China goes against US natural gas

Hi Jan.  First, I want to let you know that I appreciate your reply.  I was wondering if you could clarify a few more things for me.  I feel like I understand the tax implications of the US-Canadian issue, but I certainly could be missing something.  

 

On 8/11/2018 at 3:18 AM, Jan van Eck said:

To parse out the various issues you raise:  Canada's big-dollar exports to the USA do not require "workers" in the sense you raise them, simply because most of the exports are resource materials shipped in bulk, with lower labor content. 

^This is a good point, and I agree it could account for much of the population disparities concerning the relatively equal trade values between the countries.   

On 8/11/2018 at 3:18 AM, Jan van Eck said:

cheap Canadian electricity

^Another good point, and a good example of an advantage that Canada would have to drive costs down.  But after reading your post, I started wondering why Canada can make electricity for so much cheaper than the US?  So I looked it up.  It turns out that hydro power is very inexpensive to produce, and Canada produces about 350 twh from hydro.  However, it turns out that the USA also produces about 300 twh from hydro.  So why not just ship those materials to plants built nearby US hydro power?  Then I thought that maybe all US hydro power is located in US metro areas which consume all that power, driving costs back up.  So I looked that up, too.  And sure enough, there are many hydro plants in the US that are near the coast (for shipping) but far from metro areas.  Maybe I am missing something, but there must be something more to it than just low cost power, because there seems to be a lot of places in the US that can produce low cost power on par with what Canada can produce...

Then there was this:

On 8/11/2018 at 3:18 AM, Jan van Eck said:

The competitive advantage that Canadian plants and workers have is that they do not carry a health-care burden

At first I thought, "Wow, that makes total sense.  It is not wonder US companies cannot compete."  However, the more I thought about it, the more I realized that health-care does not come free, and even more so when it comes from the government.  So, even though it may at first appear to be free to the fact that the corporations do not directly pay for it on their balance sheet, it must still be paid for by someone via taxation.  Now, assuming the Canadians do not have some actual competitive advantage in the production of health-care, itself (which would therefore result in lower heath care costs), then ultimately, the Canadian government must get an equivalent amount of money that would be necessarily retrieved in the US.  That money must come from one of two places: 1.) higher taxes on Canadian people/businesses, in which case the Canadian businesses would not actually have a competitive advantage over US businesses (since what the Canadians would save in reduced health care costs would then be spent on higher corporate taxes), or 2.) tariffs on other nations, in which case, Canadian businesses would have an advantage. 

This brings me to my first (and really my only) clarifying question.  You wrote:

On 8/11/2018 at 3:18 AM, Jan van Eck said:

The imposition of a VAT is a new phenomenon, and I do not believe it has any impact on the trade relationship

Now, if we are looking purely at the VAT, it would not have any impact on the trade relationship since the tax is removed on exports and it is added to imports.  Two countries could even have differing VAT rates and it would still end up being a wash since the same tax rate would be applied, like you said: on the retail end. 

But therein seems to lie the real problem.  For VAT to work properly, both trade nations need to earn the majority of their tax revenues from the VAT.  So here is an example for illustrative purposes:

Nation "C" has 20% VAT and 0% corporate income taxes.

Nation "U" has 0% VAT and 20% corporate income taxes.

Business C resides in nation C, and it produces a product for $100.  Then a 20% VAT is added to it (nation C has a 20% VAT), resulting in a product priced at $120 in nation C.

Business U resides in nation U, and it produces a competing product for $100.  No VAT are added to it (nation U has a 0% VAT), resulting in a product priced at $100 in nation U.

Since business C's product costs $120 and business U's similar product costs $100, business C cannot compete, and gets pushed out of the market.  That is why VAT are REMOVED when exported.  Therefore, the $120 product has the 20% VAT removed, resulting in a $100 product made by business C when exported and then sold in nation U.  Now, both business C and business U can sell their product for $100 in nation U.  

But there is another problem.  Business C's product sells for $120 in nation C, but business U's product sells only for $100.  That will push business C's products out of the market in nation C.  So, the VAT is then ADDED to all imports, including business U's product.  This raises the cost of business U's $100 product to $120 in nation C.  

After all is said and done, both products cost $120 in nation C, and both products cost $100 in nation U.  

All is fair, right?

Well, that is what nation C wants the people from nation U to believe.  There are even idiot economists who go around in the public media explaining why VATs are "trade neutral", and then show the above example.  Those same economists always seem to forget the following:

If are assume the products from business C and U are equal in quality and are now equal in price (because the VAT was removed from exports and added to imports), we can then safely assume that both companies sell the same number of products in each country.  For the sake of the illustration, let us also assume that each product is sold for the same "profit" (aka: income from operations) of $1 per product sold.  This means that both companies bring in $100 of income ($1 profit x 100 products sold) for the same amount of work. 

All's fair, right?

Well, not quite.  

Business C is now charged 0% corporate income taxes.  This means business C keeps all $100 as net profit.  Business U, on the other hand, is now charged 20% in corporate income taxes, and so they only get to keep $80 in net profit.  Both companies performed the same work, and both companies had the same 20% tax rate applied to them, but the net profits of both companies ended up being drastically different! 

$100 > $80  

This difference occurred because of the difference of VAT vs. income tax.  The companies that operate under the income tax must raise then raise the cost of their products to account for the additional taxes they must pay (since they end up paying both income taxes AND also some VAT), but that their competitors do not have to pay both; in fact, their competitors only end up having to pay half of the VAT and none of the income taxes.  Thus, the end result of the VAT vs. income tax system ends up looking like this:

Product C being sold in Nation U $100

Product U being sold in Nation U $120

................................................................

Product C being sold in Nation C $120

Product U being sold in Nation C $140

As a result of the VAT, all of the products manufactured in nation U get pushed out of the market.  This is because a VAT acts as a tariff when and only when placed upon countries that derive a larger % of their tax revenues from income taxes rather than the VAT.  

The VAT is trade neutral when it is placed on countries that derive a larger % of their tax revenues from VAT rather than income taxes.

^This is the prime reason why the entire world has shifted to the VAT system rather than the the income tax system, even though the income tax system is superior in every point other than its collection.

Since the US uses the income tax to generate tax revenue and it does not use the VAT, US corporations are suffering from a horrendous trade barrier in basically every country in the world.  When we look at the actual numbers considering Canada-US, this amounts to an additional 10% tariff on all US products being imported into Canada.  The proper response, then, would be for the US to put a counter tariff of 10% on all Canadian products being imported into the US.  This would make trade fair and allow the free market to take over.

Or am I missing something?

 

On 8/11/2018 at 3:18 AM, Jan van Eck said:

the other big advantage that Canadian companies have is a vastly depreciated Canadian dollar

^I understand this is a huge advantage (dare I say: "Yuuuge"?).  However, it is only an advantage when people have been "convinced" that free trade is somehow good.  Free trade is not good...it is DANGEROUS.  Free trade gives an unfair advantage to any country willing to depreciate its currency. 

The proper response to a depreciating currency is that the opposing country should simply increase tariffs on the country which is depreciating its currency.  And bam!  Problem solved.  The increased tariffs will counter the effects of the depreciated currency.  Let them depreciate it more, and that gives you more room to increase tariffs even further.  If you continue this process, the free market will eventually take over since the aggressor who is depreciating its currency will eventually have all capital in-flows cease, resulting in a liquidity crunch and depression...then the riots and starvation...  The point is, though, that all other nations will take notice and start playing fair.

So it seems the real problem all along was NAFTA, not the depreciating Canadian currency.  NAFTA prevented the US from properly responding to the Canadian economic attacks against the US when the Canadians depreciated their currency.  The proper response should have been the the US defended itself against the Canadian aggressors by increasing tariffs, but NAFTA prevented this, and it allowed the Canadians to take extreme advantage of the US.  So why did NAFTA happen in the first place?  Well, it is one of two things: either the US politicians were just bamboozled (because they were idiots), or they were bribed (because they were villains).  Call it what you will, but NAFTA has demonstrated for us with absolute certainty is that US politicians are either stupid or evil.  It is highly unlikely that they were both and practically impossible that they are neither.  I'll let you decide which of the two is the more likely option.   

 

On 8/11/2018 at 3:18 AM, Jan van Eck said:

Now in manufactured goods most of those flow from Ontario and Quebec

Interestingly, these are two of the provinces with the highest VAT rates (although 10% of Quebec's comes in the form of a sales tax, which in all intents and purposes, other than in its collection, is equivalent to a VAT).  This is very likely not a "coincidence" since this high VAT rate gives Canada's two largest manufacturing powerhouses a 15% competitive advantage over US companies.  Although, if we want to be fair, many US states impose a sales tax, and so this should be subtracted from the VAT, resulting in only about a 10% competitive advantage for Canadian manufacturing; hence why I suggested that it seems that the only fair thing for the US to do would be to impose a 10% retaliatory tariff on ALL Canadian manufactured goods.   This 10% tariff on all goods would finally make trade fair between the US and Canada.  

As for the resulting depression you said would likely occur as a result of the 10% tariff... well, that is Canada's problem for allowing their politicians to steal the wealth of the Canadian people through highly inefficient government programs.  Those programs will shutdown because they need to shutdown for the sake of the Canadians.  Depression = short term pain in return for the long term gain of replacing those inefficient government programs with free-market based efficient ones.  We do live in a world of limited resources, after all.  The only ones who seem unable to comprehend that fact are politicians trying to get elected by buying votes from the sheeple who are bad at math.  

...  

Unless I am missing something?

And that is, of course, my question.  What am I missing?  I can't be the only one who realizes that the entire world is using the VAT to scam America's wealth away.  Is my thinking incorrect?  And if so, then how?  Or has the US politician been completely and utterly bamboozled by every other country in the world to the point that no one realizes this fact?  OR maybe it is this: every other country in the world has been paying off US politicians so that they make these horrible trade deals ("trade failures" is more accurate)?  I figure the obvious answer is that I am wrong, but if so, then how was my reasoning incorrect?  I need my misunderstanding to be articulated so I can understand what I am misunderstanding.  To me it seems that the concept of "free trade" (which people have been peddling in the US...Koch brothers, et al.) is really nothing more than this: Make Americans Suffer Again (#MASA).  

Tariffs = Fair trade.  

Free Trade = Unfair trade. 

^If I have to choose between the two, I'd choose liberty and justice for all... 

...Tariff on!

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New York State, because of Niagara Falls, actually makes quite a bit of hydro. There is quite a bit in the Northwest too, Hoover Dam and Lake Mead are great sources. But the issue is how much electricity the USA consumes. The USA is also a very large oil producer, but we are also the world's leader in consumption.

With health care there is a cost issue. Not the who pays the cost, but rather how much it costs. The USA system is roughly 3X cost per user. If you have the right insurance, it is very good, but the market place is extremely inefficient, the power isn't in the providers or the consumers (doctors, nurses, and patients). 

