trade and taxes

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					Taxation and Trade
  Arindam Das-Gupta
    Outline - 8 effects on trade
   Taxes can cause trade
   Trade taxes reduce trade and welfare
   Differential tariffs distort production and
    trade patterns
   Tariffs increase non-traded goods demand
   Trade taxes cause smuggling and forex black
    markets
   Costly customs procedures reduce trade –
    like a tariff
   Trade liberalisation can boosts revenue – or
    not
   Trade effects of different domestic taxes
    depend on incidence
    Outline - plus 7 more...
   Can VAT revenue replace lost trade tax
    revenue? Maybe or maybe not.
   Taxes distort investment in exports -
    including services
   International incidence of tax depends on
    monopoly power in traded goods
   Tax competition or tax relief can distort factor
    movements instead of trade
   Tax havens reduce tax bases and are being
    cooperatively combated
   Globalization reduces domestic tax bases
   Other policy instruments can also impact
    international trade
       Importance of trade and trade
       taxes
80
                                     Trade
60                                   Taxes (%
                                     of
40                                   Revenue)
20                                   Trade (%
                                     of GDP)
0
                      World
     South



             Asia &




                              OECD
     Asia
              East
                                                      Trade (% of GDP)




                                             0
                                                 50
                                                      100
                                                            150
                                                                  200
                                                                        250
                                                                              300
                                                                                    350
                                     India
                               Bangladesh
                                  Pakistan
                                    China
                                                                                          taxes




Trade
                                    Nepal
                               Korea, Rep.
                                Indonesia
                                Sri Lanka
                               Papua New
                                 Guinea
                               Philippines
                                  Vietnam


Taxes on international trade
                                 Thailand
                                 Mongolia
                                 Maldives
                                 Malaysia
                                Singapore
                                             0
                                             1
                                             2
                                             3
                                             4
                                             5
                                             6
                                             7
                                             8
                                             9
                                                                                          Importance of trade and trade

                                             10




                                                 Trade taxes (% of GDP)
Taxes can cause trade: Example 1
          A: No tax equilibrium
          Tax imposed on X1
          X1: exported good post tax
          X2: imported good post tax
          B: Post tax equilibrium
    Trade creation and diversion with
    customs unions: Example 2

   Customs union: levy lower (or no)
    import tariffs on members and
    common tariffs on non-members
   Leads to increased trade between
    members (“trade creation”)
   Less trade with non-member countries
    (“trade diversion”)
    Trade taxes and trade

   Impact trade and welfare negatively
   Non-tariff barriers (quotas) have similar
    effects - if quota is auctioned by govt.
    – else quote revenues go to quota holder and
      there are income effects on trade
    – rent seeking may also occur
   Differential trade taxes or other taxes
    distort trade patterns
Effects of tariffs on trade and welfare
                                          B+A:
                                          welfare
                                          loss from
                                          tariff tm
Effects of export taxes on trade and
welfare

                             B+A
                             welfare
                             loss from
                             export tax
                             te
        Differential tariffs distort production
        and trade
Good 1 - High Tariff      Good 2 - Low Tariff
            Tariffs increase non-traded goods
            and reduce traded goods
            production
     T                       NT Non-Traded Goods
p           Traded Goods   p

