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International Trade Effects of Value Added Taxation

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  • Paul Krugman
  • Martin Feldstein

Abstract

The actual value added tax systems used in many countries differ significantly from the completely general VAT that has been the focus of most economic analyses. In practice, VAT systems exempt broad classes of consumer goods and services. This has important implications for the effect of the VAT on international trade. A value added tax is sometimes advocated as a way of improving a country's international competitiveness because GATT rules permit the tax to be levied on imports and rebated on exports. This leads to political support for the VAT among exporters and producers of import-competing products. For a general VAT on all consumption, this argument is incorrect except in the very short run because exchange rates or domestic prices adjust to offset the effect of the tax on the relative prices of domestic and foreign goods. When prices or exchange rates have adjusted, a general value added tax will have no effect on imports and exports. In practice, the value added tax frequently exempts housing and many personal services. The VAT thus raises the price of tradeables relative to nontradeables and induces a substitution of housing and services for tradeable goods. Since this implies a reduced consumption of imported goods, it also implies a decline in exports. The most likely effect of the introduction of a VAT would thus be a decline of exports.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3163.

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Date of creation: Nov 1989
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Publication status: published as Taxation in the Global Economy, ed. by Assaf Razin and Joel Slemrod, University of Chicago Press, 1990.
Handle: RePEc:nbr:nberwo:3163

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  1. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
  2. Hamilton, Bob & Whalley, John, 1986. "Border tax adjustments and U.S. trade," Journal of International Economics, Elsevier, vol. 20(3-4), pages 377-383, May.
  3. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  4. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier.
  5. Dornbusch, Rudiger, 1974. "Tariffs and nontraded goods," Journal of International Economics, Elsevier, vol. 4(2), pages 177-185, May.
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Cited by:
  1. John Mutti & Harry Grubert, 1996. "The Significance of International Tax Rules for Sourcing Income: The Relationship Between Income Taxes and Trade Taxes," NBER Working Papers 5526, National Bureau of Economic Research, Inc.
  2. Julien Gourdon & St├ęphanie Monjon & Sandra Poncet, 2014. "Incomplete VAT rebates to exporters : how do they affect China's export performance?," Working Papers 2014-05, CEPII research center.
  3. Joanna Piotrowska & Werner Vanborren, 2008. "The corporate income tax rate-revenue paradox: Evidence in the EU," Taxation Papers 12, Directorate General Taxation and Customs Union, European Commission, revised Oct 2008.
  4. Cnossen,Sijbren, 2002. "Tax policy in the european union, A review of issues and options," Research Memorandum 023, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
  6. Michael Keen & Murtaza H. Syed, 2006. "Domestic Taxes and International Trade," IMF Working Papers 06/47, International Monetary Fund.
  7. Sijbren Cnossen, 2002. "Tax Policy in the European Union: A Review of Issues and Options," CESifo Working Paper Series 758, CESifo Group Munich.
  8. Barbara Annicchiarico & Fabio Di Dio & Francesco Felici, 2014. "Fiscal devaluation scenarios: a quantitative assessment for the Italian economy," Working Papers 1, Department of the Treasury, Ministry of the Economy and of Finance.
  9. Joel Slemrod, 1994. "Free-Trade Taxation and Protectionist Taxation," NBER Working Papers 4902, National Bureau of Economic Research, Inc.
  10. David Bradford, 2004. "The X Tax in the World Economy," CESifo Working Paper Series 1264, CESifo Group Munich.
  11. David F. Bradford, 2003. "Addressing the Transfer-Pricing Problem in an Origin-Basis X Tax," NBER Working Papers 9843, National Bureau of Economic Research, Inc.
  12. Chandra, Piyush & Long, Cheryl, 2013. "VAT rebates and export performance in China: Firm-level evidence," Journal of Public Economics, Elsevier, vol. 102(C), pages 13-22.
  13. Reto Schleiniger, . "Consumption Taxes and International Competitiveness in a Keynesian World," IEW - Working Papers 042, Institute for Empirical Research in Economics - University of Zurich.

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