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.
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.
> 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.
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.