In the debate over whether to adopt a destination-based cash flow tax with a border adjustment tax (BAT) to replace our current corporate income tax, proponents argue that foreign value-added taxes (VAT) give foreign companies an advantage over American companies that the BAT would correct. The argument goes this way: when a French company exports a product to the United States, it doesn’t pay the American corporate income tax, and it receives a rebate on its French VAT payments. Meanwhile, an American company exporting to France has to pay both—it is subject to the US corporate income tax and then pays the French VAT on the product when it is sold in France.
This argument, however, confuses consumption and income taxes, and it compares apples to oranges. What matters is whether the playing field is level in the country where the products are competing. As a matter of fact, the playing field is already level.
When a French company sells to customers in the United States, it is subject to the French corporate income tax. A competing American firm selling domestically pays the US corporate income tax. Neither is hit with a VAT. In other words, there is a level playing field.
Let’s look at what happens to a US company selling in France. The US government imposes a corporate income tax, and the French government imposes a VAT. A French competitor selling domestically in France also pays a corporate tax—the tax levied by the French government—as well as the French VAT. The playing field is level in France, too.
It is true that American companies suffer a tax disadvantage, but that is a consequence of America’s burdensome and distortionary corporate income tax system, which makes it hard for US companies to compete abroad. No matter where US companies compete in the developed world, they face higher corporate income tax rates than their competitors because of US policy. That’s the real “Made in America” tax, not other countries’ VATs.