FairTax Overview
Border Adjustable Taxes Act as Unanswered Trade Subsidies.-- Add to this the fact most of our
trading partners effectively rebate their taxes at the border and provide for themselves a powerful export
trade subsidy and benefit for consumption of domestic goods that is unanswered by the U.S. It is a
widely understood proposition that the U.S. should not target a particular trade deficit level, subsidize its
exporters or impose tariffs on imports. The reason, established clearly in economic theory, is that doing
so interferes with mutually beneficial transnational economic exchanges, to the disadvantage, in the
aggregate, of both countries’ economies. However, the U.S. government should not, as a matter of
policy, accord a huge advantage to foreign companies competing in the U.S. market or impose a huge
disadvantage on American producers and workers selling their goods and services in the U.S. and
foreign markets. That has been the effect, however, of border adjustable VATs.
Consider this. The U.S. tax system imposes heavy income and payroll taxes on U.S. workers and
businesses producing goods in the U.S. whether those goods are sold in the U.S. market or abroad.
Recall U.S. corporate taxes are the about nine percentage points higher than the OECD average.12 The
U.S., however, imposes no corresponding tax burden on foreign goods sold in the U.S. market.
Moreover, foreign VATs -- a major component of the revenue raised in most developed countries -- are
rebated if foreign goods are exported to the U.S. market. This creates a large and artificial relative price
advantage for foreign goods, in both the U.S. market and abroad.
The table below illustrates this point. American producers pay two sets of taxes when selling into
foreign markets. Conversely, in U.S. markets, foreign goods bear no U.S. tax and the foreign value
added tax is forgiven. Thus, a most manifest unfairness in the U.S. tax system is that it places U.S.
producers – including businesses and workers in manufacturing, agriculture, mining, and forestry – at a
large competitive disadvantage relative to their foreign competitors here and abroad. Our failure to
counteract these border-adjusted taxes explicitly encourages consumption of foreign, goods. And it
converts many of our nation’s retailers into tax free trade zones for foreign produced goods.
Advantage for Foreign Producers
U.S. production
Foreign production
Sold in U.S. market
Pays U.S. income and
payroll taxes.
Pays no U.S. income or
payro