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17 hours ago, Epic said:

 

  However, the more I thought about it, the more I realized that health-care does not come free, and even more so when it comes from the government.  So, even though it may at first appear to be free to the fact that the corporations do not directly pay for it on their balance sheet, it must still be paid for by someone via taxation.  Now, assuming the Canadians do not have some actual competitive advantage in the production of health-care, itself (which would therefore result in lower heath care costs), then ultimately, the Canadian government must get an equivalent amount of money that would be necessarily retrieved in the US.  That money must come from one of two places: 1.) higher taxes on Canadian people/businesses, in which case the Canadian businesses would not actually have a competitive advantage over US businesses (since what the Canadians would save in reduced health care costs would then be spent on higher corporate taxes), or 2.) tariffs on other nations, in which case, Canadian businesses would have an advantage. 

This brings me to my first (and really my only) clarifying question.  You wrote:

Now, if we are looking purely at the VAT, it would not have any impact on the trade relationship since the tax is removed on exports and it is added to imports.  Two countries could even have differing VAT rates and it would still end up being a wash since the same tax rate would be applied, like you said: on the retail end. 

But therein seems to lie the real problem.  For VAT to work properly, both trade nations need to earn the majority of their tax revenues from the VAT.  So here is an example for illustrative purposes:

Nation "C" has 20% VAT and 0% corporate income taxes.

Nation "U" has 0% VAT and 20% corporate income taxes.

Business C resides in nation C, and it produces a product for $100.  Then a 20% VAT is added to it (nation C has a 20% VAT), resulting in a product priced at $120 in nation C.

Business U resides in nation U, and it produces a competing product for $100.  No VAT are added to it (nation U has a 0% VAT), resulting in a product priced at $100 in nation U.

Since business C's product costs $120 and business U's similar product costs $100, business C cannot compete, and gets pushed out of the market.  That is why VAT are REMOVED when exported.  Therefore, the $120 product has the 20% VAT removed, resulting in a $100 product made by business C when exported and then sold in nation U.  Now, both business C and business U can sell their product for $100 in nation U.  

But there is another problem.  Business C's product sells for $120 in nation C, but business U's product sells only for $100.  That will push business C's products out of the market in nation C.  So, the VAT is then ADDED to all imports, including business U's product.  This raises the cost of business U's $100 product to $120 in nation C.  

After all is said and done, both products cost $120 in nation C, and both products cost $100 in nation U.  

All is fair, right?

Well, that is what nation C wants the people from nation U to believe.  There are even idiot economists who go around in the public media explaining why VATs are "trade neutral", and then show the above example.  Those same economists always seem to forget the following:

If are assume the products from business C and U are equal in quality and are now equal in price (because the VAT was removed from exports and added to imports), we can then safely assume that both companies sell the same number of products in each country.  For the sake of the illustration, let us also assume that each product is sold for the same "profit" (aka: income from operations) of $1 per product sold.  This means that both companies bring in $100 of income ($1 profit x 100 products sold) for the same amount of work. 

All's fair, right?

Well, not quite.  

Business C is now charged 0% corporate income taxes.  This means business C keeps all $100 as net profit.  Business U, on the other hand, is now charged 20% in corporate income taxes, and so they only get to keep $80 in net profit.  Both companies performed the same work, and both companies had the same 20% tax rate applied to them, but the net profits of both companies ended up being drastically different! 

$100 > $80  

This difference occurred because of the difference of VAT vs. income tax.  The companies that operate under the income tax must raise then raise the cost of their products to account for the additional taxes they must pay (since they end up paying both income taxes AND also some VAT), but that their competitors do not have to pay both; in fact, their competitors only end up having to pay half of the VAT and none of the income taxes.  Thus, the end result of the VAT vs. income tax system ends up looking like this:

Product C being sold in Nation U $100

Product U being sold in Nation U $120

................................................................

Product C being sold in Nation C $120

Product U being sold in Nation C $140

As a result of the VAT, all of the products manufactured in nation U get pushed out of the market.  This is because a VAT acts as a tariff when and only when placed upon countries that derive a larger % of their tax revenues from income taxes rather than the VAT.  

The VAT is trade neutral when it is placed on countries that derive a larger % of their tax revenues from VAT rather than income taxes.

^This is the prime reason why the entire world has shifted to the VAT system rather than the the income tax system, even though the income tax system is superior in every point other than its collection.

Since the US uses the income tax to generate tax revenue and it does not use the VAT, US corporations are suffering from a horrendous trade barrier in basically every country in the world.  When we look at the actual numbers considering Canada-US, this amounts to an additional 10% tariff on all US products being imported into Canada.  The proper response, then, would be for the US to put a counter tariff of 10% on all Canadian products being imported into the US.  This would make trade fair and allow the free market to take over.

Or am I missing something?

 

^I understand this is a huge advantage (dare I say: "Yuuuge"?).  However, it is only an advantage when people have been "convinced" that free trade is somehow good.  Free trade is not good...it is DANGEROUS.  Free trade gives an unfair advantage to any country willing to depreciate its currency. 

The proper response to a depreciating currency is that the opposing country should simply increase tariffs on the country which is depreciating its currency.  And bam!  Problem solved.  The increased tariffs will counter the effects of the depreciated currency.  Let them depreciate it more, and that gives you more room to increase tariffs even further.  If you continue this process, the free market will eventually take over since the aggressor who is depreciating its currency will eventually have all capital in-flows cease, resulting in a liquidity crunch and depression...then the riots and starvation...  The point is, though, that all other nations will take notice and start playing fair.

So it seems the real problem all along was NAFTA, not the depreciating Canadian currency.  NAFTA prevented the US from properly responding to the Canadian economic attacks against the US when the Canadians depreciated their currency.  The proper response should have been the the US defended itself against the Canadian aggressors by increasing tariffs, but NAFTA prevented this, and it allowed the Canadians to take extreme advantage of the US.  So why did NAFTA happen in the first place?  Well, it is one of two things: either the US politicians were just bamboozled (because they were idiots), or they were bribed (because they were villains).  Call it what you will, but NAFTA has demonstrated for us with absolute certainty is that US politicians are either stupid or evil.  It is highly unlikely that they were both and practically impossible that they are neither.  I'll let you decide which of the two is the more likely option.   

 

Interestingly, these are two of the provinces with the highest VAT rates (although 10% of Quebec's comes in the form of a sales tax, which in all intents and purposes, other than in its collection, is equivalent to a VAT). 

...  

Unless I am missing something?

And that is, of course, my question.  What am I missing?  I can't be the only one who realizes that the entire world is using the VAT to scam America's wealth away.  Is my thinking incorrect?  And if so, then how?  Or has the US politician been completely and utterly bamboozled by every other country in the world to the point that no one realizes this fact?  OR maybe it is this: every other country in the world has been paying off US politicians so that they make these horrible trade deals ("trade failures" is more accurate)?  I figure the obvious answer is that I am wrong, but if so, then how was my reasoning incorrect?  I need my misunderstanding to be articulated so I can understand what I am misunderstanding.  To me it seems that the concept of "free trade" (which people have been peddling in the US...Koch brothers, et al.) is really nothing more than this: Make Americans Suffer Again (#MASA).  

Tariffs = Fair trade.  

Free Trade = Unfair trade. 

^If I have to choose between the two, I'd choose liberty and justice for all... 

...Tariff on!

Getting back to Chad Conway on his massive post  ["Epic"], yes, Chad, you are really "missing something."  I am going to try to go over the highlights of where I think you are going wrong.

1.   The Value Added tax is just about exactly the same as the State sales tax you find in the USA.  The tax is levied on the retail purchase. It does not (or should not) show up in the internal manufacturing chain.  Now you have made detailed illustrations of Country A and B and C, and how you conclude different tax structures affect the trade between those countries and the relative transfer of wealth between the countries.  It does not quite work that way.   The reason is that the manufacturer in your examples does not set the retail sales price, which is typically anywhere from 40% to 400% higher.  If you take for example shampoo, you may safely assume that the discount trail on the retail price is 40-10-8-2, so the retailer takes 40% off the price as his payment to the distributor, and then there is a 10% allowance for advertising (so the manufacturer is contributing to retail sales advertising of the product in what is in effect a cost-share), then there is another 8% for the distributor, and then there is 2% for cash discount. 

     So if you start off with that retail taxed case of shampoo for $100 then the manufacturer is receiving $47.92.  The 25% VAT is not levied on his receipts, but on the final price, which the consumer is paying.  The other guys in the chain do not pay the VAT  (typically; of course nothing to stop some Minister of Finance to structure chain VATs if he wanted to, hey that is what national sovereignty is all about). Whether the VAT is 5% or 12% or 25% is not affecting what the manufacturer receives; he is remote from the whole VAT thing. 

2.   Now the competing manufacturer in country #2 is also building the product and attempting to sell it for $100, this time as an export.  He still requires the retailer and the distributor.  By the time the dust settles he again is getting $47.92.  In sum: both manufacturers receive the same amount - except for exchange rates!!!!!   For the imported product from country B/#2, the final buyer is still paying $100 plus the 25% VAT, so it makes no difference. 

3.   So the VAT is NOT a tariff.  It has more of the flavor of a national sales tax, instead of each Canadian Province levying a Provincial Sales Tax.  Of course,  nothing to stop some Province from levying a PST anyway!  Hey, they gotta raise the coin somehow, why not some extra tax. 

4.   The idea of a VAT is that is it supposed to be a tax on consumption.  So if you earn millions but buy nothing, then you pay nothing.  It is an absurd concept, to be sure, but I didn't make the world, and all kinds of things out there are absurd. 

5.   Canadian electricity is much cheaper than US electricity because it is being built and run in Canadian dollars, and the Loonie is trading at a discount of 0.76  [reciprocal of $1 US = $1.31 CDN].  Since both countries have the same or close internal costs, including wages, then if Canada is trading at a substantial discount then it can sell its products with a hefty profit cushion built in.  So if you for example do aluminum smelting in the Saguenay instead of on the Columbia River, your Quebec electricity costs are only 3/4 and your wage bill is only 3/4, all compliments of the sinking loonie exchange rate.    In October 3013 the exchange was at $1.03;  in January 2015 it was at $1.42.  Now it is sitting at $1.31.  These fluctuations are far more determinative of relative competitiveness than any other factor. 

6.   Socialized Canadian health care spreads the costs over all of society,not simply the manufacturing sector.  And because you have no insurance companies and their extravagant managerial lifestyles to support, the costs run less. And because Canada has mandatory patenting, and single-point purchasing of pharma, it wrings costs out of those sectors.  Canada's health care is vastly cheaper that US care.  However, due to other absurd govt programs, including Industrial Wind machines and Solar, the savings get chewed up and then rationing sets in to keep costs to the revenue stream.  Canada has rationing, just as the US does; the difference is that in the US the rationing is by knocking people off the insurance system, in Canada the rationing is by stretching out surgeries. Canada could easily have the money to run a top-notch healthcare system on the French model, if they resisted the temptation to get into loony projects.   And that, they cannot resist. 

