. If you want to sell something to a EU-based consumer, that money has to be paid no matter where you're from. What could be more fair than that?

Again: the difference is coming purely from the US government choosing to tax a US company. Just why is that a problem that should be solved by the EU?

That you are screwed over by USA not EU.

Scenario one From 5000 1k goes to USA. And from 10k 2k goes to EU. USA 1k and EU 2k.

Scenario 2 From 5000 1k goes to EU, and from 10k 2k goes to eu. But you get 1k back. EU 2k.

Now if you were to export the EU car to USA. You would get 1k back for EU from step 1, And then pay 2k in sales tax to USA. Netting the same.

You seem to be saying that its fair that the EU end up with 2k in taxes in both cases, where in the case where it was imported there was far less happening in the EU.

Yes. It is. Because it is government stealing my money. After I already paid income tax. VAT is charged from me not the seller, the seller just has to move the money from me to tax authorities.

VAT is tax on my consumption. It is in essence extra tax on anything and everything I buy. Thus it is really not taking any money from the seller, but me a EU citizen.

Basically money for USA here should come from income taxes paid by workers and the corporate taxes paid on profits. And then well capital gain taxes paid for profits paid out.

So let me get this straight: because the US wont let you get the sales tax you paid back like you would with a VAT, you blame the "sane" system for effectively imposing an import tax, even though there is no way for the that receiving system to know how much sales tax was paid already and deduct it properly?

I'll gladly flip that argument on its head: the US is imposing an export tariff, since everything sold from the US to Europe includes US sales tax in the process, while in the inverse, any EU company charges 0% VAT to the US.

You can’t equate VAT and sales tax, as the article explains. It’s an inherent property of US sales tax that it pyramids (multiplies on each intermediary sale). You would have the analogous effect if you sell the US-produced car to a US-based reseller: The sales tax on the steel is lost to you as well then, you don’t get it refunded from the sales tax paid by the US end consumer who buys the car from the reseller.

So if anything, the sales-tax system should be critized, not the VAT.

The EU import VAT has the purpose of treating EU producers and foreign producers equally, by subjecting both to the same tax rate. But you can’t blame the EU for steel being effectively more expensive in the US (if that is actually the case), similar to how you can’t blame the EU for labor costs being higher (or lower) in the US.

> buy $5000 worth of steel in the US, inclusive of sales tax

Sales tax is only charged on retail sales to consumers, there is no sales tax on raw materials for production. So if material costs are the same, and sales tax and VAT rates are the same, the steel will be less in the USA, because there will be no sales tax. In your example, the steel would only be $4k in the US.

You are calling the US tax sales tax but acting like it was applied like a VAT.

Exactly. So in reality the US car was produced for less than 5k* worth of steel because the steel price in Europe includes VAT, and in the US it does not. End of story.

*This is true if the price of steel is the same in Europe and the US. It might not be, and a country or a region might have a competitive advantage. For instance a country might add tariffs on steel imports and increase the costs of manufacturing.

You are missing the fact that the US manufacturer is paying more because the US tax system applies sales tax multiple times on inputs as they move through manufacturing steps. Raw materials like steel are often exempt even in the US, but many other business expenses are not. This is outdated approach to taxation. The entire world has moved on to VAT, which taxes only the final sale to the consumer. Foreign countries are not being unfair, as it is not their responsibility to manage the US tax system and keep it efficient - that's the job of the US government.

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