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> The U.S., for instance, has a 2.5 percent tariff on cars imported from Germany, while Germany has a ten percent tariff on American cars. In addition, Germany’

by tzs 1y ago

> The U.S., for instance, has a 2.5 percent tariff on cars imported from Germany, while Germany has a ten percent tariff on American cars. In addition, Germany’s value-added tax is remitted on exports but charged on imports. As a result, while the logos of Mercedes-Benz, BMW, and Volkswagen are seen all over American roads, those of Ford and General Motors are a rare sight in Germany. What does that part about VAT have to do with this? VAT is essentially a sales tax with a more involved collection process. The big difference in collections is that VAT is collected at each step of the chain of manufacture and distribution but refunded if the next step is not to a consumer, whereas in sales tax it is only collected on the final sale to a consumer. As for why VAT is remitted on exports, it is the same reason why if GM builds a Tahoe in their factory in Arlington, Texas and sells it to a dealer or consumer that is not in Texas they do not pay Texas sales tax. Sales tax and VAT are both destination based. Exports, whether from Texas or Germany, are not to the final consumer and so VAT and sales tax are not owed. Saying that VAT has anything to do with why BMW is more common than GM in Germany makes as much sense as saying that sales tax is why GM is more common than BMW in Texas.

bitshiftfaced 1y ago
German car makers deduct VAT on machinery, equipment, factory supplies, and sometimes even utilities or specific components. Some US states offer car manufacturers tax exceptions on things like raw materials, but it is by no means apples to apples. When BMW builds a car in Germany, it enters the show floor free of embedded taxes on inputs. Thats not necessarily the case for US cars Another important difference has to do with the size of the VAT tax compared to single-stage taxes. For example, in the US if you taxed 19% on inputs every step of the way, no one would be able to afford the final sticker price. Instead, the US taxes a much smaller amount but does not refund this like the VAT system, and the end consumer tax is the same small percentage. VAT can be much higher because it avoids the cascading tax effect. In the end maybe 19% tax was collected on the manufacture and sale in both the US and Germany, and all you changed was one having a higher tax versus cost but the sticker price evened out in the end. Because of this difference in the two tax systems, VAT can be, and is, much higher than US state/local tax. But then, this means that differences in tariffs creates a compounding effect. A German manufacturer can sell to a US end consumer on average about: 100% cost + 2.5% tariff + 102.5% * (8.5% consumption tax) = 111% after tax cost. On the other hand, if Ford builds in the US and sells to a German end consumer, then the calculation goes: 100% cost + 10% tariff +110% * (19% VAT) = 131% after tax cost. So while Germany's VAT is 10.5% higher than the average US sales tax, and equal to the VAT any German would pay in Germany, its actually almost double that amount when you take into account the compounding affect of Germany's higher tariffs. In short, the differences in the two tax systems result in systemically higher tax rates for VAT. And this means that EU car manufacturers do see a trade advantage in terms of selling to EU end consumers compared to US manufacturers selling to EU end consumers (when compared to either selling in the US) since the final after-tax cost calculation is multiplicative.
- orwin 1y ago
  That's because sales taxes are even more shitty than VAT, it's not one of the many issues with VAT. I actually dislike all consumption taxes, but I find myself defending VAT way too much on this platform :/
- tpm 1y ago
  > VAT can be, and is, much higher than US state/local tax. > And this means that EU car manufacturers do see a trade advantage in terms of selling to EU... What is never mentioned in these discussions is that high VAT means higher prices as a whole and that has a chilling effect on consumer spending. German (and all other EU) manufacturers have a disadvantage of a smaller home market. This is then compounded by having other taxes on gas (+VAT too of course), which is much more expensive than in the US. So it's simply less affordable to have a car in the EU. And as a result, a high VAT and other taxes are not a competitive advantage for any local industry. This is different to tariffs or direct support, which are an advantage.
- lalaland1125 1y ago
  You have a lot of words here, but it still seems like the VAT is irrelevant here as it applies equally to both domestic and foreign production. I agree the 10% tariff on US cars that is problematic, but that has nothing to do with the VAT
  - bitshiftfaced 1y ago
    I'll try to summarize it for you. My first point was that with from the EU buyer's perspective, the German car can be delivered a bit cheaper because VAT is totally removed from it up until the end. The US car entering the EU market might have has sales tax embedded into the cost due to the differences in the tax systems. To illustrate my second point, let's imagine both countries have a 10% tariff, and it takes $50,000 to build a car (ignoring point #1). In Germany, the German car's after tax cost is 50000*1.19=59500 and the US car's is 50000*1.1*1.19. The difference between the two cars in the German market is 5950. In the US market, taking the average sales tax, the German car's after tax cost is 50000*1.1*1.085=59675 and the US built car is 54250, a difference of 5425. The difference between the cars is $525 tighter in the US market compared to the EU market. The German car makers get an advantage by virtue of how VAT is systemically higher and the resulting multiplicative effect, even when the tariffs are the same. When the EU tariffs are relatively higher, as they are now, the effect is even greater.
rjsw 1y ago
There are plenty of Fords and Opels (was GM) on German roads, not ones built in the US though.
lalaland1125 1y ago
> What does that part about VAT have to do with this? VAT is essentially a sales tax with a more involved collection process. To add some further context that helped me understand VAT: Sales taxes are great, with minimal dead weight loss and distortion, but have the downside of encouraging black markets since it's easy to avoid reporting final sale transactions. VATs are designed to be mathematically the same as sales taxes, but robust to black markets. The sales tax is captured on the manufacturing end, which is much harder to avoid reporting for a variety of reasons.
- thaumasiotes 1y ago
  > Sales taxes are great, with minimal dead weight loss and distortion That's not context for VAT. Or a fact. As far as deadweight loss and distortion go, a uniform VAT is the same thing as an income tax. If you want a tax with minimal deadweight loss, you're pretty much stuck with a capitation tax.
  - nroets 1y ago
    VAT only reduces consumption. Income tax also reduces investment. For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country when the beverage leaves the store. So it's really a consumption tax.
    - thaumasiotes 1y ago
      No, there's no difference. Whether all prices rise by 25%, or all incomes fall by 20%, the system will reach exactly the same equilibrium. When a VAT is enacted, you can model this as everyone with an income paying the corresponding income tax. (For full accuracy, you'd also need everyone with monetary holdings to pay a one-time wealth tax, but you can safely ignore this because the amount of wealth is so small relative to the amount of income.) The effect of the VAT is to make all money less valuable. This means that people will seek to earn less of it. > For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country VAT is paid on all transactions; that's the whole point of VAT. You're thinking of a sales tax that exempts business purchases. As soon as the tank is purchased, its seller must pay the appropriate VAT.