7.   The world is NOT using the VAT to scam America's wealth away.  The US wealth is being frittered away both internally and externally, through massive military spending.  The US gets involved in building combat planes that cost between $300 million and $1 billion each. It maintains this million-man army.  It maintains this massive navy.  It maintains an entirely separate crew of tough guys, the US Marines. All that has to get paid for.  The problem is that the military is highly capital-intensive; look at one submarine at $3.5 billion, not including development costs; one aircraft carrier at $13.5 Billion, not including the support fleet of frigates and tenders and other stuff that sails with it. It is the Beaucoup Bucks.  The rest of the world simply coasts, and lets the USA be the world policeman on the US nickel.  That is where the wealth extraction is.  Not in VAT taxes.  In the military. 

Let me know if this helps.  I will be doing a separate Discussion Article on the Canadian exchange rate.  Cheers. 

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(edited)

1 hour ago, John Foote said:

New York State, because of Niagara Falls, actually makes quite a bit of hydro. There is quite a bit in the Northwest too, Hoover Dam and Lake Mead are great sources. But the issue is how much electricity the USA consumes. The USA is also a very large oil producer, but we are also the world's leader in consumption.

With health care there is a cost issue. Not the who pays the cost, but rather how much it costs. The USA system is roughly 3X cost per user. If you have the right insurance, it is very good, but the market place is extremely inefficient, the power isn't in the providers or the consumers (doctors, nurses, and patients). 

The power output of Niagara Falls is governed by Treaty, and there are roughly equal shares.  Remember that Niagara is only 177 feet high, and Churchill Falls in Labrador (power sold by Hydro Quebec) has a vertical standpipe fall of 1,000 feet.  They get far more power out of Churchill that Niagara could ever get, simply due to the drop.

Analogously, the dam structures on the Manicouagan and James River systems are from a Plateau of 1,000 feet above seal level, as it cascades off the plateau and down to the sea.  Admittedly, each dam by itself does not get that drop, but there are a series of dams on the rivers and collectively they harness the drop.  So Canada is able to extract much more power out of its river systems than the Americans can. It gives them "energy density" and thus economies of scale in transmission and production. Bottom line:  Canada's power is always going to be cheap. For New England and New York City, their best deal is to forget about producing the stuff themselves and simply buy it from Hydro Quebec. 

Edited by Jan van Eck
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2 hours ago, Jan van Eck said:

Let me know if this helps. 

Hi Jan.  Thanks for the reply!  Your response did help, but probably not in the way you had hoped it would.  There are several very wise individuals on the Oilprice forums, and the amazing posts I have seen on this website have a lot to do with why I finally decided to join and begin posting myself.  I had been lurking for quite some time before finally deciding to take the next step by joining in the conversation, and I'm glad I did.  I have learned a lot here, and I look forward to learning a lot more.  I only mention this because I wanted to make sure that you knew that you were one of those wise individuals, and I have highly respected many of your posts.  Your wisdom and clarity of thought are a rarity and a pleasure to me.  

But your response did not help me to understand what I was missing.  Rather, it helped me to understand why so many other people have been missing it.  After all, if Jan, of all people, and Jan, who could be the cleverest of all people I have had the pleasure of interacting with, has managed to misunderstand the implications of the VAT, then it is no wonder that so many other and much less clever people have been struggling so badly with it.  So, yes, your response has helped me indeed.  

Now let me see if I can help you to understand how the VAT affects US businesses.    

...

But before we do, there are a few things I wanted to mention: 

 

4 hours ago, Jan van Eck said:

I will be doing a separate Discussion Article on the Canadian exchange rate.

^I look forward to reading this one!

 

3 hours ago, Jan van Eck said:

Since both countries have the same or close internal costs, including wages, then if Canada is trading at a substantial discount then it can sell its products with a hefty profit cushion built in.  Canadian electricity is much cheaper than US electricity because it is being built and run in Canadian dollars, and the Loonie is trading at a discount of 0.76

^This did help to clarify what I was looking for.  I wanted to know what economic advantage the Canadians had over the US, and you put it nicely and eloquently in the above statement: their main economic advantage is their depreciating currency.  And as I mentioned previously, a depreciating currency is normally not an advantage.  Depreciating your currency is like shooting yourself in the foot to kill your enemy upon whose head you are currently standing.  Yes, that is one way to defeat a foe, but it is much wiser to first remove your foot and then shoot his head.  Depreciating one's currency hurts citizens in the present in order to benefit the citizen's industry in the long run.  In the long run, you defeat your foe, but you will have to limp a long for quite some time because of it.  In contrast, a strong dollar not only helps the citizen to grow their wealth, but it also reduces the tax burden on the citizen by allowing the government to increase tariffs: that's a win-win for your citizens.  However, thanks to NAFTA and our other hobbling trade agreements, the US citizen has effectively had their heads placed under the feet of their enemies who have been oh so very eager to pull that trigger.  Now, I loath the idea of calling Canada the enemy of the US, but it is Canada who has pulled the trigger, figuratively of course, by depreciating their currency and thereby working to drive US businesses out of business in the process.  Economic though it is, it is still an attack, and Canada is the aggressor.  The resent US tariffs on Canada are the response.  

 

3 hours ago, Jan van Eck said:

Socialized Canadian health care spreads the costs over all of society,not simply the manufacturing sector.  And because you have no insurance companies and their extravagant managerial lifestyles to support, the costs run less.  Canada's health care is vastly cheaper that US care.

^This is a really good point.  Like the currency devaluation, this is a huge competitive advantage Canada has over the US.  I commend Canada for their ability to lower costs and pass those economic efficiencies onto their businesses.  It is a clever move for their nation's industry, and Jan, I appreciate you taking the time to clarify this point for me. 

3 hours ago, Jan van Eck said:

Canada could easily have the money to run a top-notch healthcare system on the French model, if they resisted the temptation to get into loony projects.

Can you really blame them for such projects?  I mean, look at the name of their dollar.  ;)

3 hours ago, Jan van Eck said:

The US wealth is being frittered away both internally and externally, through massive military spending.

^Yup.  I often don't think people (especially those in gov't who seem so willing to spend other people's money) realize just how much depreciation really costs.  If an aircraft carrier costs $12.8 billion, and it only stays in service for 50 years, that means it costs $256 million each year in depreciation (excluding upkeep costs).  The US has 19 of these, which means each year the US spends $4.9 billion in sunk costs just to keep them afloat.  (I feel there is a bit of irony hidden somewhere in those words).  When you add the fact that each has around 60 fighter jets, and that each fighter costs around $100 million, well, that is a lot of depreciation.  What is worse, the federal government can't write that depreciation off!  

On the other hand, I sure wouldn't want to pick a fight with a US aircraft carrier, so these costs come with benefits.  

...

On the other hand, the VAT does not come with benefits, at least not to US businesses.  So, here is what I needed to clarify for you:

 

4 hours ago, Jan van Eck said:

So if you start off with that retail taxed case of shampoo for $100 then the manufacturer is receiving $47.92.  The 25% VAT is not levied on his receipts, but on the final price, which the consumer is paying.  The other guys in the chain do not pay the VAT  (typically; of course nothing to stop some Minister of Finance to structure chain VATs if he wanted to, hey that is what national sovereignty is all about). Whether the VAT is 5% or 12% or 25% is not affecting what the manufacturer receives; he is remote from the whole VAT thing. 

2.   Now the competing manufacturer in country #2 is also building the product and attempting to sell it for $100, this time as an export.  He still requires the retailer and the distributor.  By the time the dust settles he again is getting $47.92.  In sum: both manufacturers receive the same amount

^Here is actually where you made your error.  The point I have been trying to make is that these nations are using the VAT to generate revenue in lieu of some other form of taxation...namely: corporate income taxes.  Since nations with VATs can generate revenue from VATs, they do not need to then tax their business' income, allowing those businesses to generate higher profits, and thereby lower their prices to more effectively compete in the market.  Businesses that are subject to income taxes, on the other hand, do not have this option, and as a result, they get priced out of the market.  For instance, the $47.92 you mentioned is not actually net profits, like you have assumed when you said "both manufactures receive the same amount."  They are not receiving the same amount at all.  This $47.92 is operating profit, not net profit.  Yes, they are receiving the same amount in operating profit, but you can't use operating profit to buy anything because it does not actually have any real value yet.  Operating profit only gains value after it has been turned into net profit, which arrives only AFTER the income tax has been removed.  At a 20% income tax (the amount used in my example), the company subject to income taxes would pay $47.92 * 20% = $9.58 in additional taxes that the other nation's company does not have to pay, leaving the first company with only $38.34 of profit (not the $47.92 that you had incorrectly assumed was net profit).  So again, even though the sale prices of the items are the same in both countries after the VAT, and even though the amount of operating profit is the same with both companies after the VAT, the company subject to income taxes earns only $38 on the same amount of work that the other company earns $48.  That is not fair at all!  Of course, in reality, the end result is that the excess profits earned by the company subject to VATs would allow them to lower prices, eventually driving the companies subject to income taxes out of business...hence, the VAT operates as a trade barrier, and a large one at that.

 

3 hours ago, Jan van Eck said:

So the VAT is NOT a tariff.

You are right, by definition the VAT is it not.  I never disagreed with this statement.  In fact, I wasn't trying to imply that it was a tariff.  I was trying to say that it acted as a trade barrier in the exact same way that tariffs act as trade barriers.  So it doesn't matter whether you call a foreign VAT a tariff on US business or whether you consider the US income tax a tariff on US business, the reality is when the two are used together during trade, and only when they are used together, then the two of them have the exact same end result as if a tariff had been applied.  If is looks like a duck, quacks like a duck and walks like a duck...its a duck.  The VAT, when applied to a nation that imposes a corporate income tax, walks like a tariff, quacks likes a tariff, and has the exact same end result as a tariff = it imposes a trade barrier upon the country with the income tax, and that trade barrier acts to unduly punish the businesses of that nation.  

The world is NOT using the VAT to scam America's wealth away. 

I understand that the VAT was never intended to scam America's wealth away; however, the reality is that the US is the only major world economy that still uses the income tax (except for maybe Hong Kong).  As a result of the incompatibility between the two tax systems, the VAT is currently being used to scam America's wealth away because it is forming a trade barrier that prevents US companies from fairly competing in the world market, resulting in US companies losing market share (and the accompanying net profits) to their foreign competitors.  This has resulted in a transfer of wealth from US corporations (and their employees, US citizens) to other nations who have gained that market share (as well as those net profits).  "Scam" might be too harsh of a word since it implies intentional deceit, but that transfer for net profits was gained as a result of an unfair advantage, and so I think it is still reasonable to agree that America's wealth is being unfairly taken away, whether or not it was part of any scam. 

