Summary of "The spat over VAT" Episode of The Indicator from Planet Money

Release Date: April 15, 2025

Introduction

In the episode titled "The Spat Over VAT", hosts Paddy Hirsch and Adrian Ma delve into the complexities surrounding the Trump administration's focus on Value Added Tax (VAT). This discussion emerges in the backdrop of President Trump's recent declaration of a national emergency concerning the trade and economic practices of America's trading partners. The episode aims to demystify VAT, explore its implications on international trade, and analyze the differing perspectives between the administration and economic experts.

Understanding VAT vs. Sales Tax

Defining the Taxes: VAT, or Value Added Tax, is often misconstrued as a novel trade barrier. However, as economist Kimberly Klosing clarifies at [03:27], "A value added tax is a consumption tax, it's a multi-step tax, but it amounts to exactly the same thing as a sales tax. It's just administratively different."

Mechanics of VAT: Unlike the straightforward sales tax in the United States, VAT operates through multiple stages of production and distribution. For instance, creating a chair involves several transactions:

1. Wood Production: The woodmaker pays VAT on the wood purchased.
2. Chair Manufacturing: The chairmaker adds value to the wood and pays VAT on this added value.
3. Retailing: The retailer further marks up the chair's price, applying VAT again before the final sale to the consumer.

As Paddy Hirsch illustrates at [04:18], "In the US, the only one of these people... who pays the consumption tax is the person who buys the chair in the store." Conversely, in VAT systems prevalent in Europe and other countries, each stage of production and distribution incurs VAT, culminating in the consumer bearing the total tax burden.

The Trump Administration's Stance on VAT

The Trump administration has labeled VAT as a "non-tariff barrier to trade that distorts the market" (Paddy Hirsch at [00:50]). Contrary to the consensus among economists, the administration argues that VAT discriminates against U.S. producers exporting to Europe and inadvertently favors European manufacturers in the U.S. market.

Administration's Argument:

• Rebates on VAT: When European manufacturers export to the U.S., they receive VAT rebates on their production costs. The administration contends that this gives them an unfair advantage.
• Tariff Calculations: Utilizing trade deficit data, the administration has proposed imposing tariffs based on imbalanced trade figures, a method Kimberly Klosing criticizes as nonsensical ([08:27]). For example, with a trade deficit of $80 (buying $100 of mangoes and selling $20 of goods), the proposed tariff would be 40%, derived by dividing the deficit by two.

Economists' Perspectives

Kimberly Klosing's Analysis: At [07:19], Klosing points out flaws in the administration's logic, stating, "If you imagine trading with the island country that only sells mangoes... it's kind of a nonsense way to generate a tariff." She emphasizes that VAT is fundamentally a consumption tax and not inherently a trade barrier. Moreover, she highlights that the U.S. benefits from export subsidies, which distort trade in the opposite direction.

Michael Strain's Insights: Economist Michael Strain from the American Enterprise Institute challenges the administration's beliefs. At [07:36], he argues, "The President and some of his key advisors genuinely, though incorrectly believe that if the US runs a bilateral trade deficit with another nation, that is in itself evidence that that other nation has trade barriers against U.S. exports." Strain further asserts that the administration's focus on VAT is misinformed and fails to address the actual dynamics of international trade.

Implications of Tariffs and Trade Barriers

Economic Consequences: Both Klosing and Strain agree that indiscriminate tariffs, such as those proposed under the guise of addressing VAT concerns, are detrimental. Strain outlines several adverse effects at [09:59], including:

• Higher Consumer Prices: American consumers would face increased costs.
• Reduced Wages and Incomes: Real wages and household incomes could decline.
• Decreased Competitiveness: U.S. manufacturing firms might struggle against international competitors.
• Employment Declines: Manufacturing jobs could diminish.
• Slowed Economic Growth: Overall economic expansion might decelerate.
• Geopolitical Tensions: Strained relationships with allies could escalate.

Trade Distortions: Klosing also points out that the U.S. has long benefited from trade systems it helped establish, fostering prosperity. Imposing tariffs as a reactionary measure not only undermines these systems but also introduces unnecessary distortions.

Potential Consequences of the VAT Dispute

The episode underscores that the Trump administration's approach to VAT, driven by trade deficit concerns, may lead to multifaceted challenges:

1. Economic Strain: As highlighted by Strain, higher consumer prices and reduced disposable incomes could stifle economic activity.
2. Competitive Disadvantages: Tariffs might make U.S. goods less attractive abroad, harming exporters.
3. International Relations: Tariff impositions could sour diplomatic ties, weakening alliances and cooperative economic efforts.
4. Domestic Market Disruptions: Industries reliant on international supply chains might face increased costs and operational hurdles.

Conclusion

"The Spat Over VAT" episode of The Indicator from Planet Money provides a comprehensive examination of the Trump administration's contentious focus on VAT as a trade barrier. Through insightful discussions with economists like Kimberly Klosing and Michael Strain, the episode elucidates the fundamental nature of VAT, contrasts it with the U.S. sales tax system, and critiques the administration's rationale and methodology. The consensus among economic experts is clear: blanket tariffs based on flawed interpretations of VAT and trade deficits are poised to inflict significant economic harm and destabilize international trade relations. The episode serves as a crucial analysis for listeners seeking to understand the intricacies of tax policies and their broader economic implications.

Notable Quotes

• Paddy Hirsch [03:27]: "A value added tax is a consumption tax, it's a multi-step tax, but it amounts to exactly the same thing as a sales tax. It's just administratively different."

• Kimberly Klosing [08:27]: "It's kind of a nonsense way to generate a tariff."

• Michael Strain [09:59]: "We will see higher prices for American consumers. We will see reductions in real wages and real incomes for workers and households."

Produced by Lily Quiros, engineered by Robert Rodriguez, fact-checked by Sierra Juarez, and edited by Julia Richie Kkannon for NPR.