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Comment by Muromec | Hacker News Reader

>EU countries can price their goods more competitively.

Assuming we talk about US consumers -- EU manufacturer is more (?) competitive by not paying VAT on their manufacturing, the same way US companies don't on their domestic production. Where is an advantage exactly?

>A US company selling to the EU still has to factor in US corporate taxes in its pricing and does not get a VAT rebate

Which VAT rebate they should get if they and their suppliers didn't pay VAT in the first place? They get back 0 USD of the 0% VAT rate in US. Sounds about right.

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There is a structural disadvantage. You are correct that both the US and EU do not pay VAT when exporting. EU countries get full VAT rebate when exporting. But, the US primarily taxes businesses via corporate income tax (~21% federally, plus state taxes). EU follows a VAT system which is refunded on export. Corporations don’t get refunds on exports of their own countries prescribed tax. EU companies can structure their pricing differently since it is leaving the EU without a tax burden. EU exports tax free.

On your other questions, I think you are missing the bigger picture. The part you are missing is that EU exporters get a tax refund. The rebate the US is missing is an equivalent tax relief system. VAT-based economies remove tax burdens for exporters and keep them for importers.

To be clear, the EU is not “cheating”. Trump just sees the entire system resulting in a trade imbalance and the only mechanism he has right now is tariffs without overhauling the entire US tax code or some other similar relief system. There are other options that could be implemented like this and the one chosen was the tariff.

>On your other questions, I think you are missing the bigger picture. The part you are missing is that EU exporters get a tax refund.

I'm not missing it, you are missing it. Yes EU companies get a tax refund and US companies don't, because there is nothing to refund when nothing was paid.

>But, the US primarily taxes businesses via corporate income tax (~21% federally, plus state taxes)

Believe it or not, but corporate income taxes in Europe also exist. I can see the argument that tax burden for companies in US is higher because government collects more in income tax and less in VAT tax. I'm not sure that is actually true and strongly suspect it's not, as EU is anything but a low-tax jurisdiction. If anything, that's a good argument for US to introduce VAT tax.

You are correct that US exporters don’t get a VAT refund because they don’t pay VAT and corporate tax exists in both systems. But US exporters still face a tax burden that EU exporters do not. Introducing the VAT would fix this particular issue but it doesn’t fix everything. Trump isn’t wrong that the EU system is giving an edge to their exporters. In the US, VAT has been seen as regressive and hurts lower income consumers more. Changing to VAT would be politically difficult and those major changes to the US tax code have been resisted by Congress. US could offer credits on exports to act sort of like the VAT system. I am not sure what kind of impact that would have. That tax would still have to be collected elsewhere. Or corporate taxes could be reduced on exports.

> But US exporters still face a tax burden that EU exporters do not.

What exports (to where) we are talking about and what is this burden? I don't exactly follow your argument here.

Any US goods exported to a VAT country (e.g Germany, France, Italy, Japan, etc) and the industries affected are automotive, manufacturing, agriculture, technology, pharmaceuticals, etc. All of them

Some examples

A Ford car exported from the US to Germany must be priced after paying US corporate tax (21% federal + state taxes)

A BMW exported from Germany to the US gets a full VAT refund (~19% in Germany), making it tax-free on export

US does not refund taxes on exports, but the EU does

My final points are that EU exporters sell their products abroad with no tax burden due to VAT refunds and US exporters must price in US corporate taxes

Final example

Boeing (US) exports planes priced after US corporate tax (~21%)

Airbus (EU) exports planes after receiving a VAT refund (~20%), making their planes cheaper in global markets

This is why Trump and others see VAT as a “hidden tariff”

Okay so the problem is actually collecting corporate taxes. A solution would be perhaps an international treaty for a global minimum corporate tax rate? Trump left that treaty recently, oh well.

Of course the exported car is not "tax-free". There is a 19.325% corporate tax rate + municipal tax on corporations in Germany. This is already pretty close to the one you mentioned. Then labour is more heavily taxed in Germany. And you have a sales tax in the US as well, you haven't taken that into account.

Maybe use Ireland as an example?

The argument is not that BMW doesn't pay corporate tax. The issue is that BMW gets a VAT refund on exports, while Ford does not get equivalent tax relief.

Remember that the sales tax applies only at the point of sale, while VAT is applied at every stage of production but refunded for exports. This is what I have been saying all along.

Even though BMW still pays German corporate tax, the tax on exports is removed via VAT refunds.

The real solution is that the US needs export tax relief to offset corporate tax on exported goods. Trump’s tariffs do not fix this - it is just a temporary fix to the trade imbalance. A global corporate tax agreement does not solve this issue either as that is not the root of the issue.