3 hours ago, Jan van Eck said:

The Value Added tax is just about exactly the same as the State sales tax you find in the USA. 

Yes, exactly.  

21 hours ago, Epic said:

Interestingly, these are two of the provinces with the highest VAT rates (although 10% of Quebec's comes in the form of a sales tax, which in all intents and purposes, other than in its collection, is equivalent to a VAT). 

^I quoted myself just to make sure you knew that I completely understand and agree with you.  A VAT and a sales tax are basically identical in how they apply to the consumer.  They do differ in how they are accounted for and collected, with the cost advantage going to the sales tax but the collection rate advantage going to the VAT.  Moreover, my point was not that the VAT by itself imposed any form of trade barrier.  It does not.  When two nations that both use VATs trade, then there is no trade barrier imposed on either country since one side is not being punished by an additional corporate income tax burden.  The trade barrier is imposed only when one nation has a VAT and another generates tax revenues via corporate taxes.  So, if the US eliminated their corporate income taxes and replaced them with a 15% national sales tax (or their own VAT), then certainly all would be well with US trade.  The trade barriers would be neutralized and Canada would be forced to devalue their currency even further in order to maintain their unfair trade advantage (like China has currently been doing in response to the latest US tariffs).  

All I am saying is this: simply because Canada, Europe, and China are using underhanded and deceptive trade tactics by devaluing their currency and applying VATs in order to win unfair advantage over the US, why should the US then be forced to respond by sinking to their level, by devaluing the US dollar at the expense of the US citizen, and by imposing inefficient VATs at the expense of US savers?  This is even more so the case when the US has such a simple and effective means of leveling the playing field: tariffs.  

Tariffs are simple to account for, cost-effective, easy to collect, and most importantly, they don't require the passing of a constitutional amendment. 

Here is my fear: if I cannot even get Jan, with all his rapier wit and clever wordplay, to understand the debilitating implications of corporate taxes upon net profits in the face of the VAT (which is being used by other nations as a substitute for those corporate taxes), then how in the world could I ever get enough support from the average US voter in order to pass an amendment that requires agreement of 66% of the House and Senate, both of whom would be needed in order to authorize the US to implement a new form of taxation that would then allow the reduction of corporate income taxes down to 0%?  If you follow US politics, you know that the US has recently (just this year) reduced corporate taxes from 39% down to 21%, and Americans were up in arms claiming that this was merely a ploy to benefit the rich at the expense of the poor.  Can you imagine trying to convince them to lower that tax rate to 0% and replace it with a sales tax on the consumer?!?!?  

There would be blood in the streets. 

But if the corporate tax rate isn't further reduced (or if tariffs aren't further imposed), then US companies still won't be able to compete effectively in the world market.  And unless they can compete fairly, then there is only one end game for US debt... 

...and when that end game comes, then the American people really will start to realize just how disastrous the effects of depreciation can be, and 50 years later, US aircraft carriers will be a thing for the history books.  If that time ever comes, it will not be enemy guns that have defeated the US military, but rather, it will be defeated by the economic ineptitude of their own citizens.  

 

 

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Chad, your massive post is overwhelming (yet again!).  I see some errors in there, but cannot reply immediately.  Promise to get back to you on this further.  Cheers.

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7 hours ago, Epic said:

 

^This did help to clarify what I was looking for.  I wanted to know what economic advantage the Canadians had over the US, and you put it nicely and eloquently in the above statement: their main economic advantage is their depreciating currency. 

...

On the other hand, the VAT does not come with benefits, at least not to US businesses.  So, here is what I needed to clarify for you:

 

^Here is actually where you made your error.  The point I have been trying to make is that these nations are using the VAT to generate revenue in lieu of some other form of taxation...namely: corporate income taxes.  Since nations with VATs can generate revenue from VATs, they do not need to then tax their business' income, allowing those businesses to generate higher profits, and thereby lower their prices to more effectively compete in the market.  Businesses that are subject to income taxes, on the other hand, do not have this option, and as a result, they get priced out of the market.  For instance, the $47.92 you mentioned is not actually net profits, like you have assumed when you said "both manufactures receive the same amount."  They are not receiving the same amount at all.  This $47.92 is operating profit, not net profit.  Yes, they are receiving the same amount in operating profit, but you can't use operating profit to buy anything because it does not actually have any real value yet.  Operating profit only gains value after it has been turned into net profit, which arrives only AFTER the income tax has been removed.  At a 20% income tax (the amount used in my example), the company subject to income taxes would pay $47.92 * 20% = $9.58 in additional taxes that the other nation's company does not have to pay, leaving the first company with only $38.34 of profit (not the $47.92 that you had incorrectly assumed was net profit).  So again, even though the sale prices of the items are the same in both countries after the VAT, and even though the amount of operating profit is the same with both companies after the VAT, the company subject to income taxes earns only $38 on the same amount of work that the other company earns $48.  That is not fair at all!  Of course, in reality, the end result is that the excess profits earned by the company subject to VATs would allow them to lower prices, eventually driving the companies subject to income taxes out of business...hence, the VAT operates as a trade barrier, and a large one at that.

 

All I am saying is this: simply because Canada, Europe, and China are using underhanded and deceptive trade tactics by devaluing their currency and applying VATs in order to win unfair advantage over the US, why should the US then be forced to respond by sinking to their level, by devaluing the US dollar at the expense of the US citizen, and by imposing inefficient VATs at the expense of US savers?  This is even more so the case when the US has such a simple and effective means of leveling the playing field: tariffs.  

Tariffs are simple to account for, cost-effective, easy to collect, and most importantly, they don't require the passing of a constitutional amendment. 

Here is my fear: if I cannot even get Jan, with all his rapier wit and clever wordplay, to understand the debilitating implications of corporate taxes upon net profits in the face of the VAT (which is being used by other nations as a substitute for those corporate taxes), then how in the world could I ever get enough support from the average US voter in order to pass an amendment that requires agreement of 66% of the House and Senate, both of whom would be needed in order to authorize the US to implement a new form of taxation that would then allow the reduction of corporate income taxes down to 0%?  If you follow US politics, you know that the US has recently (just this year) reduced corporate taxes from 39% down to 21%, and Americans were up in arms claiming that this was merely a ploy to benefit the rich at the expense of the poor.  Can you imagine trying to convince them to lower that tax rate to 0% and replace it with a sales tax on the consumer?!?!?  

There would be blood in the streets. 

But if the corporate tax rate isn't further reduced (or if tariffs aren't further imposed), then US companies still won't be able to compete effectively in the world market.  And unless they can compete fairly, then there is only one end game for US debt... 

 

 

Once more, unto the breach.......

Chad, going directly to your post on the VAT and the corporate income tax, I believe you misunderstood the genesis of the example I had constructed of the two corporations and their $100 cases of shampoo.  That figure of $47.92 is NOT a "net profit," as you cast it.  Rather, that is the total gross receipts that the manufacturer would receive after the discount chain that is applied to the retail dollars, which here are $100.  Now, what portion of that $47.92 is "profits"?  Well, that is a function of how lean, or "efficient," the manufacturing enterprise is: from steps on the factory floor, to the distribution, to the salaries paid to the executives.  There may end up as NO profits at all, or it may run at a loss, or it might make a few dollars, say $2.50.   Typically, a manufacturing enterprise will end up with about 5% in "net profits," if at all, so on $47.92, that would be $2.50. 

Therefore, a 20% corporate income tax, assuming the earnings on the shampoo are not lost on other products or applied to tax loss carry-forwards, would amount to fifty cents.   On a retail sales of $100 that would be one-half of one percent, so it is not an earth-shattering amount. 

Nor is it at all a certainty that a 20% paper corporate tax rate actually translates into a real payment of 20%, or for that matter any payment at all.  For example, the General Electric Corporation had sales of at least $60 billion, but paid zero on corporate taxes.  Zero.  I invite you to contemplate a tax structure where a company can go sell $60 billion of product and not pay a dime on taxes.  

It is precisely because of these anomalies that some alternative to corporate taxes was considered in other countries.  Instead of a tax on production, which is effectively what a corporate income tax is, there is a VAT tax on consumption, which is inescapable.  The final buyer pays the tax.  Thus if the rich guy at GE goes out and buys a $80 million yacht, he pays that 25% VAT, or an extra contribution of $20 million to his favorite government  (in the case of Canada, the deep-State bureaucracy ensconced in Ottawa) and he cannot escape it - unless of course that big barge is sitting in the harbor in Malta and the only time he can go use it is if he jets over there in his personal Gulfstream G-5. But then the airplane has cost him another $50 million and he has to pay VAT on that.  And it assumes that Malta is not charging VAT to bring it into their jurisdiction, which is unlikely. 

What is the effective corporate tax rate in the USA?  I dunno, as averaged across all corporations - but given the creativity of accountants and tax advisers, my educated guess is that is is a lot lower than 21%  - a whole lot lower. 

The reason the USA has this income tax structure is, in theory, to make sure that no one, including corporations, escapes contributing to the Federal coffers - in no small part in order to continue building those big aircraft carriers at Newport News shipbuilding in Virginia, and other pricey toys. It seem to work, as "the rich" pay the vast portion of taxes.  Indeed, some 47% of Americans pay no federal taxes at all.  If you were to install a VAT, then all those poorer people would be confronted with an immediate 25% increase in their living costs - and that would be unaffordable, leading either to riots in the streets, an insurrection, or targeted assassinations  (I personally think the latter, given the current propensity for conspiracy theories coupled with all those guns out there). The point is that all taxes end up as "fair," once the society has had a long enough exposure and has re-calibrated itself to the taxes.  But, in the short term, while it all goes into adjustment, new taxes are very unfair, and that is why tax structures change so rarely, if ever. 

SO:  when you say that these countries are using the VAT to generate revenues in lieu of some other tax, such as corporate taxes, I would disagree.  It is more a question of tax philosophy: are goods taxed by an increment of the earnings they generate (easily enough thwarted by clever accounts), or are they taxed by their consumption, which is rigidly fixed and cannot be muddled?  I think you will find that countries with VAT taxes also have much higher total tax loads, and much higher govt involvement in social affairs and the economy, than the USA with its income-tax structure.  If you look at say Denmark, the personal income tax is at 50% of your paycheck, and you don't escape that.  Plus you pay their VAT taxes, so even more of your cash is going to fund that big govt honey-pot. 

the VAT does not render US companies unable to compete in world markets.  First, as shown above, the corporate domestic income tax is not large enough to bite the corporation into the ground, especially after you factor in accelerated depreciation on machinery, one-year inventory and R&D write-downs, reserves accounts, and other accounting adjustments.  Second, US companies do not sell undifferentiated goods.  US products have considerable differentiation, and that renders their goods distinguished from other producers, and the consumer buyer is then facing differentiated products - so they are not really competing on price.  Similarly, in heavy industry, machinery is heavily differentiated, and someone buying say a Euclid mining truck or a CAT bulldozer is buying a very differentiated product. Either you buy it or you settle sor some also-ran.  Historically, the US builds these fantastic industrial machines and products, and can command a premium simply because of the design. 

