Trump's 'Reciprocal' Tariffs: A Misunderstanding of VAT and its Impact
The Trump administration is again floating the idea of "reciprocal" tariffs on foreign countries. This plan, ostensibly a response to foreign tariffs and non-tariff barriers, fundamentally misunderstands the Value Added Tax (VAT). The article argues that equating VAT with tariffs is wrong; VAT is border-adjusted, rebating taxes on exports and imposing them on imports, resulting in a neutral economic effect. The real impediment to US competitiveness is the complex US state sales tax system, with its cascading taxes leading to "tax pyramiding" that increases costs for US businesses. Instead of raising tariffs, the article suggests reforming the US federal tax system, such as implementing full and immediate investment deductions, to boost US manufacturing competitiveness.