TY - JOUR
AU - Krugman,Paul
AU - Feldstein,Martin
TI - International Trade Effects of Value Added Taxation
JF - National Bureau of Economic Research Working Paper Series
VL - No. 3163
PY - 1989
Y2 - November 1989
UR - http://www.nber.org/papers/w3163
L1 - http://www.nber.org/papers/w3163.pdf
N1 - Author contact info:
Paul R. Krugman
Department of Economics
Princeton University
Woodrow Wilson School
Princeton, NJ 08544
Tel: 609/258-4570
Fax: 609/258-2809
E-Mail: pkrugman@princeton.edu
Martin S. Feldstein
President Emeritus
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138-5398
Tel: 617/868-3905
Fax: 617/868-7194
E-Mail: msfeldst@nber.org
M1 - published as Martin S. Feldstein, Paul R. Krugman. "International Trade Effects of Value-Added Taxation," in Assaf Razin and Joel Slemrod, editors, "Taxation in the Global Economy" University of Chicago Press, 1990 (1990)
AB - 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.
ER -