Finally, in many markets the past penetration of US product assures repeat sales of US product.  For example, street traffic lights throughout South America are American built.  If you are in Cuba and you want working street traffic lights, you go get them from the USA  (except because of the product embargo after the Bay of Pigs invasion, the US will not sell them to you). If you are in Buenos Aires and you want the new lights to be compatible with the old ones, you go back to that US manufacturer.  And you would be surprised just how many products are part of that world infrastructure, made in the USA . 

Now, as to your comments on currency devaluation:  yes, by devaluing a currency a nation can obtain an advantage over its trading partners.  However, the pitfall of a floating currency is that that and cut both ways.  Picture yourself as the President of say Bombardier on February 28, 2009, and your Canadian Dollar (the "Loonie") is trading at 78 cents.  You have this huge advantage in selling your subway cars to the New York Transit Commission, because you are building them for 78 cents and your American brothers are building a similar model for one dollar. So you are sitting there grinning and signing contracts - for future deliveries several years out.   But now the currency starts its climb and on April 16, 2011 it peaks out at $1.04!   Guess what: those subway cars you are building now earn you 35% less in local Canadian dollars.  But you still have to pay for your materials and your workers the same number of Canadian dollars.  And your enterprise just went upside-down.

Your long-term, multi-year supply contract for 400 subway cars at $3 million each just ended up costing you a hit of $400 million extra - compliments of a climbing currency.  You are crying in the soup all day long, the shareholders want you fired, and you may face insolvency.  You were counting on that 30% extra revenue from the exchange rate, built it into your pricing structure - and just got burned and hammered. 

And when it goes the other way around, you are grinning and you are the cat in the kitchen lapping up the spilt milk.  Kinda overwhelms differences in tax structures.  Cheers.

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11 hours ago, Jan van Eck said:

 

Hi Jan.  Thanks for the reply.  I hope my questions and the length of my posts are not too taxing.  ;)  The following is my response.  I do not want you to feel obligated to respond, but I have found our conversation quite enlightening, so please do if you have both the time and the inclination.

13 hours ago, Jan van Eck said:

That figure of $47.92 is NOT a "net profit," as you cast it.  Rather, that is the total gross receipts that the manufacturer would receive after the discount chain that is applied to the retail dollars, which here are $100.  Now, what portion of that $47.92 is "profits"?  Well, that is a function of how lean, or "efficient," the manufacturing enterprise is: from steps on the factory floor, to the distribution, to the salaries paid to the executives.  There may end up as NO profits at all

^Technically, I called them "operating profits", not "net profits", but I agree that your definition of "total gross receipts" is conceptually more accurate.  Now, I do agree with all of the points you made above.  Tax structures are complicated, and they give an unfair advantage to some firms and penalize others.  However, a part of me considers all of this to be a bit of a misdirection.  In my illustration, I had made the assumption "all else equal" in order to control for the unknown factors as well as incalculable factors so as to highlight that if all else really was equal, then the VAT really does unfairly punish US corporations.  To illustrate: if we really did assume all else is equal, then we would have to assume that the US company and the non-US company would have the same costs-of-goods-sold, the same salaries paid to executives, and the same profit margins...which would result in total gross receipts = operating profit (at least in percentage terms, which is, of course, all we need to prove that the VAT penalizes US firms). 

In reality, as you have pointed out, all else is not equal.  You made several good points about competitive advantages that US companies have that non-US companies do not, such as compatibility issues that result in repeat sales for US companies.  As a result, it is possible that these competitive advantages for US businesses outweigh the competitive disadvantage of the VAT.  As such, the VAT may not be a problem for US companies, at least not for some of them.  On the other hand, it still may. 

Is it fair that non-US companies must compete against US companies that build national infrastructure in such a way that seems to guarantee repeat business?  Nope.  Is it fair that US companies must account for the VAT by lowering their prices beyond what their foreign competitors must do?  Again, nope.  Regardless, I do not believe you can disagree that my illustration does in fact demonstrate the VAT hinders US corporations in the same way a tariff would.  But, according to your input, it is possible that this VAT "tariff" is still a justifiable response to other advantages possessed by US companies. 

Still, the whole idea behind the VAT smells funny, and I think it has to do with switching costs.  For instance, if US corporations decide to extract too much profit from Buenos Aires by jacking up the prices, Buenos Aires could simply go to an alternate manufacturer of infrastructure.  The switching costs would be high, but those switching costs could still be lower than deciding to pay the jacked up US prices.  On the other hand, the VAT cannot be avoided, which means its switching costs are infinite, and this denies the free market of all its ability to curtail its influence over US corporations and, ultimately, the US people.  That fact, and that fact alone, is sufficient to remove it from the category of "competitive advantage", and place it into another category altogether.  Unfortunately, this would imply that none of your "competitive advantage" arguments hold any weight when considering the implications of the VAT, and we are back to the drawing board = the VAT is a moral equivalent to a tariff on US companies, and since the US in incapable of enacting its own VAT, the VAT of other nations can be fought only with US tariffs against those foreign aggressors.  If foreign governments believe that the US tariff response is unfair, then let them simply raise their VATs to accommodate, or else depreciate their currency some more, or simply respond with their own tariffs.  If the VAT is truly fair, then their retaliation against US tariffs will protect them from the unjustified US tariffs, but if the VAT is unfair and the US tariffs truly are justified, then their retaliation will only result in harm to their economy and their people.  So I say we should let the tariffs fly, and allow the chips to fall where they will.  Short term pain of the tariff war will allow us to discover justice in the long run.

 

11 hours ago, Jan van Eck said:

Thus if the rich guy at GE goes out and buys a $80 million yacht, he pays that 25% VAT, or an extra contribution of $20 million to his favorite government 

^This was and is and has been my  point this entire time.  If you are a rich guy and want to buy stuff, you get to pay your taxes to your favorite government...unless your favorite government is the USA.  Since the US does not have a VAT, no one in the world can pay their VAT taxes to the USA.  Instead, everyone in the world, including Americans, pay them to Europe, or China, or Canada, or to whichever country happens to be their favorite product maker.

The real problem with the VAT is that it is a tax by foreign governments onto US citizens.  Of course, US citizens don't pay this tax directly unless they are traveling abroad, but they do pay it indirectly.  Since US corporations must lower their sales prices to accommodate for the VAT's effects on price discovery, this means that US companies must lower their wages so they can lower those prices, which means US workers earn less than they ought to earn for their labor.  So, even though, as you mentioned, US corporations do not pay in a substantial amount of their revenues in corporate income taxes, the VAT still operates as a financial burden on US citizens, and that just seems wrong in so many ways.  It seems like an attack against US citizens by a foreign power (financial attacks are still attacks).  It seems like the whole world wants the USA to lose and die, and the worse it loses and the faster it dies, it seems the happier it would make them! 

For instance, if you are a German citizen, you can decide to purchase a US good in Germany, and then you get to pay taxes on it to the Germany government.  However, if you are a US citizen, you do not have the option of buying German goods and paying taxes on those purchases to the US government.  Moreover, if you are a US citizen and travel to Germany and buy a US product while there, you pay taxes to the German government!  What manner of wrong is this!  Germans did not produce that product, nor did Germans buy that product nor did Germans sell that product, and yet Germany gets tax revenue from the production, purchase and sale! 

Now, if a German travels to the US and buys a German product while there, then the US government does not generate any tax revenue, not from the German's income, not from the German company's income, nor from the purchase nor from the sale. 

US exports = taxed twice

Germany export = taxed none

And this is somehow justified because US companies produce products that are only compatible with other US products, thereby giving them a competitive advantage which can easily be bypassed if they decide to jack-up their prices too high?

...

On the other hand, I did notice that Germany only generates 20% of its tax revenues from VATs, whereas the US generates 24% of its tax revenues from ad-valorem taxes.  Unfortunately, I couldn't find data for Germany's ad-valorem taxes, nor could I discover how much of the US ad-valorem taxes came from tariffs and how much came from US citizens.  So, even though is seems unlikely, it is, I suppose, quite possible that despite US exports being double-taxed, and despite German exports avoiding all taxes corporate taxes, there still may be a degree of fairness in this scenario.  It certainly seems fishy to me, but without more informative numbers, it is hard to say definitively one way or the other.   

On the plus side, Jan, you have definitely gotten me to think a lot more about this.  

 

11 hours ago, Jan van Eck said:

when you say that these countries are using the VAT to generate revenues in lieu of some other tax, such as corporate taxes, I would disagree. 

What I was trying to say was this: before the US tax reform this year, every single European country that had a VAT also had a lower corporate income tax than the US.  Think that is a coincidence?  The European nations are using the VAT tax to generate revenues, and as a result, it lowers their need to apply corporate income taxes to generate those revenues.  For instance, Germany generates 20% of their revenue from the VAT, and thus, that is 20% of their tax revenue which need not be generated from some other tax, such as corporate income taxes, which is resting at 5.5%.  Now compare that to the US, who had a 0% VAT but a 39% corporate tax incidence in 2017.  Thus, the VAT really was being used by Germany to in lieu of applying some other tax.

 

12 hours ago, Jan van Eck said:

the VAT does not render US companies unable to compete in world markets.  First, as shown above, the corporate domestic income tax is not large enough to bite the corporation into the ground

^It is large enough to force US companies overseas.  It is large enough to prevent US companies from investing domestically.  A lack of domestic investment does hinder US productive capabilities in the short run, and it could prove disastrous in the long run.  In fact, in 2017, the fortune 500 companies had created over 10,000 subsidiary companies for the sole intent of avoiding US corporate taxes.  I mean, 10,000+?  If the corporate tax did not negatively affect US corporations, then why waste all of the resources and overhead to create over 10,000 new companies for the sole purpose of avoiding US corporate income taxes?

 

12 hours ago, Jan van Eck said:

Finally, in many markets the past penetration of US product assures repeat sales of US product.  For example, street traffic lights throughout South America are American built.  If you are in Cuba and you want working street traffic lights, you go get them from the US

^How do you know all of this stuff? (ok, this point was meant to be more of a compliment to you than anything else, but still, I am a little curious as to how you can remember random facts like this?  Have you ever been on Jeopardy?  You could probably win.)

