R1 (Building Trade Walls)
Hey guys, today I want to talk about an NYT article written a couple days ago about international trade & tariffs. While the article, overall, has a lot of good data and analysis, the author’s insistence of treating VAT and other consumption taxes as a tariff has left me a little perplexed.
The author first starts of describing “how the United States and other countries currently treat trade.”
There are two ways that are highlighted
• “Tariffs, or taxes on imports.”
• Consumption Taxes (VAT & Sales Tax)
The author further goes on the state that “once value-added taxes and sales taxes are included in an international comparison, America’s taxes on imports are much lower than those of almost every other country.”
At this point, while it isn’t explicitly stated in the article, it is heavily implied that the author believes VAT and other Sales Taxes have similar effects as tariffs. I emailed the author and he mentioned that his reasoning was that consumption taxes reduce domestic consumption without affecting exports. Consequently, the trade deficit would be reduced.
I don’t believe that this is to be completely accurate. Especially since the VAT or sales tax would be replacing other forms of taxes (i.e. income taxes).
In the 1990 paper titled “International Trade Effects of Value-Added Taxation”, Martin Feldstein and his co-author Paul Krugman authored the following words:
• “A VAT is not, contrary to popular belief, anything like a tariff-cum-export subsidy. “
• “The point that VATs do not inherently affect international trade flows has been well recognized in the international tax literature.”
I will give the author of the NYT article some credit. Feldstein and Krugman do agree that in the short term, there maybe a few favorable effects to a country’s trade balance.
“To the extent that a VAT does improve competitiveness, it does so in the short run by offering less bias against saving than an income tax, which other things being equal, tends to improve the trade balance.”
However, this is only for the short term. In the long term, we can expect trade to balance out since “a resulting accumulation of foreign investment would lead to an increase of imports in excess of exports.”
Since the rest of the paper is pretty much the analysis Feldstein and Krugman conducted, I’m just going to leave a link below for others to see.
So to the NYT author’s original point. Yes, I am convinced that in the short term, a Value-Added Tax would improve a country’s trade balance, but in the long term, it won’t really have such an effect. Due to this, I believe that the second graph in the article is highly misleading. It is not accurate to compare VAT and Sales Taxes across a variety of countries as a means of analyzing how protectionist countries are. VAT and Sales Taxes are not import tariffs and are not protectionist measures.
I have a few other links that back up my argument, and you can access them
ここには何もないようです