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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
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.
- 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 savings 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
- 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.
- 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.
- 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. economy. 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 other countries. However, a consumption tax could induce a
one-time drop in asset values of pre-existing wealth, which may be perceived as
inequitable. The extent of such changes in asset values, if any, ultimately depends on
the 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.
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