7 International Trade Effects of Value-Added Taxation

There is a well-understood economists ’ case for a value-added tax (VAT). As a consumption tax, a VAT would not impose the bias against saving that is inherent in income taxation and could therefore help promote capital formation and economic growth. Against this advantage must be weighed possible disadvantages resulting from higher administrative costs and greater difficulty in providing an acceptable degree of progressivity to the overall tax-and-transfer structure as well as the possible political costs (or benefits, depending on one’s point of view) of a tax that is relatively invisible and thus easy to raise. Among many businessmen, however, the case for a VAT is often stated quite differently. They view such a tax as an aid to international competitive-ness since VATs are levied on imports but rebated on exports. The case is often stated as follows: an income tax is paid by producers of exports but not by foreign producers of the goods we import, while a VAT is paid on imports but not on exports. Surely, say the proponents of this view, this means that countries that have a VAT have an advantage in international competition over countries that rely on income taxation. In fact, this argument is wrong. A VAT is not, contrary to popular belief, anything like a tariff-cum-export subsidy. Indeed, a VAT is no more an inherently procompetitive trade policy than a universal sales tax, to which an “idealized ” VAT, levied equally on all consumption, is in fact equivalent. The point that VATs do not inherently affect international trade flows has been well recognized in the international tax literature. ’ This point is als