                               NT **
p   T**                    p
                                    *
                               NT
p   T   *
                           p
Trade taxes cause smuggling and
forex black markets
   Smuggling
    – Real resources used to avoid payment of tax
    – Nexus with corruption
    – Are bribes more efficient than smuggling?
   Impact on forex black markets
    (“hawala”) with exchange rationing
    leading to a forex premium
    – premium serves as “surrogate tariff”
    – tariff increase causes premium to fall
    Trade tax administration and trade
   Customs procedures impact imports and
    exports like trade taxes - without revenue
    benefits.
   Customs streamlining can boost trade and so
    trade tax revenue.
    – Customs cooperation also facilitated by
      harmonised goods classification and automation
   Some customs reforms can help curb under-
    over-invoicing and smuggling, increasing
    revenue - has conflicting effects on trade.
    – Pre-shipment inspection may help or hurt
      government revenue
Revenue effects of trade liberalisation
   If trade causes growth, revenue should
    rise if buoyancy is positive.
   Replacing QRs by tariffs should boost
    revenue
   Both in theory and empirically lower
    tariffs impact on trade tax revenue
    indeterminate: Laffer curve
   Sufficient tariff lowering must reduce
    revenue
   Theory and empirical evidence on
    possibility of replacing tariff revenue by
    domestic tax revenue conflict.
    Domestic taxes and trade
   Key difference between domestic consumption
    taxes and import duties: import duty discriminates
    against imports.
   Backward shifted taxes are borne by inputs and do
    not impact trade.
   Extent of forward shifting critical: Non-trade taxes
    effect trade if they are forward shifted to buyers of
    products via higher prices
    – E.g.1 Corporate taxes can raise capital costs and so
      production costs
        • Foreign tax credits limit importance of this on trade
          (greater impact on factor flows)
    – Eg. 2 Taxes on intermediate inputs, (fuel excise) can
      have similar effects - they cannot be credited.
    – If these tax-induced effects are sector specific, they
      impact relative costs and trade via impacts on both
      consumption and production.
Impact of forward shifted
production taxes on trade
Backward shifted taxes and mixed
shifting
   Studies for the US suggest this case
    obtains via the corporation tax
    – No direct impact on international trade
    – Impact is through lowered domestic
      investment
   Resource taxes also usually shifted
    backward
   Wage taxes part forward and part
    backward shifted
    Tariffs versus VAT
   Are broad-based consumption taxes superior
    to trade taxes?
     – Keen-Ligthart: If all goods are tradeable then a
       tariff cut that raises the value of domestic
       production plus combined with higher consumption
       tax which leaves domestic prices the same leads to
       higher welfare and revenue!
        • VAT base (consumption versus imports) is larger
          than tariff base: To raise a given revenue a lower tax
          rate can be used: less distortion.
        • But a VAT is seldom a “pure” VAT: itself
          distortionary:
        • More evasion prone in poor countries?
        • Revenue result requires qualification with non-
          traded goods or intermediate goods
        • Can fail with imperfect competition if tariff revenue
          is lost as rent to exporters
Price neutral replacement of a tariff
with a consumption tax
                                Production
                                with tariff
                                at b
                                Production
                                with VAT
                                at e
                                abcd: tariff
                                revenue
                                acfg: VAT
                                revenue
    Revenue effect of VAT replacing
    tariffs: empirical evidence
   More open economies introducing a
    VAT may lose revenue (Ebrill et. al. 2001).
   Finding contrary to theory suggesting
    importance of caveats (non-traded &
    intermediate goods, imperfect
    competition).
   VAT may have boosted export tax
    revenue due to credit-invoice mechanism
    (Ebrill, et. al., 1999).
   Caveat: lowering tariffs somewhat does
    not always lead to revenue loss (e.g. less
    smuggling/bribes).
               Tax shifting and its impact on
               production costs and trade
          Forward Shifting and Impacts on Production Costs and Trade
Tax         How Tax is         Incidence               Trade Impacts
            Shifted
Corporate   Higher cost of     Part shifted forward    Costs of K-intensive goods
Tax         capital            to consumers, part      relatively more affected:
                               backwards to capital OECD Exports, imports of
                               owners                  developing countries
Excise      Higher fuel prices 100% forward            Energy intensive:
Taxes on    for energy users   shifting typically      OECD exports & developing
fuel                           assumed                 country imports retarded
Payroll/    Higher gross of    Depends on demand- Exports of labour intensive
Social      tax wage rates     supply elasticities for products retarded
Security                       labour - as for Corp
                               Tax
Resource    Not shifted or     Backward shifted to     None
Taxes       shifted backwards resource owners
                                                              Source: Whalley (2002)
Domestic tax effects on services;
Tax exporting
   If non-traded goods bear a lower effective
    tax than traded goods (e.g. housing, services)
    then more investment in non-traded goods
    and so less demand/supply of traded goods.
   Services tend to be lightly taxed so service
    taxation promotes trade in goods
   Export of services increasingly important:
    Service taxes reduce export cost advantage.

   If taxes are origin based then exporting
    countries are able to “export” tax - revenue
    benefits if countries are not “small”.
Globalization Issues
    Tax competition, double tax relief
    and factor movements
   If tax competition succeeds in attracting
    foreign factors (FDI or skilled labour)
    this may act as a substitute for trade.
   Similarly with tax incentives
   Tax treaties and unilateral tax sparing
    can have similar effects.
   Tax havens have no “real” effect but
    lead to lower revenues in non-haven
    countries due to changed ownership
Tax havens: The OECD’s Harmful
Tax Competition (HTC) Initiative
   Tax havens: countries with tax regimes designed
    to attract investments/transactions that are
    motivated by tax avoidance with laws of other
    countries.
   OECD: Criteria for identification of HTC by
    “uncooperative tax havens”.
    – Secrecy laws/practices to prevent exchange of
      information for tax purposes with other
      governments on its residents
    – Lack of transparency (e.g. accounting/auditing
      rules lax or non-standard).
    – No requirement that activity be substantial for
      preferential tax.
   OECD to adopt common defensive measures.
    Effects of globalization on tax bases
   Globalization my decrease national
    revenue bases, especially of poor
    countries.
    – Most countries will find it increasingly
      difficult to tax mobile factors - and
      capital/skilled labour mobility is increasing.
    – International pressure to also decrease trade
      taxes most important in poor countries
    – OECD restrictions on attracting legal
      ownership
   Likely increase in importance of
    consumption taxes and wage taxes
    Conclusions

   Trade off between growth from
    globalization and fiscal capacity
   Plight of immobile factors
   With globalization, importance of tax
    information exchange
   Search for new revenue sources
   Impact of regulations and expenditure
    versus taxes

				
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