 

12 hours ago, Jan van Eck said:

Picture yourself as the President of say Bombardier on February 28, 2009, and your Canadian Dollar (the "Loonie") is trading at 78 cents.  You have this huge advantage in selling your subway cars to the New York Transit Commission, because you are building them for 78 cents and your American brothers are building a similar model for one dollar. So you are sitting there grinning and signing contracts - for future deliveries several years out.   But now the currency starts its climb and on April 16, 2011 it peaks out at $1.04!   Guess what: those subway cars you are building now earn you 35% less in local Canadian dollars.  But you still have to pay for your materials and your workers the same number of Canadian dollars.  And your enterprise just went upside-down.

^I am not sure I fully understand this.  Let me make an example.  Let's say I sell subway cars for $10 (loonies) each.  My labor and materials costs are $5 (loonies) per car, leaving me with $5 (loonies) in operating profit (lets assume $5 operating profit is what I need to run a successful subway car manufacturing plant).  But the buyer is a US company, and so they trade $7.8 USD to get $10 (loonies) to pay me for each car I deliver.  So, I am effectively selling my subway cars for $7.8 USD vs. the $10 USD subway cars produced by the American subway car manufacturer.  Of course, everyone will come buy from me rather than the US company until I run out of manufacturing capacity or they no longer need any more cars.  

However, several years later, I still need $5 (loonies) in operating profit to be successful, my labor and materials costs are still at $5 (loonies), and the contracts I wrote several years ago are still in effect at $10 loonies per subway car delivered.  But, the exchange rate went against me, now sitting at $1.04 loonies to $1 USD.  So now the American buyer must trade $10.40 USD to to get $10 loonies to purchase my car, but they could have purchased that an equivalent car from the American company for only $10, ...40 cents cheaper.  That trade sounds bad for the American buyer, and clearly not what you had stated above since my company would be perfectly fine, due to the terms in the contract.  The downside for me is that I will certainly have some problems getting those American buyers to resign those contracts.  Due to the new exchange rate, I'd have to lower my price to win those contracts, in which case I would be manufacturing at a 40 cent loss...but that loss wouldn't happen until I have to resign the contracts.  But that is not what you seemed to say above.  Above you said I would be earning less because I am locked in my contract.  But here, in both cases, I would be earning $10 loonies no matter where the exchange rate goes.  Maybe you meant that if the exchange rate goes against me, then my workers would demand higher wages?  <--But that seems highly unlikely.  Wages are sticky in the short term, and I don't think anyone checks the exchange rate before arguing with their boss for a raise.  Maybe if I have foreign suppliers, my cost-of-goods-sold would go up, but that assumes I didn't lock in the price for those materials in my contract with my supplies...an unlikely and foolish mistake.  Or maybe my contract was written in USD.

Let me try that.  

Ok, so, let's say I sell subway cars for $10 USD each.  After the exchange rate, I end up with $7.80 loonies.  To account for this lower value, lets say that I need to pay may workers $5 loonies but now I only need $2.80 loonies to be successful.  All is well and good with these new numbers, so I sign my contracts out for several years at $10 USD per car.

Then the currency moves against me.  

Now I get paid $10 USD and transfer that into $10.04 loonies.  I pay may workers $5, and earn $7.24 instead of only $2.80.  Hurray!  I just hit the jack pot.  

But no, that is clearly not what you meant, either.  Am I calculating my exchange rates incorrectly?  Also, when dealing with long term contracts and floating currencies, don't companies hedge against currency movements?  I know that hedging can cost some cash, so it might not always be a viable alternative for some companies, but at least there is no risk of becoming insolvent.  

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7 hours ago, Epic said:

Hi Jan.  Thanks for the reply.  I hope my questions and the length of my posts are not too taxing.  ;) Of course they are!!!

But no, that is clearly not what you meant, either.  Am I calculating my exchange rates incorrectly?  Also, when dealing with long term contracts and floating currencies, don't companies hedge against currency movements?  I know that hedging can cost some cash, so it might not always be a viable alternative for some companies, but at least there is no risk of becoming insolvent.  

Sorry to be the wet blanket, but you are calculating everything incorrectly.  I will attempt to get back to you when I can break a couple hours free. 

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A feeling of doom slowly creeps in.....

If these 2 guys can't get on the same page, how the heck is Trump going to get it?

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The future of US LNG exports is Europe not China. The gas pipelines from Turkmenistan and eastern Siberia will deliver massive amounts of gas to China, while the supplies of gas to Europe come primarily from Western Siberian fields that are largely depleted. This depletion is confirmed by the massive capital expenditure at the tip of the Yamal to get additional reserves, which was stranded gas due to the vast distance from pipelines and operating conditions in the Arctic. The volumes to Europe were further exacerbated as China took over Turkmenistan and volumes that once went to Gazprom were diverted.    

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On 8/21/2018 at 9:40 AM, Jan van Eck said:

Sorry to be the wet blanket, but you are calculating everything incorrectly. 

Hi Jan.  This is just a reminder that I am still eagerly awaiting the correct calculations.  Having had very little experience with exchange rates, I do look forward to discovering what I did wrong.  

In the meantime, I have another thing for you to ponder as well.  

Namely, you have helped me to realize that it is not just the VAT which acts as a trade barrier, but that all taxes act as a trade barrier. When taxes are not equally applied to all competing companies, a trade barrier is created.  Here is an illustration:

Let's say I collect apples and bring them to market each day.  Let's say that if I work hard and hire some help, I can collect 10 apples each day and sell them for $1 each at the market. 

Now, let's say you collect oranges and bring them to market each day.  If you work hard and hire some help, then you can also collect 10 and sell them for $1 each. 

Now, let's say that market has $20 of capital to spend on purchasing fruit, and so we can both sell all of our fruit each day, and we each collect $10 in revenue.  But then, the government decides to place a 20% tax only on apples.  Now, the market will purchase all 10 of your oranges (since your oranges only cost $1 whereas my apples now cost $1.20 after the new tax).  However, since the market only has $10 of capital remaining after purchasing all of your less expensive oranges, the market can now only afford to purchase 8 of my apples (8 apples * $1.20 per apple = $9.60).  The market now has $0.40 left, and cannot buy either of my last two apples. 

Therefore, I am left with a decision: either I fire workers so that I now only have enough help to collect 8 apples each day, or else I must lower my price per apple in an attempt to capture that remaining $0.40.  If I lower the price of each apple to $0.83, then after applying the 20% tax, I can sell all 10 of my apples, and I would earn $8.30 in revenue (10 apples at 83 cents each = $8.30 revenue), rather than only $8 in revenue (8 apples at $1 each = $8 revenue). 

Obviously, earning $8.30 is superior to earning only $8; however, to earn that extra $0.30,

I must either fire some of my workers or else get all of my workers to agree to a pay cut so that I can afford to lower the price of my apples.  Either way, my workers suffer.  Since the economics of the situation favor the pay cuts, this situation stagnates wage growth for my workers.

Let me say that again for clarity: taxes that are not equally applied to all competitors result in wage stagnation for the taxed companies.

This apples/oranges illustration applies directly to nations.   If a company in one nation produces apples (or Ford Mustangs) and is competing directly against a company in another nation that produces oranges (or BMW i8s), the higher the tax rate in that nation, then the greater the wage stagnation will be. 

To see which country's citizens are suffering the greatest trade barriers from unequal taxation, one need only compare 'taxes as a share of GDP' for each nation.  By using 'taxes as a share of GDP', we get the closest representation that the nation's collective tax rates will have on the wage stagnation for its citizens.  When we look specifically at that metric, we discover that US tax rates are among the lowest in the world (I will attached chart for the visual learners like me).  We may then conclude that US citizens have had the highest wage growth in the world. 

However, the real-world data suggests precisely the opposite.  US citizens have actually suffered the greatest wage stagnation in the world over the last 40 years. 

Therein lies the major threat to US citizens: wage stagnation.  US wage stagnation has resulted primarily from the VAT.  The VAT is applied by every major nation in the world, excepting only the US.  This VAT skews the given taxes rates of each nation in a way that favors every nation that uses a VAT and harms every nation that does not.  The US and Hong Kong are the only developed nations that do not use this tax.  As a result, the burden from the VAT taxes of the entire world falls squarely upon the shoulders of their citizens. 

The reason US citizens suffer from the VAT is due to the fact that VATs are added to US exports and subtracted from US imports.  As a result, this tax deceptively makes it "appear" that foreigners are paying this tax.  This deception increases the 'taxes per share of GDP' paid by those foreigners.  Under normal circumstances, when a tax is paid by its citizens, those same citizens suffer the effects of paying that tax.  However, this is not the case with the VAT.  The effects of the VAT, though paid by foreigners, is actually suffered by US citizens.  Here is how:

I already demonstrated in my first apple/oranges example that when a tax burden is placed unequally upon competitors (whether companies or nations), then that unequal tax treatment will correspond to wage stagnation for the workers in the country with the higher tax burden, and wage growth for the workers in the country with the lower tax burden.  Since the VAT is removed from exports to the US and added to imports from the US, this forces US companies to lower the price-points for both their products that are exported AND their products that are sold domestically.  Yes, you read that correctly: even US companies that only sell products domestically must lower the prices as a result of the foreign VAT.  But again, what happens when prices are lowered?  As demonstrated in the apples/oranges example, US companies (this includes any US companies that compete with foreign companies) are now forced to make the decision between firing workers or reducing US wages.  Due to the economics behind this decision, this almost always results in reducing US wages and thereby stagnating wage growth in the US.

The reverse also happens.  Since foreign companies do not need to compete so heavily on price-points, this allows them to compete more directly for talent.  They do this by paying higher wages to their workers in an attempt to keep the best talent for themselves. 

From these facts, we see how the VAT burden has been shifted to US citizens, even though it 'appears' to be paid by foreigners.  To illustrate this shift: if a 25% VAT is placed on US exports to be paid by foreigners, but this tax also results in 35% wage growth for those same foreigners who pay that 25% VAT, then those foreigners have actually received a net benefit of +10% income.  To compensate for that +10%, US citizens suffer a -10% wage stagnation. 

In other words, foreign nations gain tax revenue by reducing the income of US citizens.  

It is by this method (manipulating US wages) that nations with a VAT have been able to strip away US industry for the last 40 years.  After all, not all US companies operate under high enough margins to simply stagnate wage growth.  Instead of stagnating the wages of their workers, some choose to close their doors. 

Under all other tax systems, any additional tax placed upon the citizens of one nation results in that tax burden being met by those same citizens.  Only with tariffs and the VAT does that burden get shifted to the people of other nations.  And specifically with the VAT, that burden gets placed almost solely on US citizens (this is due to the US being one of the only two major nations operating without a VAT).  In this sense, the VAT operates exactly like a tariff that directly targets the US.  However, the VAT does not 'look' like a tariff (at least not on paper, according to 'taxes as a share of GDP').  Since it does not look like a tariff, the VAT creates the illusion that its tax burden is being met by locals, and not US citizens.  This illusion allows foreign governments to falsely deny the debilitating effects that the VAT has on US citizens, and it allows them to steal the wealth and industry of our great nation. 

