Working Paper: NBER ID: w17919
Authors: Chunding Li; John Whalley
Abstract: This paper discusses how joint cross country indirect tax initiatives can be used to achieve global rebalancing. This is potentially an important development for G20 discussions which thus far have centered on exchange rates as the instruments to achieve rebalancing. We suggest that if China and Germany (as major surplus countries) switch their present VAT systems from a destination principle to an origin principle, and the US (as the major deficit country) adopts a VAT on a destination principle VAT, jointly these actions can significantly reduce the three countries' joint imbalances and so contribute to global rebalancing. We use a numerical general equilibrium model with a monetary structure incorporating inside money to capture endogeneity of trade imbalances, and to also investigate the potential impacts of such initiatives. These confirm that VAT structures are not only good for global rebalancing but also the changes we consider are beneficial for welfare and revenue collection. Our research is aimed to inject new ideas to the present global rebalancing debate.
Keywords: Indirect Tax; Global Rebalancing; Value Added Tax
JEL Codes: F10; F32; F47; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| China and Germany switching VAT systems from destination principle to origin principle (F55) | reduction in trade imbalances among China, Germany, and the US (F69) |
| China and Germany switching VAT systems (H25) | affects their export taxation (F10) |
| China and Germany switching VAT systems (H25) | potentially increasing their revenues and reducing trade surpluses (F69) |
| US adopting a destination principle VAT (H25) | decrease in its trade deficit (F19) |
| introduction of destination-based VAT in the US (H25) | taxing imports while exempting exports (F10) |