Ireland is a great example because it is corporate friendly and has lower tax rates plus a VAT system. Dell (Ireland) can export tax free while Apple cannot. So Apple has to absorb the full corporate tax burden. Granted both are PC makers but sort of a different class or consumer target. But you get what I am saying.

You are misunderstanding. Both VAT and sales tax are only paid by the end consumer. The main difference is that VAT is progressively collected at each production step whereas sales tax is only collected during the final transaction to the end consumer.

If a good is exported, no VAT nor sales tax is due in the export country. But because some VAT has already been collected in the earlier production stages, that VAT needs to be returned to the exporter. No sales tax will have been collected at the time a good is exported, hence there is none to return.

In both cases, the end result is that no VAT or sales tax is paid in the export country. Hence the situation is completely the same.

Corporate taxes are orthogonal to this discussion. Both US and EU have them and they apply to corporate profits, independently on if they derive from exports or domestic sales. So no reason to complicate the discussion by bringing them up.

I feel like I keep repeating myself

You got some things right

VAT countries can export tax-free because VAT is refunded

Even though VAT itself is not a tariff, its refund system effectively subsidizes exports by removing domestic tax costs

You are missing the trade impact of VAT refunds though

It is a fact that US goods tend to be more expensive in VAT countries like the EU because they face an extra tax burden upon import that EU goods do not face when exported to the US. This extra burden is the VAT that the consumer now has to pay. Whereas when it’s exported to the US, the US consumer does not have to pay the VAT so the trade playing field is not equal.

That’s why Trump sees VAT as a “hidden tariff.” Even though VAT is not a tariff, it functions like one by favoring VAT-based exports

Yes, you are indeed repeating yourself. Unfortunately, that does not make what you are saying more right.

VAT countries export VAT free. Sales tax countries export sales tax free.

When you import something to a VAT country, the end consumer has to pay VAT. When you import something to a sales tax country, the end consumer has to pay sales tax.

Maybe we can make some progress if you could explain how these situations are not completely analogous, and what precisely is it that gives VAT countries an unfair advantage?

You mean the problem that sales tax is applied on inputs in the US sometimes? How do you know Ford is affected by this and hasn't structured their supply chains in a way to avoid this problem?

As mentioned in the article this is a domestic problem as well in inter-state commerce. I would also be worried that it distorts supply chains.

Tariffs are not a temporary fix for this either, since the USD will just appreciate and perhaps we'll put counter-tariffs on your tariffs. You'll need to fix this problem on your side.

I agree it’s a structural problem. A few different comments I have said this. Tariffs are one option and it’s the one Trump has chosen. Apparently it has triggered the EU. Trump can’t make Congress overhaul the tax system to include a VAT.

>A Ford car exported from the US to Germany must be priced after paying US corporate tax (21% federal + state taxes)

>A BMW exported from Germany to the US gets a full VAT refund (~19% in Germany), making it tax-free on export

Does US tax exports on turnover instead of income now? Does BMW not pay corporate income taxes? Are you being dense on purpose?

No, the US does not tax exports on turnover.

US corporate tax is on net income (profit), not on revenue. Ford's export price still carries the cost of US corporate tax

You assume the argument is that BMW doesn’t pay corporate tax but that is not the point. You assume the US is taxing exports unfairly. It isn’t, but it also doesn’t provide tax relief like VAT systems do.

You are ignoring the fact that VAT refunds lower the export price for BMW, but Ford gets no equivalent tax break. Even though both BMW and Ford pay corporate taxes, BMW’s exports are tax-free because VAT is refunded.

The real issue is structural tax asymmetry.

The EU removes tax burdens from exports (via VAT refunds) and US does not because it has no such system. This makes US exports less competitive in VAT countries like Germany.

The entire system makes for a trade imbalance for US exporters to the EU but there is no fair equivalence in EU hence Trump’s actions and remarks.

>The EU removes tax burdens from exports (via VAT refunds) and US does not because it has no such system.

US didn't collect the tax in the first place, so there is no burden to relieve the company from. Refunding tax on exports makes it symmetric, otherwise EU would tax exports that US doesn't. I don't get why you bring up corporate taxes here at all, as they are present in both situation and are not refunded.

I doesn't sound like you are arguing in a good faith to me.

>This makes US exports less competitive in VAT countries like Germany.

No it doesn't. Both imported and locally produced goods will have the same tax applied to them. Both local manufacturers and US companies have to price in their corporate taxes. Nobody pays the VAT except the end consumer in the end.

US collects tax through the entire process and at the point of sale to the consumer. EU refunds the entire VAT so on that point you are wrong. EU exporters have a tax as advantaged export. This is mostly because the US does not have a VAT system.

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