All one must do to see the truth of these statements is to look at the data for US wage growth in the past 40 years.  As foreign nations have steadily risen their VAT over the last 40 years, US wage growth (after being adjusted for inflation) has stagnated at 0%.  In comparison, the wages in all of the major foreign countries have sky-rocketed.  UK wage growth has grown by 40%, Japan by 80%, France by 100%.  Germany and Canada have both crushed US wage-growth.  Even Greece has beat the US, and that should speak volumes on its own.  I will attach a few charts below to help those who tend to be more visually inclined.  As you can see in the first image, US taxes sit at 26%, clearly on the low end of the spectrum of developed nations.  However, the lack of VATs could be causing that value to be understated by as much as 20%.  Denmark tops the list at around 47%, but due to VATs distorting the numbers, Denmark's taxes could be overstated by as much as 20%.  If we adjust for the number for the VAT, it is quite possible that the US tops the chart by a great deal, exceeding even Denmark by up to 19%.  Furthermore, just to double check the data (which I could only go back to 2009), I compared Denmark's recent wage growth (high taxes) with Korea's recent wage growth (low taxes), and Korea beat Denmark by 100%.  

So here is the question: why is every nation not just beating US wage growth, but crushing it?  I think the best answer seems to be that 'US tax rates as a share of GDP' are being manipulated by the VAT.  This results in US citizens suffering the tax burden for the world's VATs, and this burden has resulted in the form of 0% wage growth.   Historically, the VAT around the world has been steadily growing each year, and each year it does, the US tax payer takes on that additional burden in the form of lowered wages.  The system is rigged.  As VATs continue their ascent, the US will continue its decent toward bankruptcy.  

 

fig1_10.3.2017_update.png

wage growth.png

wage growth2.png

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8 hours ago, Epic said:

Hi Jan.  This is just a reminder that I am still eagerly awaiting the correct calculations.  Having had very little experience with exchange rates, I do look forward to discovering what I did wrong.  

In the meantime, I have another thing for you to ponder as well.  

..........................................................................................................

 

So here is the question: why is every nation not just beating US wage growth, but crushing it?  I think the best answer seems to be that 'US tax rates as a share of GDP' are being manipulated by the VAT.  This results in US citizens suffering the tax burden for the world's VATs, and this burden has resulted in the form of 0% wage growth.   Historically, the VAT around the world has been steadily growing each year, and each year it does, the US tax payer takes on that additional burden in the form of lowered wages.  The system is rigged.  As VATs continue their ascent, the US will continue its decent toward bankruptcy.  

 

Your analysis is very interesting construct, but is incorrect, both in foundational premises and in execution of concept.   In short, the analysis is fatally flawed.  I remain curious where you get these ideas from, or is this something that you have concluded from your distillation of the results (low relative US wages)? 

I shall try to write further to clarify the problem areas in this analysis. Jan

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3 hours ago, Jan van Eck said:

Your analysis is very interesting construct, but is incorrect, both in foundational premises and in execution of concept.   In short, the analysis is fatally flawed.  I remain curious where you get these ideas from, or is this something that you have concluded from your distillation of the results (low relative US wages)? 

I shall try to write further to clarify the problem areas in this analysis. Jan

Hi Jan.  The conclusion for low wage growth is my own.  It is the only logical conclusion that can be drawn from the data I have.  Of course, like I said several posts ago, I may be missing some vital data, and this lack is causing my conclusion to be in error.  I have done a limited amount of research in this area as well, involving both news articles and scholarly papers.  However, every paper I have read always offers several possible reasons for the low wage growth but then inevitably concludes with "We really have no idea why the US is hindered by low wage growth." 

In fact, I just read a Bloomberg article about it the other day.  However, like most other articles or papers, Bloomberg offers several terterary possibilities as to why there is no wage growth in the US, only to eventually cop out by admitting they really have no idea why there is no wage growth. 

https://www.bloomberg.com/news/articles/2018-08-22/what-s-holding-back-wages-in-america

Quotes from article:

"America’s labor market is a jigsaw puzzle whose pieces don’t quite fit together."  <---they admit a lack of understanding concerning wage growth.

"Slow wage gains in other industries can put a structural ceiling on pay in service-sector jobs."  <-- they offer a solution that doesn't address the root cause...which is: why are there slow wage gains in other industries.

"Although the companies in the Russell 3000 Homebuilding index have an average profit margin of 6.2 percent, the way the industry runs itself depresses wages. Homebuilders bid out jobs such as framing, roofing, plumbing, or bricklaying, and subcontractors win the work based partly on price. That gives companies such as Sentry Roof Services in Norcross, Ga., scant room to maneuver."   <---they admit price seems to be the key factor, but they don't explain why price is the key factor.

"You have to be competitive on price or else lose business."  <---another admission on price, but they demonstrate a clear lack of expaination concerning why low price drives down wages.  

And of course, no mention that the US is one of the only major nations with no wage growth.  So why is the US the only nation?  The answer must be something specific to the US and only the US, and it must have something to do with driving down prices.  There appears to be only two possibilities: one is foreign VATs, which run average around 20%.  20% of the world market is quite substantial.  The other is foreign currency devaluations.  I believe both of these factors have driven US wages down, because they both act like tariffs on US companies.  In order for US companies to compete vs. those added "tariffs", US companies MUST lower price.  When price is lowered, US wages are also driven lower. 

Both of these factors have influenced wage stagnation.  However, only the VAT has been steadily increasing since the 80s.  The value of the dollar has not risen that dramatically since the 1980. In fact, the dollar has actually devalued since 1980s, after reaching its high at 128 in Feb, 1985...the highest in US history, I believe.     

Therefore, blaming wage stagnation on the VAT skewing the effects of 'US taxes paid as % of GDP' seems to make the most sense...assuming I am not missing something vital. 

 

 

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4 minutes ago, Epic said:

 

You are missing other key points.  Will describe later.

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(edited)

4 hours ago, Epic said:

  However, every paper I have read always offers several possible reasons for the low wage growth but then inevitably concludes with "We really have no idea why the US is hindered by low wage growth." 

In fact, I just read a Bloomberg article about it the other day.  However, like most other articles or papers, Bloomberg offers several terterary possibilities as to why there is no wage growth in the US, only to eventually cop out by admitting they really have no idea why there is no wage growth. 

https://www.bloomberg.com/news/articles/2018-08-22/what-s-holding-back-wages-in-america

Quotes from article:

"America’s labor market is a jigsaw puzzle whose pieces don’t quite fit together."  <---they admit a lack of understanding concerning wage growth.

"Slow wage gains in other industries can put a structural ceiling on pay in service-sector jobs."  <-- they offer a solution that doesn't address the root cause...which is: why are there slow wage gains in other industries.

 

"You have to be competitive on price or else lose business."  <---another admission on price, but they demonstrate a clear lack of expaination concerning why low price drives down wages.  

And of course, no mention that the US is one of the only major nations with no wage growth.  So why is the US the only nation?  The answer must be something specific to the US and only the US, and it must have something to do with driving down prices.  There appears to be only two possibilities: one is foreign VATs, which run average around 20%.  20% of the world market is quite substantial.  The other is foreign currency devaluations.  I believe both of these factors have driven US wages down, because they both act like tariffs on US companies.  In order for US companies to compete vs. those added "tariffs", US companies MUST lower price.  When price is lowered, US wages are also driven lower. 

 

The other countries you cite, beside the UK, are pseudo-socialist countries.  Therein, there are stronger trade unions (which tend to push wages up) and a tradition of labor witting on the Boards of Directors together with management. The USA has no tradition of labor sitting on the Board of Directors.  Further, its trade unions have been dissipating, and union membership is at a low ebb (outside govt employee unions).  Although purely anecdotal, compare the wages of unionized state policemen with those of private security firms such as armored-car companies, and you see this trade-union effect on display. 

The socialized countries also tend to offer various benefits paid out of the State treasury, including a very expansive universal health care, which effectively puts more real cash into wage-earners' pockets.  For example, a cancer patient in France would not only receive "free"  (in actuality, single-payer) health care, but also a year off from work - with full pay. Such extensive benefits effectively raise real wages and real standards of living. It is unimportant if such benefits and wages flow from union actions, or legislation, or merely a tradition in society of "share the wealth," the net effect is that the real wages go up. 

When you see stagnant real wages, you conclude that it must be perforce the result of some tax mechanism. That is confusing correlation with causation.  The VAT by itself has no effect on wages, sales in export, or anything else, as respects the EU.  The VAT is a consumer-purchase tax.  All transactions between manufacturers and distributors are effectively tax-excluded, as although there is or might be a levy, there is "drawback" of that tax when the goods are sold forward, from distributor to retailer, for example.  And the same applies to export sales from the USA into the Euro customs union:  The importer of that Ford pays (only on paper) the VAT, but immediately can obtain a full drawback when that Mustang leaves his import lot and passes to the distributor, then to the retailer.  Ultimately the auto is presented to the retail consumer, who pays that VAT.  Everybody else in the daisy chain ends up paying nothing. 

Now, the VAT faces the retail buyer for both the Ford and that BMW.  Either purchase will accrue the VAT, as it is a consumer-driven tax.  The one consumer that does NOT pay the VAT tax is the US visitor that buys the BMW in Germany; he gets a Form at the export dock to fill in for a duty-drawback, in this case a VAT-drawback, upon export, and the taxing authority eventually gets around to sending him a VAT refund cheque. Upon arrival of the boat in the Port of Baltimore (or Newark), an import duty (i.e. "tariff") is levied, at whatever rate Mr. Trump decides on.  That tariff seems to be about 4.5%.  It gets paid by the importer (in this case, the private individual) to the US Treasury.  Such tariffs are potent financing instruments for the US Treasury; indeed, up until WWI the entire US government was financed exclusively by such duties, and there was no income tax, etc.  It was all tariffs. [That went out the window with the "temporary income tax" to finance the war, but ended up becoming part of the permanent landscape; that is the nature of government, to continually expand into an administrative State, or, as some would say, the "deep State".] 

