The bipartisan Border Tax Equity Act, or H.R. 2600, has just been introduced by Reps. Bill Pascrell Jr., D-N.J., Duncan Hunter, R-Calif., Michael H. Michaud, D-Maine and Walter B. Jones, R-N.C. The purpose is to correct border-tax inequities that cost U.S. producers and service providers $379 billion a year. The goal of U.S. post-World War II trade agreements, such as the General Agreement on Tariffs and Trade and the World Trade Organization, was to lower tariffs mutually in pursuit of worldwide free trade. The trouble is that it takes two to tango and we trade with at least 137 countries that dance to a different tune.
When other countries reduced their tariffs, they simultaneously imposed border tax schemes, particularly Value Added Taxes, which add up to almost exactly the same amount as the tariffs that were supposedly reduced or eliminated. This sleight-of-hand is achieved by imposing VAT taxes on imports (a de facto tariff) and rebating VAT taxes on exports.
These de facto tariffs in many countries, including the European Union, are now as high or higher than tariffs were at the beginning of the GATT. Today, 94 percent of all U.S. exports and imports of goods are traded with VAT countries. The scheme started as a historical accident. The VAT, a consumption tax, was labeled an "indirect" tax, while income-payroll-property taxes paid by U.S. businesses were called "direct" taxes.
U.S. negotiators agreed in 1955 that indirect taxes, such as the VAT, "shall not be deemed to be a subsidy." At that time, the rates of VAT taxes were only 2 percent to 4 percent and U.S. negotiators looked upon this concession as no big deal.
However, foreign countries caught on to how to use the VAT to cheat the United States. Over the years, other countries' use of the VAT has grown into a major violation of GATT's primary purpose: the reduction of border barriers. The average VAT imposed by all our trading partners today is a whopping 15.7 percent of the cost. European Union nations average a VAT of 19.2 percent. The VAT is one of the major factors causing the loss of 3.2 million manufacturing jobs since 2000 and the dramatic increase in our trade deficit to $763.6 billion in 2006.
The disparate treatment of border taxes is harmful and costly to U.S. agricultural producers, manufacturers, and service providers in two ways. First, the refunds of indirect taxes amount to subsidies to foreign companies that export to the U.S. even though subsidies are supposed to be prohibited by WTO rules.
Phyllis Schlafly is a national leader of the pro-family movement, a nationally syndicated columnist and author of Feminist Fantasies.
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