America's Tax Disadvantage

So in light of news such as Toyota overtaking GM as the world's top selling automaker, I am frustrated even more over the tax disadvantage that American manufacturing is placed at in the World Market. Here is a letter to the house ways and means committee ( a bit long) from Americans For Fair Taxation (The FairTax folks), that makes an outstanding point regardless of what you think of the FairTax.

Currently the US is the only country of the 30 OECD (The biggest most developed countries) that does not remove at least a portion of its consumption taxes on the export of its goods. All items produced in the US have substantial embedded taxes from the sales taxes of each of the items that made it up as well as the payroll taxes and corporation taxes on the companies who made the items. But it isn't just that, since US goods have embedded taxes they are taxed here and abroad (Foreign VAT), while foreign goods sold in the US have neither the US embedded tax nor the VAT of their home country! This makes them cheaper abroad and cheaper in the US. Currently among the OECD countries there is an average of 17% Value Added Tax (VAT) on exported items that is removed, which places the US at a huge disadvantage since we do not border adjust our taxes at all! Why? Well, America historically has supported free and open trade which means we have almost always had lower tariffs on imports than other countries. Since WW2 there has been a huge shift in which other countries have greatly reduced their tariffs (On average from 40% to 4% today) and replaced them with the VAT so as to allow free trade but to adjust imports for the difference in cost of government in the home country (Each country has their own amount of VAT which they remove on the export of an item and then place on any imports of items- the amount depends on the size of the government spending). Effectively, this leaves America as the only major industrialized country who has its imports sold without embedded taxes and its exports sold with a double tax.

The results are staggering- Toyota overtaking GM is only a simple example. It is for good reason that Daimler Chrysler chose their world headquarters in Germany (With border adjusted taxes) rather than the US or that companies like Accenture headquarter abroad for tax purposes. America has handicapped itself and unless we wish to send all of our manufacturing overseas and have foreign countries completely own both our government (in the form of debt) and our companies due to our trade deficit, then we desperately need a major overhaul on our system of taxation.