Thus the US consumer pays his State and possibly County/city sales tax, running between zero and 6.5% depending on where he lives, and the registration fees which are a disguised tax, and if he is a BMW  buyer or a Subaru buyer, he is paying that tariff also, built into the price of the sticker on the car window.  The retail buyer does not "see" the tariff and thus has no way of knowing what it really is.  How does the tariff affect internal US auto sales?  It doesn't, not really, as the USA is the world's dumping ground for surplus autos manufactured in the competing nations.  This part is what is being overlooked in policy circles, and also by you.  The competing countries  (excluding Korea) have labor components that are converted, by the unions, into fixed costs; the workers cannot be fired, and if they are laid off, then they are paid at the effective full wage rate.  So the hourly worker is in effect another piece of factory machinery or real estate, it has this overhead cost that is there whether or not it is being used.  The financing charges on the loan for the building do not abate simply because you are only using it 2/3 or 3/4 of the time, or you cancel the third shift. Similarly, worker costs continue.  Thus those manufacturers have to obtain a ramped-up production level in order to "spread the overhead" over a larger number of auto units.  Now, what to do with the excess production, which is far more than the European or Japanese markets can absorb?  You dump them into the USA at whatever price you can get for them  (and that is where exchange rates come into play). 

This phenomenon, of converting worker wages from variable costs to fixed costs, is not unique to either the Europeans or the Japanese;  GM ended up in the same situation with its last contracts with the United Auto Workers.  The result was that GM had to "run like crazy" to pay the wages bills that were no longer able to be set aside with layoffs. So GM flooded the market with big Chevys and Pontiacs and sold them by offering deep-discount sales specials that went on for months.  Eventually they trained their customers to wait for the sales, and ended up going out of business. (And then it went to a Sec. 363 bulk asset sale in the bankruptcy court, and the shareholders got zero.) 

The current situation, in manufacturing in Europe in everything from tires to coal production to aircraft, is that there can be no "redundancies," or lay-offs, so Governments get sucked into supporting programs to maintain those employment levels, as it is an all-or-nothing game; either the workforce stays on the payroll, or the company folds.  And you get these bizarre distortions in the market for workers, with governments ordering output where there is no real need, just to keep the voter workforce employed.  And you get the same types of distortions in the farm sector, where for example wheat in France and eggs in Germany get supported by supply management against imports and potential competitors, to keep the sacrosanct agricultural sector going  - and you see the same dynamic playing out in Canada, which fiercely defends its dairy sector against US intrusion with supply management procedures (and provoking the ire of Trump). 

Getting back to  that pesky VAT:  the German buyer of that Mustang does pay the VAT, but he pays for his BMW with a VAT also - at the same rate.  The difference between the two will be in the Euro tariff on autos, which is apparently a bit higher than the US tariffs on German autos.  But the VAT itself is not a determinant (other than that the VAT is also on the tariff segment, so he pays double-tax).  I submit none of those taxes are sufficient to distort the market.  The retail buyer is going to buy the Mustang  (probably  for less than the BMW) if he fancies it, as the Mustang has a lower wage input, although even that is not the final determinant, as today with robotics the wage component of US autos is only about 4% of the manufacturing costs. Not really enough to rock the boat.

So, getting past all that, what is the driver of wage stagnation in the USA?  It is not the VAT  (and even if there were a gigantic tariff wall in Europe to keep those pesky Mustangs out, the domestic US market is plenty large enough; Ford does not need to export one single Mustang anywhere to stay profitable), and since in the US the workers have layoffs, so it is not the fixed-cost burden that Europeans face.  Rather, it is the absence of a tradition of "share the wealth" which is deeply ingrained into European culture, with those worker seats on the Board of Directors; in the US, you have these young people from the rich enclaves going into finance and law and ending up in the upper management of these large corporations, and "stiff the workers" becomes this blood sport.  It is as if society has reverted to the Carnegie Steel ethos of a century ago.  And there are social reasons for that which I am prohibited from publishing, so I won't go there, but you can figure that one out. 

I shall address your issues with the vexing math of currency devaluation in a bit. 

Edited by Jan van Eck
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16 minutes ago, Jan van Eck said:

Such tariffs are potent financing instruments for the US Treasury; indeed, up until WWI the entire US government was financed exclusively by such duties, and there was no income tax, etc.  It was all tariffs.

Actually alcohol taxes financed much of the Federal Government back in the day. The big alcohol companies didn't bother to lobby much against the abolitionists feeling secure. The abolitionist knew something had to backfill the monies, and this is part of what got income taxes staying in place. The 18th Amendment insured income tax was to stay, and of course by the time the 21st repealed the 18th, there was no going back. 

It's a naive and silly notion to think like was better for people in 1919, or 1933, than today. But alcohol used to fund much of the Federal budget. 

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7 hours ago, Jan van Eck said:

Further, its trade unions have been dissipating, and union membership is at a low ebb (outside govt employee unions).  Although purely anecdotal, compare the wages of unionized state policemen with those of private security firms such as armored-car companies, and you see this trade-union effect on display. 

Have they really been dissipating, or have businesses with unions simply been unable to compete and were driven out of the market?  Businesses going bankrupt would also help explain why the govt employees and the state policemen are unionized...  There is no need to worry about the govt being driven out of business since they have a monopoly: just raise taxes to pay for the higher wages.  Of course, private security firms can go out of business, and so they can't raise wages.  

This was the first article that popped up in a quick search:

https://www.nationalreview.com/corner/blame-unions-hostess-bankruptcy-james-sherk/

Quotes from the article:

"The firm proposed reducing its benefits to stay competitive. Unsurprisingly Hostess’s unions balked. But after examining the firms’ books, the Teamsters reluctantly accepted the cuts.  But Hostess’s other union — the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union — would not. The union went on strike. Hostess warned them that the strike would quickly bankrupt the company. The Teamsters warned the Bakers the company wasn’t bluffing, but the union chose to keep striking.  Hostess announced it had no choice but to file for bankruptcy. More than 18,000 employees will lose their jobs."

"This is the problem with labor unions. They make companies less nimble, less competitive. A unionized firm takes longer to respond to changing market conditions. It has to negotiate any changes with the union, and unions are not always reasonable. So unionized companies invest less, make less, and create fewer jobs than non-union firms. Over time they wither away.  This is why union membership hit a record low in 2012." 

7 hours ago, Jan van Eck said:

When you see stagnant real wages, you conclude that it must be perforce the result of some tax mechanism. That is confusing correlation with causation

Technically, this isn't what I said.  What I said was that when I see stagnant real wages, I blame unfair price competition.  I then tried to discover what was causing that price competition, and I discovered that the VAT was creating unfair price competition.  Thus, I am not actually confusing correlation with causation.  I may still have a faulty premise, however: namely, that the VAT does not create unfair price competition.

9 hours ago, Jan van Eck said:

The importer of that Ford pays (only on paper) the VAT, but immediately can obtain a full drawback when that Mustang leaves his import lot and passes to the distributor, then to the retailer.  Ultimately the auto is presented to the retail consumer, who pays that VAT.  Everybody else in the daisy chain ends up paying nothing. 

But it is paid by the consumer.  The fact remains that this tax raises the final price for the consumer, and that fact is the only fact that matters.  Here are some numbers.  A BWM 5 Series costs $53,000 if purchased in the USA.  Interestingly enough, the BWM 5 Series also costs about $53,000 USD if purchased in Germany.  The Ford Mustang costs $35,000 USD if purchased in the USA.  So, if trade is fair and the VAT has no effect on final prices paid by the consume, then one would logically assume that the Ford Mustang would cost $35,000 if purchased in Germany.  

But it doesn't.  The Mustang costs $50,000 in Germany.  Who in their right mind would pay $50,000 for a $35,000 car?!?!?

But Ford can't sell their cars for $35k.  So, in order for Ford to compete, they are forced to lower wages so as to drive the price of their Mustang down as far as possible in order to better compete or else be driven out of that market.  Ford has to use clever marketing and other gimmicks to get morons to pay $50,000 for their $35,000 car.  However, BMW doesn't have that problem in the USA.  They can sell their $53,000 car for $53,000.  It sure must be nice to be BMW.

9 hours ago, Jan van Eck said:

This phenomenon, of converting worker wages from variable costs to fixed costs, is not unique to either the Europeans or the Japanese;  GM ended up in the same situation with its last contracts with the United Auto Workers.  The result was that GM had to "run like crazy" to pay the wages bills that were no longer able to be set aside with layoffs. So GM flooded the market with big Chevys and Pontiacs and sold them by offering deep-discount sales specials that went on for months.  Eventually they trained their customers to wait for the sales, and ended up going out of business. (And then it went to a Sec. 363 bulk asset sale in the bankruptcy court, and the shareholders got zero.)

^Very interesting information.  It would guess that if the VAT didn't protect their overseas markets (USA), then they would have been driven into bankruptcy as well.  

9 hours ago, Jan van Eck said:

How does the tariff affect internal US auto sales?  It doesn't

It does affect sales.  The reason it does affect sales is because it DOESN'T affect price.  Notice: the BWM sells for $53,000 in both the US and in Germany.  Sale price is not affected, and so the US consumer can get a $53k foreign car for $53k.  This is not so with the VAT and Ford.  The German cannot get a $35k foreign car for $35k...no, he must spend $50k to get a $35k vehicle. 

Well, let me rephrase that.  The German can get a $35k foreign car, as long as he buys it from a country with similar VAT.  What he cannot do is buy a $35k USA-made car.  For that, he needs to shell out $50k.  

Everything you have said is very interesting information, but nothing you have said explains why US goods are so much more expensive overseas while foreign goods are not equally expensive in the US.  Even your statement about wages being fixed overseas does not explain wage stagnation in the US.  If anything, the ability to uses wages as a variable cost should give US companies a competitive advantage, which would ultimately drive wages higher in the US.  But it doesn't.  

 

9 hours ago, Jan van Eck said:

I submit none of those taxes are sufficient to distort the market.

Then why do Germans pay 40% more for US goods than Americans pay for German goods?  40% is a market-distorting price level.  

... 

I can tell you right now why they pay about 40% more.  It is because Germans have a 19% VAT added to US imports, and a 19% VAT removed from their own exports.  19 + 19 is close enough to that 40% market-distorting price difference.  

 

9 hours ago, Jan van Eck said:

what is the driver of wage stagnation in the USA?  It is not the VAT.  Rather, it is the absence of a tradition of "share the wealth" which is deeply ingrained into European culture, with those worker seats on the Board of Directors; in the US, you have these young people from the rich enclaves going into finance and law and ending up in the upper management of these large corporations, and "stiff the workers" becomes this blood sport.

^You know, I could agree with this.  For the time being, let me concede the VAT debate.  In fact, I feel bad even responding to you yet again.  However, Thomas Sowell says that if you want to help someone, then tell them the truth.  Even though my truth might be dead wrong, you may still consider it my good-faith attempt to be your friend ;)  (I know, I know... it looks like nothing of the sort!)  Still, you have taken time (a lot of time) out of your schedule to help me work through these ideas, and I really want to let you know how much I appreciate your efforts.  I will also make sure to up-vote your responses as part of my thanks.  After all, we can't just let Tom win without a fight!

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