Trump Calls VAT "Unfair"
Considers Value-Added Tax a Key Factor in Reciprocal Tariff Policy
As U.S. President Donald Trump decided to impose 'reciprocal tariffs' considering the tariff and non-tariff barriers of various countries, he evaluated value-added tax (VAT) as a more punitive tax than tariffs, making VAT a key factor in the expansion of tariff wars.
On the 13th (local time), The Wall Street Journal (WSJ) reported that although VAT is a common tax imposed in most European countries, President Trump considers it unfair.
On the same day, President Trump signed a presidential memorandum containing the decision to impose reciprocal tariffs, citing as review factors not only tariffs imposed by countries on U.S. goods but also non-tariff barriers or measures. In particular, the memorandum stated that "unfair discriminatory taxes or extraterritorial taxes imposed on U.S. companies, workers, and consumers by trading partners, including VAT," are also factors to be reviewed when setting reciprocal tariffs.
VAT is a consumption tax imposed in several countries such as Korea and Europe but is not levied in the United States. When purchasing a TV or dining at a restaurant in Europe, one must pay VAT just as one pays sales tax in the U.S.
While sales tax is generally collected only once at the point of final product purchase, VAT is levied each time value is added as the product passes through the supply chain. For example, if a consumer buys a bicycle for $100 in the U.S., they pay the full sales tax once at the time of purchase.
However, buying a bicycle in Germany is somewhat more complex. If a bicycle manufacturer buys steel and aluminum for 50 euros to make a bicycle and sells it to a bicycle shop for 80 euros, the manufacturer is considered to have created 30 euros of added value and VAT is levied on that 30 euros. When the bicycle shop sells it to the consumer for 100 euros, the shop pays VAT again on the 20-euro difference. Although the manufacturer or shop pays the VAT, it is included in manufacturing and distribution costs and reflected in the price, so ultimately the final consumer bears the burden.
According to the think tank Tax Foundation, VAT rates in European countries vary from 8.1% in Switzerland to 27% in Hungary. The tax base is broad, but many countries apply lower rates or exemptions to food and tourism items.
VAT applies to goods and services sold domestically regardless of origin. U.S.-made cars imported into Europe are subject to the same VAT as European cars. In contrast, tariffs apply only to imports, so local producers do not pay them.
This system has been criticized for disadvantaging U.S. exporters. The average VAT rate in Europe is 20%, much higher than the U.S. average sales tax rate of 6.6%. While U.S. goods sold in Europe are subject to VAT, European goods sold in the U.S. receive VAT refunds in their home countries and pay only the lower U.S. sales tax.
President Trump said he would consider VAT as a tariff. White House Deputy Chief of Staff for Policy Stephen Miller recently said in a Fox News interview, "This is a major reason why the U.S. auto industry has long been hurt and jobs lost," adding, "This is very unfair treatment, and President Trump is clearly pursuing a policy of reciprocity."
There are also opinions that VAT is a fair tax. Sean Bray, Vice President of Global Projects at the Tax Foundation, said that while European countries refund VAT to exporters, the U.S. also exempts sales tax for its exporters, and since products competing in the same market are subject to the same tax rates regardless of production location, U.S. companies are not disadvantaged.
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