VAT and Trade
For mostly top-secret reasons, I was going through Ezekiel Emanuel's old posts about his health-care voucher proposal, and came across this odd line
about the Value-Added Tax: "[The VAT] could be used in interesting ways for restraining imports and promoting exports." Hm, I've heard this in a number of places before, especially from manufacturing groups, unions, and Ross Perot—namely, that the VAT could help us boost exports and correct the trade deficit—and it's never quite made sense to me. First, here's
a primer on the VAT; read it if you need to know how it works. Okay, now the idea behind the "VAT and trade" theory, as I understand it, is that exporters would not have to collect the tax from buyers abroad, and would instead be exempt from paying the tax to the government. (The WTO allows this.) On the other hand, importers
would still have to pay the VAT for goods brought across the border. Seems unbalanced, right? It looks like a subsidy for exports and a penalty on imports, which should, in theory, help fix our trade deficit.
But that theory seems entirely wrong! For one, exports would still cost the same abroad as they did before, so it's not clear why exporters would start selling more. Second, it's true that imports would become more costly. But so would all other domestic goods, by the same amount. So it's not like consumers would suddenly lose their appetite for imports. And if for some reason there was an imbalance created, wouldn't the exchange rate just adjust accordingly? Now it's possible that a VAT could reduce the trade deficit by boosting savings, but that's about it. Or am I missing something blindingly obvious here?