The lengthy dispute[⇒ related story] between the USA and EU over the United States’ FSC income-tax concessions to US exporters has its roots in an historical error, according to one of the authors of the FSC legislation: Garry Hufbauer. He recommends that the error be corrected, but his proposals seem to require either a significant change in the tax arrangements now in place in the rest of the world or a change in the WTO rules on export subsidies. In an article in today’s Financial Times, Hufbauer reveals that the USA has been ‘caught out’ by a concession it made to France on the tax treatment of exports back in the 1960s when building Europe was a US foreign policy priority. With his co-author, Hufbauer recommend that as it repeals the FSC exemptions, as it is bound to do by the terms of the WTO decision that they are an export subsidy, the USA should insist that the erroneous distinction that permits WTO members to operate a VAT exemption on exports but not an income tax exemption on exporters be abolished. bq. Congress should simultaneously urge US trading partners to cease exempting their exports from VAT and cease imposing those taxes on imports. If they do not amend their tax practices within a decent period, the US tax code should at least be amended to exclude export income from US corporate income tax and allow American-made goods and services a fair opportunity to compete in world markets. (Hufbauer and Christian in the “FT”:http://www.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1078381610696&p=1012571727102 [sub]) According to Hufbauer, the historical deal between the USA and the European Commission made a distinction between ‘direct’ taxes like income taxes that impacted producers and value-added taxes such as a VAT (or GST in Australia) that were said to be ‘indirect’, impacting consumers in the same way as an excise on alcohol or cigarettes. But, he claims, VAT and income taxes are now understood both to impact the producers of goods and services: VAT is not like excise at all. Because they have the same impact, says Hufbauer, both taxes deserve the same treatment under WTO rules. They should be imposed on exports and remitted on imports. Instead, under current WTO rules, VAT may be remitted on exports but imposed on imports. I think it’s highly unlikely that the USA could convince its trading partners to ‘turn back the clock’ on VAT exemptions on exports (and imposition on imports) although this approach would have the highly desirable feature of resolving the problem of collecting national VAT taxes on goods and services traded over the internet. The problem is that VAT exemptions on exports are now built-in to too many tax arrangements around the world to be readily changed. The USA will have to find a long-term solution to the perceived disadvantage for its exporters that is in its own hands. But would the exemption of US firms from all income tax on export income solve or exacerbate the export subsidy problem posed by the current FSC exemptions? The WTO “rules say(link to text of Subsidies Agreement on WTO site)”:http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm that any remission of a direct tax on an exporter (“tax revenue foregone” in the terms of Article 1.1 (ii) of the Agreement on Subsidies) is a subsidy. Even if we admit that the distinction between income taxes and VAT is a distinction without a difference, amending the US tax code to exempt income tax does not seem to get around this WTO rule. Should the WTO rule on export subsidies be changed to accommodate the US historical reluctance to add a federal value-added tax to the overall tax mix? Who would gain and who would lose from this?