Image Source: Pixabay

Tyler Cowen recently made an uncharacteristic mistake:

But there is another way to pose the question and that is “should the resources in the EU be allocated toward export, or not?” And then exports are VAT-free, and within-EU sales generally are not VAT-free. So there is an encouragement to exports here. America has sales taxes, but VAT rates usually are higher. Thus you can say that Europe does more to encourage exporters than does the United States. Of course you can say the same about many other European government interventions. Germany’s notorious Sunday closing laws also encourage more exports. Send it to the US, and let it be sold on a Sunday, bitte! (Just not in Paramus, NJ.)

From an American point of view, I don’t think anything is wrong with this kind of “export subsidy” (and that is not how I would describe it in a first-order sense, but we are steelmanning here).

Note that he did not call a VAT an export subsidy, but did suggest that “there is an encouragement to exports here”. I don’t see how that is true. If you have a 20% VAT, and export goods to another country with a 20% VAT, obviously, there is no advantage. But what if you export to a country with no VAT? 

Consider a $100 item that sells in Europe for $120 due to the VAT. According to PPP, it would sell for $100 in countries without a VAT. So, once again, there is no obvious encouragement to export. (PPP may not hold for other reasons, but that has no bearing on whether VATs encourage exports.)

I’m not suggesting that you cannot construct an argument where VATs encourage exports. Thus, if you compare a VAT to a situation with no VAT and a bigger budget deficit, the imposition of a VAT might result in a lower real exchange rate and more exports. But that’s true of any device for raising tax revenues, and I don’t see Tyler making that argument. The fact that within-EU sales are VAT-free seems completely irrelevant unless I’m missing something.

One other point, and this is not aimed at Tyler’s post. If it were true that VATs were like export subsidies, then they would be exactly the opposite of tariffs. European tariffs discourage US firms from exporting to Europe. European export subsidies would encourage US firms to export to Europe, as export subsidies are equivalent to import subsidies. So, if VATs were like export subsidies, then they would also be the exact opposite of import taxes.

More By This Author: