Following Donald Trump’s inauguration, Nicholas Hallam, chief executive of Accordance, explores the president’s approach to VAT and tax policy
As Donald Trump has a controversial opinion about everything under the sun, his strong feelings about VAT ought not to have come as a surprise. He had this to say about the “VAT tax” during his 26 September 2016 debate with Hillary Clinton:
Let me give you the example of Mexico. They have a VAT tax. We’re on a different system. When we sell into Mexico, there’s a tax. When they sell in — automatic, 16%, approximately. When they sell into us, there’s no tax. It’s a defective agreement. It’s been defective for a long time, many years, but the politicians haven’t done anything about it.
The supposed unfairness of the Mexican VAT regime on US exporters was intended to be an example – there were many, many others – evidencing Trump’s overarching economic thesis: that a weak-minded and commercially naïve US is being bamboozled by wily and energetic developing countries. Mexico and China are, for Trump, the chief villains (he has an almost touching respect for what he sees as the amoral worldliness of Chinese policy makers); the consequence of their actions being the hollowing out of US manufacturing, and catastrophic blue-collar job loss in the forgotten ”flyover” states.
Trump appears to see VAT as a mechanism that has been deliberately constructed to put the US at a trade disadvantage with competing nations. When defending his recent contact (against Chinese wishes and expectations) with Taiwan, Trump, apparently alluding to the Chinese VAT regime, pushed back on the tax issue: “Did China ask us if it was OK to… heavily tax our products going into their country (the U.S. doesn’t tax them)?” And the warning that German car manufacturers would face tariffs of up to 35% if they manufactured and exported to the US from Mexico (rather than relying on US labour) interestingly picked on two countries with VAT systems.
Whatever the merits of Trump’s general argument, his claim about VAT, as many commentators have since noted, was completely wrong. As Paul Krugman observed at the time of the debate (with characteristic exasperated disdain):
Gah. A VAT is basically a sales tax. It is levied on both domestic and imported goods, so that it doesn’t protect against imports — which is why it’s allowed under international trade rules, and not considered a protectionist trade policy.
Trump has been regularly accused of developing a “post-truth” style of political campaigning, but, in this case, he may have been relying on the (inaccurate) testimony of an expert, rather than perpetrating a deliberate falsehood. Tim Worstall believes that Trump probably picked up the erroneous VAT idea from his economic advisor, University of California economist Paul Navarro, a known VAT critic. Although some commentators have speculated that Trump is highlighting the unfairness of foreign VAT on US business in order to give him a justification for introducing a domestic US VAT (thus levelling the playing field), Navarro’s appointment as Director of Trump’s National Trade Council suggests otherwise.
VAT has for a long time been a source of controversy and confusion in American political life. Though widely acknowledged to be extremely effective as a revenue generating system, Democrats have resisted adopting VAT because of its regressive nature – they would prefer to focus on more notionally redistributive taxes: income and corporation. And, historically, Republicans have also fought against VAT – precisely because it is so effective. Uncompromising GOP icon Grover Norquist put the case like this:
It’s an extremely efficient money machine for big government. The VAT is embedded inside the price of a good (as opposed to the US, where sales tax is transparent and on top of the price). As such, people forget they pay it, and European governments have found it too easy to raise the tax repeatedly over time.
Given the slightly fraught context, it is no wonder that Mrs Clinton didn’t want to wade in to a debate about indirect tax systems. She may have even been aware that the really toxic resentments with VAT systems tend, contrary to Trump’s Mexican anecdote, to be generated when third parties outside of the tax area sell directly to consumers within it, but without charging VAT. A recent notorious example of this problem was last Christmas’ scandal about non-EU companies selling VAT-free into the UK and Europe through Amazon marketplaces. (Though Trump intensely dislikes Amazon, he would probably be heartened to hear that sharp-eyed US sellers were involved along with hard-nosed Chinese traders.)
The tax that truly preoccupies Trump, however, is the one on corporations. He is contemptuous of corporate America’s lack of patriotism, its hasty shifting of resource to the lowest cost international location. He is no globalist. But his remedy does not involve an appeal to the better angels of anybody’s nature: Trump plans to slash US corporation tax from 35% to 15%. Stock markets were expected to tank in the event of a Trump victory; they have done the opposite, and this pledge is probably one of the primary drivers of the pre-Trump boom.
The European Commission, with its recent decision to fine Apple €13bn ($13.9bn) as penalty for a decade-long “sweetheart” low corporation deal with Ireland, may be inadvertently dancing to his nativist tune. Trump is applying moral pressure and offering financial incentives to US multinationals to return “home” at exactly the moment the EU is doing its best to stigmatise them.
Trump’s victory has upset many cherished notions about history and progress. It is perhaps typical of him to focus on corporation tax just when the consensus among global policy experts is that indirect tax is the key future revenue generator for government.
In a thought provoking presentation at an International VAT Association conference in Zurich, George Salis, of tax technology firm Vertex, made a persuasive case that in an era of effective secular stagnation, in which tax authorities can expect little if any growth in corporation and income tax revenue, and when globalisation and surging “homeless” e-commerce are conspiring to make such taxes far harder to collect and far easier to evade, it is to indirect taxes, raised and collected at the point of transaction, that tax authorities will increasingly turn. Salis foresaw drastically increased international tax authority cooperation, with the OECD acting as the spearhead of a movement to rationalise the global collection of sales taxes and VAT. The OECD’s much vaunted multilateral anti-tax-base erosion and profit shifting initiative (BEPS) was, for Salis, the harbinger of things to come.
But that was a whole three months ago. Trump is no respecter of persons, agreements or institutions. NAFTA, TPP, TTIP, NATO, the Paris Accord: Trump’s new philosophy casts all in doubt. It remains to be seen how far he will indulge the “liberal elite” dream of a global tax order.
Nicholas Hallam is chief executive of VAT consultancy Accordance