Reshoring Initiative Has a Roadmap for American Manufacturing

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At the International Manufacturing Technology Show in Chicago, the Reshoring Initiative‘s Harry Moser laid out what he called the “reshoring roadmap” of what congress and the next president need to do to bring manufacturing jobs back to the U.S.

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Moser said that rapid job loss has been stemmed in the U.S. but more needs to be done to bring manufacturing jobs back to the U.S. The roadmap included corporate tax reform to make the U.S. more competitive with countries like Ireland, which boasts a 2% corporate tax rate. Republican presidential nominee Donald Trump has said he will lower the corporate tax rate of 39.1%. Democratic nominee Hillary Clinton has said she will raise taxes on “corporations and wealthy individuals.”

Don’t Drown in the VAT

Another part of Moser’s roadmap is a value-added tax in the U.S. A VAT is a type of general consumption tax that is collected incrementally, based on the “value added,” at each stage of production and is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. If I purchase something from the U.K, I would have to pay the vote to get it imported into the U.S.

16-RSI-0482-IndustryToday-FP.indd.pdf

Companies are reshoring jobs to the U.S. Source: The Reshoring Initiative.

Moser said the rest of the world has a VAT of about 15% whereas the U.S. has no VAT. 159 of the 193 countries in the world have a VAT.

There are two main methods of calculating VAT: the credit-invoice or invoice-based method and the subtraction or accounts-based method. Using the credit-invoice method, sales transactions are taxed, with the customer informed of the VAT on the transaction, and businesses may receive a credit for VAT paid on input materials and services. The credit-invoice method is the most widely employed method, used by all national VATs except for Japan. Using the subtraction method, at the end of a reporting period, a business calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is applied to the difference.

Moser said that the U.S. “Is on the wrong side of a tilted chessboard,” and that a VAT would help change that.

States vs. VATs

Yet, the U.S. does collect other import taxes and the very idea of passing a VAT has not been popular with both manufacturers and buyers in the past and such a tax is opposed by conservatives precisely because it makes it too easy for Washington to tax everyday transactions Americans make (try buying something from a VAT country on Amazon.com) when sales taxation has always been a state matter in the U.S.

State sales taxes could still be enforced on top of a VAT but that would heavily increase the debt burden on consumers, especially in states where there is a high sales tax and a state income tax. Countries with VATs have a much heavier total tax burden than those without VATs. Before the creation of VATs, the burden of taxation in Europe was not that much larger than it was in the U.S. However, since the late 1960s, when countries in Europe began to adopt VATs, Europe’s aggregate tax burden has increased by about 50% while the U.S. tax burden has remained relatively constant.

VATs and Economic Growth

They also believe, with some fairly startling examples such as Greece, that a VAT undermines economic growth. First, it reduces the incentives to engage in productive behavior by driving a larger wedge between pre-tax income and post-tax consumption. In Greece this resulted in tons of off-book, cash transactions that were never reported as income in the tourism sector. Greece’s VAT is a startling 24%. Their business community wasn’t for the most recent hike.

Second, it facilitates larger gov­ernment and the concomitant transfer of resources from the productive sector of the economy to the public sector, diminishing economic efficiency.

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That’s a double whammy for buyers and manufacturers (who need raw materials) who are already paying the high national corporate income tax.

Comments (5)

  1. Harry Moser says:

    Thanks for covering our material and presentation.
    I believe you are too negative on a VAT. The idea would be to eliminate other taxes such as Social Security and FICA. By doing so we would reduce the wedge between pre-tax income and after tax income, offsetting the increase in prices.
    We have to find a way to become price competitive. Take your choice: hIgher tariffs, lower USD, add a VAT, much better skilled workforce. I would start with skilled workforce but that takes decades. Second would be lower USD. Third VAT. Finally higher tariffs.

    1. Jeff Yoders says:

      Hey Harry,

      Thanks for your illuminating comment. There are just a lot of hurdles to a VAT. At least today. Can you imagine the congressional fight to eliminate FICA?

      Jeff

  2. American manufacturers are at a disadvantage for exporting because 159 countries add a VAT to the price of their products. The average is 17% worldwide. Since we don’t add a VAT to imports, that makes foreign countries’ products cheaper. European use VATs to reduce their corporate taxes, so we could reduce our corporate taxes to 15% if we had a 10% VAT. We need comprehensive tax reform that includes a VAT, reducing corporate tax rates, and adding a Sales Factor Apportionment Tax that would force multi-national corporations to pay a sales tax based on the percentage of their sales in the U. S. This would keep multi-nationals from transferring profits to other countries or re-incorporating in tax haven countries.

    1. Jeff Yoders says:

      All well and good, Michele, but how do you get congress to reduce corporate taxes by 15%? One presidential candidate is talking about increasing taxes on corporations, not lowering them. How does the federal government collect the VAT? Through customs and border protections? There are already several ways to avoid paying existing tariffs, let alone a new VAT. Do you then eliminate state sales taxes because of the VAT? There are a lot of issues that arise just from having a VAT.

  3. All taxes on corporations just increase the cost of their products. And, ultimately the consumer pays the added cost when they purchase the goods. It has been an invisible tax to the American consumer, and as stated by others, makes US Manufacturing less competitive. A more honest tax would be a sales tax at the consumer level, and all of the government largesse would have to be transparently funded from that source. Let us only plan to remove the income tax and the IRS, and leave other taxes alone at this point. What do you all think?

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