IMF tells US to adopt VAT as EU slashes Corporate Taxes
International Monetary Fund warned the US this week that its debt was heading toward unsustainable levels of 110% of GDP – many economists see 70% as the limit before growth is impeded. The IMF proposed introducing a full Value Added Tax regime to help control the debt.
Meanwhile, the EU member states are raising their VAT rates (average EU VAT rate up from 19% to 21% in past 3 years) to fund aggressive cuts in Corporation Taxes – the average EU rate is now 26% compared to the US’ 39% headline rate. Japan, China and India are all shifting their VAT systems in a similar way. It also enables uncompetitive countries trapped in the German-weighted Euro to effectively devalue their currencies to compete globally.
US left behind on global tax competition
The US is now the only country in the OECD that does not have a full VAT regime. This is one of the reasons why it has the second highest Corporation Tax (Japan is 1st) in the rich-countries’ club.
By contrast, over the past 30 years, many other countries have shifted the burden of tax onto consumers to fund cuts to their Corporation Tax rates. This helps attract and retain global job-creating investment, and lower the costs of production to help boost exports (exports are VAT exempt).
The US has always been threatened by the EU using its fiscal strategy to try to support its industry and attract global investment. The IMF is underlining this in the context of the rising US deficit. As China and India continue to mimic the EU tax system to the same advantages, the US may have rethink its reticence towards VAT.