Press Release Summary:
According to report by Manufacturers Alliance/MAPI, two long-term tax trends place US companies at competitive disadvantage; increases in value added taxes imposed by other countries and ever-less competitive US corporate income tax. Border adjustment enables governments to collect more tax revenue, and US firms end up bearing larger share of tax burden. If flexible exchange rates keep imports equal to gross exports over longer term, currency adjustments cannot undo additional tax burdens.
Original Press Release:
MAPI International Tax Analysis: Border Adjusted Value Added Taxes Harm U.S. Firms
A recent report by the Manufacturers Alliance/MAPI argues that two long-term tax trends place U.S. companies at a competitive disadvantage: increases in the value added taxes (VATs) imposed by many other countries and an ever-less competitive U.S. corporate income tax.
A VAT is a broad-based consumption tax assessed on the value added to goods and services at each stage of production. The tax applies to all goods and services for use or consumption within the country imposing the tax. VATs are typically rebated to the producer when products are exported from the country of origin.
In U.S. Exporters Beware: European Countries Pressured To Raise Value Added Taxes (ER-625e), Economist and author Garrett A. Vaughn, Ph.D., finds that VATs when border adjusted harm U.S. companies.
Border adjustment enables governments to collect more tax revenue, and U.S. firms relative to their foreign rivals end up bearing a larger share of the heavier tax burden, he writes. Border adjustment s benign impact under standard economic theory presumes that governments seek a much different goal: increasing net exports. However, even if flexible exchange rates do keep imports equal to gross exports over the longer term, currency adjustments cannot undo the additional tax burdens facilitated by border adjustment.
The report highlights the fact that much of the additional revenue pays for government-provided health care and retirement benefits benefits that U.S. exporters are expected to provide without government assistance. Therefore, in effect, U.S. exporters (who must pay a VAT to the country buying their products) pay twice for worker benefits: once for their own workers and once more for the workers employed by their foreign rivals. Higher VAT rates thus discourage imports from the United States by raising the price of its products.
High corporate income taxes also figure into the dilemma for U.S. firms. In addition to higher VATs, global competition has been forcing some European countries to reduce corporate tax rates. Germany, for instance, increased its VAT on January 1, 2007, from 16 percent to 19 percent but will reduce its corporate income tax on January 1, 2008, from more than 38 percent to 29 percent.
Conversely, the U.S. federal government has made only one change in its top corporate income tax rate since 1986: increasing it from 34 percent to 35 percent in 1993. As a consequence, U.S. companies face higher taxed and thus more expensive investment capital than their foreign rivals. The higher capital price, in turn, reduces the amount of new job-creating plant and equipment that can economically locate in this country and still allow U.S. firms to compete effectively with foreign rivals.
Until the Congress makes this country s corporate income tax more competitive, Vaughn concludes, U.S. exporters (and their workers) face an ever-tighter squeeze between what could soon be the world s highest corporate income tax and a steady diet of higher VATs.
Members may access the report online by logging on to the MAPI website (www.mapi.net). Non-members may order the publication for $50.00 by calling Mary Pearson, Publications and Accounting Assistant at (703) 647-5139 or via email to email@example.com.