ITC Survey on Consumption Tax Attracting Foreign Investment to U.S.
ITC Survey on Consumption Tax Attracting Foreign Investment to U.S.
- Institutional AuthorsU.S. International Trade Commission
- Cross-ReferenceFor related coverage, see Doc 98-23085 (1 page), 98 TNT 139-2, or
- Subject Area/Tax Topics
- Index Termslegislation, taxconsumption taxVAT
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 98-23124 (2 pages)
- Tax Analysts Electronic Citation98 TNT 140-32
NEWS
UNITED STATES INTERNATIONAL TRADE COMMISSION
July 20, 1998
[1] Several legislative proposals exist that would replace the current U.S. income tax system with a consumption tax. One of the effects of implementing a consumption tax could be the likely increase in capital investment into the U.S. economy from abroad, at least in the short run, according to independent research that was reviewed and evaluated by the U.S. International Trade Commission (ITC). The ITC's survey of these studies is found in Implications for U.S. Trade and Competitiveness of a Broad-Based Consumption Tax.
[2] The ITC, an independent, nonpartisan, fact finding federal agency, recently concluded the study for the U.S. House Committee on Ways and Means. The report summarizes various consumption-tax proposals which include a flat tax, several versions of a national sales tax, an unlimited savings allowance (USA) tax, and a value- added tax (VAT); reviews the economic literature that analyzes the effects of consumption-based taxes on international transactions; and provides a discussion of key technical issues affecting the relationship between U.S. federal tax policy and U.S. trade and competitiveness. The economic studies that were surveyed are largely theoretical since such a broad-based tax reform is unprecedented.
[3] Most of the studies in the survey conclude that, in addition to attracting foreign investment to the United States, a consumption tax may also encourage U.S. firms to locate projects in the United States that might otherwise have gone abroad. Since international investment and trade flows are inherently linked, any changes in foreign investment into the United States are accompanied by short-run changes in the U.S. trade balance. To the extent that international investment flows into (out of) an economy, the trade balance moves towards deficit (surplus). In the long run, increases in investment from both foreign and domestic sources tend to enhance an economy's competitiveness by increasing its productivity and tend to increase national economic welfare.
[4] Other highlights of the report follow.
o A broad-based consumption tax may increase the after-tax
returns on domestic savings and investments. Most studies
conclude that a change to a consumption-based tax system would
significantly increase domestic sayings and investment, with a
corresponding positive impact on U.S. gross domestic product
and wage rates. However, the studies differ in their
predictions of the net effect on domestic interest rates,
o As noted above, a consumption tax could attract investments
financed through equity capital to the United States, as well
as encourage U.S. firms to locate projects in the United
States that might otherwise have gone abroad. Studies also
indicate U.S. multinational firms may have an incentive to
shift certain investments that are financed through borrowing
to other countries. While the theoretical research indicates
that net investment flows into the United States could either
increase or decrease, most studies indicate that net
investment inflows are more likely.
o The economic analyses reviewed suggest that the tax-free
status of exports under certain types of consumption tax --
such as a VAT, sales, or USA tax -- may have short-term
effects but is unlikely to have a long-run effect on the
overall U.S. trade balance. First, the studies in the survey
conclude that such a tax-free status of exports may simply
maintain a level playing field between domestic and foreign
producers in domestic and foreign markets. Second, any
increase in net exports in the short run is neutralized in the
long run by exchange rate movements. However, the studies
suggest that changes may occur in the composition of U.S.
trade. For example, U.S. net exports of capital-intensive
goods could increase, while net exports of labor-intensive
goods could decrease.
o If consumption taxation takes a form substantially simpler
than the system it replaces, then reductions in compliance and
enforcement costs could occur and would likely result in
efficiency gains for the U.S. In addition, a consumption-based
tax could enhance the status of the United States as a
"tax haven" country; the more favorable tax treatment of U.S.
business would mean that firms subject to foreign income
taxation would tend to shift the reporting of profits
to the United States to avoid higher taxes in countries.
However, a consumption tax could induce a one-time drop in
asset values of pre-existing, which may perceived as
inequitable. The extent of changes in asset values, if any,
ultimately depends on nature of any transition provisions
that are implemented.
Implications for U.S. Trade and Competitiveness of a Broad-Based
Consumption Tax (Inv. No. 332-389, USITC Publication 3110, June 1998)
will be available on the ITC's Internet server at
http://www.usitc.gov/332s/332index.htm. A printed copy may be
requested by calling 202-205-1809 or by writing to the Secretary,
U.S. International Trade Commission, 500 E Street SW, Washington D.C.
20436. Requests may be faxed to 202-205-2104.
- Institutional AuthorsU.S. International Trade Commission
- Cross-ReferenceFor related coverage, see Doc 98-23085 (1 page), 98 TNT 139-2, or
- Subject Area/Tax Topics
- Index Termslegislation, taxconsumption taxVAT
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 98-23124 (2 pages)
- Tax Analysts Electronic Citation98 TNT 140-32