As noted recently here on this blog, border tax adjustments are a hot topic in tax and trade policy. This issue is not a new one; it has been around for a long time. In his masterpiece "World Trade and the Law of GATT," published in 1969, the great John Jackson had a section on border tax adjustments, which he concluded with the following:
What can be done about these matters? First, several words of caution must be expressed. Economists do not seem to agree on the impact on competition of the different types of taxes and therefore do not agree on the necessity for change or the nature of change desirable.[1] Yet, several groups of possibilities exist.
One possibility is the abolition of all border tax adjustments. This could be based on a finding, if true, that all nations tax their own products (or production) by one scheme or another and therefore the product (assuming no remission of such taxes by the exporting nation) has already borne its equivalent share of tax burden and should not be “double taxed” by the border adjustment. One problem with this approach, however, is the political and psychological fact that it is hard for a domestic producer to accept that sale of imported goods on his own market when those goods do not in some observable way bear a tax burden equivalent to that of domestic goods.
A second problem with this approach is that the premise is probably faulty and, even if it is not, it builds into the international trade rules greater conformity of national domestic policies (i.e., the level of government taxation) that would seem desirable. Indeed, such a system might have the effect of stimulating nations whose international trade is an important part of their economies to lower taxes, at the expense of other policy goals or value judgments. It is doubtful that a case can be made that it is good international policy to influence domestic economic policies that drastically at this time.
Another approach is to legitimize in GATT, border tax adjustments for income taxes, just as they now exist for product taxes. The danger here is the possibility of escalating border tax adjustments all around, thus restricting world trade. Those countries that have border adjustments may then find a rationale for increasing them, particularly since many of those countries also have income taxes. It might be better to tolerate a little anomaly than be led down this path of greater restriction.
A third possibility is to leave this matter open to specific negotiation, allowing “bindings” in the Schedules on border tax adjustments as part of concessions in a trade negotiation. This raises the problems of added complexity and uncertainty in the negotiating process, discussed in § 10.9.
Another possibility is further study and negotiation on the application of border taxes. Perhaps they are higher than necessary. Perhaps more specific rules on valuation and other matters might limit them to a bearable amount.
Still another possible solution, requiring careful economic analysis, would be to devise a scheme that would evaluate the various tax costs (of all types) borne by production in each country and allow an internationally agreed border adjustment charge for each country that would tend to neutralize the domestic tax burden effect on competition in the domestic market.[2] It can be questioned, however, whether this is administratively feasible, even though it might be theoretically the most sound.
In any event, border tax adjustments are posing a serious challenge to the methods of international trade regulation theretofore followed and touch the center of a growing long-range problem of reconciling freedom for each nation to pursue domestic goals while maintaining international trade to an extent that helps to efficiently and fairly allocate world resources. As such, the border tax adjustment problem has implications going considerably beyond the narrow confines of its current economic effects.[3] It could be the bellwether for the future of international trade cooperation. The relationship of this problem to that of adjusting international disequilibrium should also be recognized. In the light of this discussion, it is understandable that GATT has, at the time of this writing, established an international Working Party to study the border adjustment problem and it may formulate further rules.[4] This group has the results of studies already made in the OECD to build upon.[5]
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[1] The traditional economic justification for the present GATT-approved system for broader tax adjustments is that taxes on products are immediately reflected in a price rise, while taxes on profits are not; and that a nation’s tax policies and the social needs upon which they rest should not cause its goods to be higher prices in the world marketplace. Accepting the argument for a nation’s right to freely determine her internal society, a number of economic problems remain. What about of a product tax will actually be reflected in a price rise? This depends a great deal on the slope of the supply curve and will be different for most industries. Consider also the following:
With a traditional type of profits tax it is generally accepted that, at least in the short run, a tax on profits does not affect prices. The theoretical case is that a firm is already charging prices that are maximizing profits, an increase in profits tax will not alter the optimum price and output decision of the firm. However, there may be exceptions to this rule if a firm is in a monopolistic or oligopolistic position. If an industry’s pricing structure is maintained by a firm or small number of firms, acting as a price leader, or if the firms in an industry act together on pricing, and if they look to a level of return calculated after taxation is taken into account then a change in a profits tax could be reflected quickly in a change of prices. In the long run, it is generally accepted that a profits tax is more likely to be paid by the consumer.
Hockley, Incentives Under a Value Added Tax, THE BANKER (U.K.) 237, 239 (1968). See also Mieszkowski, The Comparative Efficiency of Tariffs and Other Tax-Subsidy Schemes as a Means of Obtaining Revenue or Protecting Domestic Production, 74 J. POL. ECON. 587, 592 (1966). Conclusion was that a TVA with a broader tax adjustment is similar to that of a sales or other consumption tax. See also Broster, Economics of an Added-Value Tax, 157 THE ACCOUNTANT 65 (July 15, 1967); Johnson & Grubel, Nominal Tariffs, Indirect Taxes and Effective Rates of Protection: The Common Market Countries 1959, 77 ECON. J. 761 (1967); Moller, On the Value Added Tax in Denmark and the Renaissance of Tax Neutrality, 21 BULL. INT’L FISCAL DOCUMENTATION 431 (1967); French Tax Action Sends Prices Up, Journal of Commerce, Jan. 8, 1968, at 1; Lawrence, EEC Border Taxes Impact Considered, Journal of Commerce, Dec. 12, 1967, at 1.
[2] I acknowledge indebtedness to Mr. John Evans, formerly United States Minister to GATT, for this idea.
[3] Cooper, National Economic Policy in an Interdependent World Economy, 76 YALE L.J. 1273 (1967).
[4] GATT Docs. L/3002 and L/3125 (1968); see also Lawrence, Accord in Euromat on Freeze B.D. Seen, Journal of Commerce, Jan. 9, 1968, at 1.
[5] Messere, note 1 supra.
