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ITC Survey on Consumption Tax Attracting Foreign Investment to U.S.

JUL. 21, 1998

ITC Survey on Consumption Tax Attracting Foreign Investment to U.S.

DATED JUL. 21, 1998
DOCUMENT ATTRIBUTES
  • Institutional Authors
    U.S. International Trade Commission
  • Cross-Reference
    For related coverage, see Doc 98-23085 (1 page), 98 TNT 139-2, or

    H&D, July 21, 1998, p. 674.
  • Subject Area/Tax Topics
  • Index Terms
    legislation, tax
    consumption tax
    VAT
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 98-23124 (2 pages)
  • Tax Analysts Electronic Citation
    98 TNT 140-32
ITC SURVEY INDICATES A BROAD-BASED CONSUMPTION TAX COULD ATTRACT FOREIGN INVESTMENT TO THE UNITED STATES
====== FULL TEXT ======

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.
DOCUMENT ATTRIBUTES
  • Institutional Authors
    U.S. International Trade Commission
  • Cross-Reference
    For related coverage, see Doc 98-23085 (1 page), 98 TNT 139-2, or

    H&D, July 21, 1998, p. 674.
  • Subject Area/Tax Topics
  • Index Terms
    legislation, tax
    consumption tax
    VAT
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 98-23124 (2 pages)
  • Tax Analysts Electronic Citation
    98 TNT 140-32
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