by tzs 1y ago

bitshiftfaced 1y ago

German car makers deduct VAT on machinery, equipment, factory supplies, and sometimes even utilities or specific components. Some US states offer car manufacturers tax exceptions on things like raw materials, but it is by no means apples to apples. When BMW builds a car in Germany, it enters the show floor free of embedded taxes on inputs. Thats not necessarily the case for US cars Another important difference has to do with the size of the VAT tax compared to single-stage taxes. For example, in the US if you taxed 19% on inputs every step of the way, no one would be able to afford the final sticker price. Instead, the US taxes a much smaller amount but does not refund this like the VAT system, and the end consumer tax is the same small percentage. VAT can be much higher because it avoids the cascading tax effect. In the end maybe 19% tax was collected on the manufacture and sale in both the US and Germany, and all you changed was one having a higher tax versus cost but the sticker price evened out in the end. Because of this difference in the two tax systems, VAT can be, and is, much higher than US state/local tax. But then, this means that differences in tariffs creates a compounding effect. A German manufacturer can sell to a US end consumer on average about: 100% cost + 2.5% tariff + 102.5% * (8.5% consumption tax) = 111% after tax cost. On the other hand, if Ford builds in the US and sells to a German end consumer, then the calculation goes: 100% cost + 10% tariff +110% * (19% VAT) = 131% after tax cost. So while Germany's VAT is 10.5% higher than the average US sales tax, and equal to the VAT any German would pay in Germany, its actually almost double that amount when you take into account the compounding affect of Germany's higher tariffs. In short, the differences in the two tax systems result in systemically higher tax rates for VAT. And this means that EU car manufacturers do see a trade advantage in terms of selling to EU end consumers compared to US manufacturers selling to EU end consumers (when compared to either selling in the US) since the final after-tax cost calculation is multiplicative.

