Germany's economy is doing just fine while the US economy languishes. There are many reasons for this, but one that predominates is the Value Added Tax (VAT). At each stage in the production process, when a product or service changes hands, it is taxed at 19%. So if you're manufacturing a car, for example, when you buy a component like a transmission from another manufacturer, that manufacturer has to pay the VAT before that product can be sold to you. Some products and services like food and doctors pay a lower VAT.
The VAT must be paid on all imports in one fell swoop as they enter the country whereas the VAT was paid in stages by different business entities at each stage along the supply chain within the country. This tends to discourage imports, and make it more profitable to manufacture and sell (and thus provide jobs) within the country of Germany itself. Contrast this with America in which there is no tax on imports (thanks to free trade) so it is cheaper to manufacture abroad and import products into the US thus creating jobs abroad. The VAT acts as a tariff on imports and also provides a loopholeproof source of revenues for the government. In the US many major corporations like GE and Exxon Mobil, for example, pay no income tax even though they make tens of billions of dollars in profits. In fact many of them actually get tax refunds or subsidies! This process defunds the government, frays the safety net for the middle class and the poor and results in the budget being balanced, to the extent that it is, on the backs of the poor and middle class.
For German exports, the VAT is refunded thus encouraging exports at the expense of imports. No wonder Germany has a healthy export economy. This acts like a tariff in reverse. So imports are subjected to a 19% VAT at the border and exports are given a 19% refund at the border. American exports are given no such incentive. In short the US is letting foreign countries eat their lunch and running up their trade deficit in the process because of an antiquated approach to taxation which favors American multinationals while shortchanging American taxpayers.
The following is from an article, "The Foreign Value Added Tax: Making Our Exports Uncompetitive:"
Unknown to most Americans, the United States is losing the ability to compete in global trade because of the little known foreign Value-Added Tax (VAT).
Foreign governments use this tax against United States producers as a means to prevent the importation and consumption of U.S. goods, while providing incentives for their countries to export their goods to the U.S. The foreign VAT was a subsidy created after World War II to speed up beneficial other countries' recovery. However, it is still used today by 149 countries to exploit this advantageous position against American trade. We have not used it domestically to off set theirs as a benefit to ourselves.
The foreign VAT gives the companies of other nations and their exports the upper-hand by providing incentives in the form of rebates equal to the indirect tax on the exported product. For example, the VAT rate is 19 percent in Germany; therefore the Germans receive a 19 percent rebate from their government on each product exported to the U.S. This acts as a subsidy for a product while encouraging the exportation of products to the U.S. However, the VAT imposes a punishment on U.S. exports by placing a VAT equivalent to the Value Added Tax rate of the importing country. This means all U.S. exports that enter into Germany are taxed 19 percent on top of another 19 percent for the transportation fees of the goods into the country. The VAT destroys American industries’ ability to promote exports, while encouraging foreigners to sell their products to Americans – it must be amended or eliminated.
In 2001, European countries had a VAT rate of 19.2 percent. By 2005, 94 percent of U.S. exports received a VAT. In the same year, foreign governments received rebates of $239 billion from the tax while collecting $131 billion from U.S. producers of goods and services.
It is not surprising that the U.S. has become a nation promoting imports over exports under these unfair and harsh tax conditions. It can be seen why some companies choose to move overseas to produce their product abroad to avoid this monstrous tax and gain the advantage of it in some cases. Because of this detrimental tax, American firms cannot compete worldwide.
Numerous attempts have been made by Congress to offset the tax – in 1974 the Nixon administration was urged to negotiate the tax during the Tokyo Round of global trade talks – only to be ignored by the other countries.
In 1972 and 1984, Congress changed the tax system to exempt between 15 and 30 percent of an exporter’s income from U.S. taxes to offset the disadvantage of the VAT. The European Union (EU) complained to the World Trade Organization (WTO) in 1998, saying the U.S. tax exemption, acting as a tax subsidy, was a direct violation of the WTO agreement. In 1999 the WTO ruled in favor of the EU, giving the U.S. one year to change its tax exemption law or face penalties from the WTO.
Again in 2000, Americans enacted new tax legislation to offset the VAT, which resulted in yet more EU complaints and another WTO case. The WTO decided in favor of the EU, leading to a ruling in 2002 allowing the EU to impose retaliatory tariffs of $4 billion each year on U.S. imports. By this time 25 European nations enacted the VAT to usurp America’s ability to trade.
In 2004 Pres. Bush created new legislation again to offset the VAT. This again led to complaints from the EU – again filing a case with the WTO – arguing export subsidies were provided by the new legislation. In 2006 President Bush and Congress stopped enacting the tax provisions to U.S. exporters, demonstrating how the EU and WTO had successfully usurped the U.S. of its power to promote fair and free trade.
During the battle between the WTO and the U.S., all nations were provided full VAT privileges, usurping the U.S. of fair trade. The WTO and EU do not serve in the best interest of the U.S. They are acting to support and promote continuance of this debilitating tax.
The only way the WTO will allow us to offset the VAT is to have one of our own. We could feasibly do this if we were to lower our income tax. Until we do get a VAT of our own, our companies and our nation will continue to suffer against this unfair disadvantage.
While the US is straitjacketed by partisan bickering and paralyzed by insane trade policies, Germany and other countries are surging ahead with enlightened, rational thinking which gets translated into effective policies that keep the German government in a position of solvency and keep German factories humming. Meanwhile, the US engages in a race to the bottom encouraging the export not of products but of jobs and defunding the government by giving tax breaks to corporations and the rich. Another informative article is the following:
In a June 28, 2010, economist Ian Fletcher said “Germany, like the U.S., is nominally a free-trading country. The difference is that, while the U. S. genuinely believes in free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century German economist Friedrich List … So despite Germany’s nominal policy of free trade, in reality a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers.”
Fletcher quoted from a report by the Heritage Foundation: “Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some good and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members.”
Another opinion of Germany’s export success as reported in The New York Times, is “the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder. By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies – emerging and developed alike – demanded.”
The same article reported that Germany’s Chancellor Angela Merkel resisted the use of government stimulus spending that the United States and some European partners used to handle the recession. Instead of extending unemployment benefits like the United States has done several times since the recession began, Germany “extended the “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions. At its peak in May 2009, roughly 1.5 million workers were enrolled in the program,” and the Organization for Economic Cooperation and Development estimated that “more than 200,000 jobs may have been saved as a result.”
As a result, Germany’s unemployment rate at the height of the global recession was 9.0 percent in contrast to the 10.2 percent of the United States. The German jobless rate in October 2010 was down to 7.0 percent in contrast to the 9.6 percent of the United States. Germany is one of the few economies experiencing a solid recovery and one of the even fewer economies without a substantial deficit crisis on its hands. Germany’s exports surged month by month in 2010, but year-end data hasn’t been released yet.
The US model of free trade has largely worked to create a trade deficit in the US, encourage a consumer based economy based on cheap imported products and undermine American workers. While the US encourages the offshoring of US corporations and unlimited imports into the US economy, it gives no incentives for corporations based in the US to export to other countries. As a result it is at a competitive disadvantage, and is losing out in the struggle to supply its government with cash and its workers with jobs. But instead of a rational assessment of this situation and a resolve to do something about it, the US argues about the President's birth certificate and engages in pointless, meaningless culture wars tantamount to arguing about how many angels can dance on the head of a pin.