Lawmakers say value-added tax would aid U.S. exporters by leveling world-trade playing field

Presidential hopeful Rep. Duncan Hunter (R-Calif.) says current U.S. tax policy puts American manufacturers at an unfair disadvantage by making it cheaper for foreign products to be sold in the U.S. and costlier for U.S. exporters to ship goods abroad.

Hunter is not alone. An increasing number of lawmakers worried about the expanding trade deficit and what they describe as a disappearing U.S. manufacturing sector believe U.S. tax policies are a part of the problem.

According to Hunter and a number of groups representing textile producers and small manufacturers, the problem is that almost every country in the world has a value-added tax system except the U.S.

In the 137 countries that have value-added taxes, a manufacturer that exports a product gets a rebate from its government equal to the value-added tax rate (VAT). This is intended to make it easier for the company to export the product.

U.S. manufacturers get no such rebate because there is no U.S. VAT. In addition, a U.S. product exported to a foreign country that has a VAT gets hit with the VAT at the border, making it more expensive for the U.S.-produced good to be sold in the foreign market.

“I’ve never met a businessman in America that says that he would have signed up for that deal,” Hunter said at a recent press conference introducing legislation that would have the Office of the U.S. Trade Representative (USTR) enter into negotiations to level the playing field.

 “Our different form of domestic taxation has put us at a competitive disadvantage,” added Rep. Bill Pascrell (D-N.J.), who is a cosponsor of the Border Tax Equity Act with Hunter and Reps. Mike Michaud (D-Maine) and Walter Jones (R-N.C.).

The legislation would direct USTR to negotiate with the World Trade Organization (WTO) by January 2009 for a remedy to the tax inequity. If the talks are unsuccessful, the bill would allow the U.S. to impose taxes on imports equal to the exporting country’s VAT.

For example, Hunter said that if China applies a 17 percent VAT on U.S. imports, the U.S. would apply a 17 percent VAT on Chinese imports and provide a 17 percent rebate to manufacturers of U.S. goods being exported to China.

A coalition of labor groups and small manufacturers critical of free-trade policies that have pushed for tough action against China are backing the legislation. They include the AFL-CIO, the National Council of Textile Organizations, the American Manufacturing Trade Action Coalition and the U.S. Business and Industry Council (USBIC).

Even opponents of the bill admit Hunter and his allies have a point. “The core point that there is an inequity is right,” the president of the pro-free trade National Foreign Trade Council (NFTC), Bill Reinsch, told The Hill.

The problem, Reinsch and others say, is that the bill would run afoul of WTO rules prohibiting members from applying different taxes on domestic and imported goods. VAT taxes comply with those rules because they are applied to both domestic goods and imports, although only domestically produced goods that are exported get a tax rebate.

 “This solution will be challenged by the Europeans at the WTO, and we will lose,” Reinsch predicted. He noted that previous Congresses have tried different approaches to dealing with inequities in the U.S. and foreign tax systems, and that U.S. laws have repeatedly had to be changed after adverse WTO decisions.

The most recent example occurred a few years ago when Congress approved legislation repealing the Foreign Sales Corporation tax system after Europe imposed retaliatory tariffs on U.S. products.

Adopting a VAT in the U.S. would be WTO-legal, but NFTC’s vice president for tax policy, Cathy Schultz, said this would require a complete overhaul of the U.S. tax system with the VAT replacing the current income tax.

In addition, she said a U.S. VAT would have to be higher than 20 percent to be revenue-neutral. “That would be politically impossible,” she said.

Schultz suggested the best way to address the inequality would be to provide direct corporate tax cuts in the U.S., making companies more competitive in the global market.

Supporters of addressing the VAT inequity acknowledge the new legislation faces an uphill climb. Some note that U.S. companies producing goods overseas and shipping them to the U.S. would be likely to oppose a U.S. VAT, although Reinsch said it was a complicated question that likely would divide business groups.

At a minimum, supporters say the bill will raise awareness in Washington of another problem faced by small U.S. manufacturers. “My first hope is that the bill will pass,” USBIC’s president, Kevin Kearns, said, “but certainly the bill adds pressure in and of itself — whether or not it passes — to do something about our trade deficit.”

Pascrell said he is optimistic that the Border Tax Equity Act will get attention in Congress. “I think we’re going to get a hearing at Ways and Means,” said Pascrell, a member of the committee. But a committee spokesman said no hearings are currently scheduled.

Ian Swanson contributed to this article.