I once proposed VAT during the first Trump presidency and then again here on
23 March 2025 but either was misunderstood or my point did not make it. In the mean time, we have seen more reports talking about VAT due to Trump mentioning them in his reciprocal tariffs dating 2 April 2025.
I still stand by my point, that VAT is the way to go. And also would be the proper way to go for the US. Let me explain.
The current situation in the US and (as an example the EU, but could as well be China, Canada, Australia, etc.) is the following:
It is very simplified. I even left out existing duties and state sales taxes for the sake of simplicity. In short, the problem is that foreigners can sell goods in the US without paying anything to the US government.
Now, taxing the import value is certainly a way to fix it. However, it is a very bad one. Why?
- The import value is lower than the retail value. Foreign companies selling cheap stuff at high margins still get around.
- The EU is known for customs audits with their domestic companies. The guys come to your office, check all invoices you paid supplier and check what you declared and paid duties on. They really do this and sue as you can see in this example from Austria. But how does the IRS or US CPB want to do a customs audit on a Chinese company? Yes, they are not and that's exactly why most imports from China are vastly underdeclared unless the importer is a domestic company.
Hence. the only effect of those duties would be on domestic sellers in the US. That will be Wallmart, Amazon and some car companies and probably some bigger European companies. But really not your favourite Chinese FBA sellers.
Why is VAT good? Check this
article:
More entertainingly, it follows from Krugman’s paper that if the US kept the overall level of tax the same, but substituted VAT for some personal tax and corporate tax, and applied VAT to absolutely everything, then that would enhance the competitiveness of, and tend to increase, US exports.
or
this one:
As with all taxes, there is a need to balance what is best for the economy overall with the need for the government to raise revenues. Most economists agree that VAT places a lesser deadweight cost on productivity than other forms of taxation, especially income taxes.
Not only does VAT act as export subsidy but it also has less nefarious effects on the economy than personal and corporate income taxes.
What would I recommend (for both US and as a response to US duties)?
- Substitute as much taxes by VAT. Works well in big economies, while Swiss would probably just travel to the EU for shopping and holidays.
- Keep tariffs but switch from a value-based to a specific system as Switzerland had it. It means that you no longer pay 5% duties on import value. But you pay 100 USD per bike or per 100 kg of steel. It is much more efficient to keep cheap Chinese goods out and you won't have to deal with fake customs invoices anymore.
How would I fix the US debt? I do not and this post has no intention to do so.