orwin 1y ago
That's because sales taxes are even more shitty than VAT, it's not one of the many issues with VAT. I actually dislike all consumption taxes, but I find myself defending VAT way too much on this platform :/
tpm 1y ago
> VAT can be, and is, much higher than US state/local tax. > And this means that EU car manufacturers do see a trade advantage in terms of selling to EU... What is never mentioned in these discussions is that high VAT means higher prices as a whole and that has a chilling effect on consumer spending. German (and all other EU) manufacturers have a disadvantage of a smaller home market. This is then compounded by having other taxes on gas (+VAT too of course), which is much more expensive than in the US. So it's simply less affordable to have a car in the EU. And as a result, a high VAT and other taxes are not a competitive advantage for any local industry. This is different to tariffs or direct support, which are an advantage.
lalaland1125 1y ago
You have a lot of words here, but it still seems like the VAT is irrelevant here as it applies equally to both domestic and foreign production. I agree the 10% tariff on US cars that is problematic, but that has nothing to do with the VAT
- bitshiftfaced 1y ago
  I'll try to summarize it for you. My first point was that with from the EU buyer's perspective, the German car can be delivered a bit cheaper because VAT is totally removed from it up until the end. The US car entering the EU market might have has sales tax embedded into the cost due to the differences in the tax systems. To illustrate my second point, let's imagine both countries have a 10% tariff, and it takes $50,000 to build a car (ignoring point #1). In Germany, the German car's after tax cost is 50000*1.19=59500 and the US car's is 50000*1.1*1.19. The difference between the two cars in the German market is 5950. In the US market, taking the average sales tax, the German car's after tax cost is 50000*1.1*1.085=59675 and the US built car is 54250, a difference of 5425. The difference between the cars is $525 tighter in the US market compared to the EU market. The German car makers get an advantage by virtue of how VAT is systemically higher and the resulting multiplicative effect, even when the tariffs are the same. When the EU tariffs are relatively higher, as they are now, the effect is even greater.

rjsw 1y ago

There are plenty of Fords and Opels (was GM) on German roads, not ones built in the US though.

lalaland1125 1y ago

> What does that part about VAT have to do with this? VAT is essentially a sales tax with a more involved collection process. To add some further context that helped me understand VAT: Sales taxes are great, with minimal dead weight loss and distortion, but have the downside of encouraging black markets since it's easy to avoid reporting final sale transactions. VATs are designed to be mathematically the same as sales taxes, but robust to black markets. The sales tax is captured on the manufacturing end, which is much harder to avoid reporting for a variety of reasons.

thaumasiotes 1y ago
> Sales taxes are great, with minimal dead weight loss and distortion That's not context for VAT. Or a fact. As far as deadweight loss and distortion go, a uniform VAT is the same thing as an income tax. If you want a tax with minimal deadweight loss, you're pretty much stuck with a capitation tax.
- nroets 1y ago
  VAT only reduces consumption. Income tax also reduces investment. For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country when the beverage leaves the store. So it's really a consumption tax.
  - thaumasiotes 1y ago
    No, there's no difference. Whether all prices rise by 25%, or all incomes fall by 20%, the system will reach exactly the same equilibrium. When a VAT is enacted, you can model this as everyone with an income paying the corresponding income tax. (For full accuracy, you'd also need everyone with monetary holdings to pay a one-time wealth tax, but you can safely ignore this because the amount of wealth is so small relative to the amount of income.) The effect of the VAT is to make all money less valuable. This means that people will seek to earn less of it. > For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country VAT is paid on all transactions; that's the whole point of VAT. You're thinking of a sales tax that exempts business purchases. As soon as the tank is purchased, its seller must pay the appropriate VAT.