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NEWS RELEASE 98-052; JULY 20, 1998 July 20, 1998
News Release 98-052
Inv. No. 332-389

ITC SURVEY INDICATES A BROAD-BASED CONSUMPTION TAX COULD ATTRACT FOREIGN INVESTMENT TO THE UNITED STATES

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.

The ITC, an independent, nonpartisan, factfinding 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.

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.

Other highlights of the report follow.

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.

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