Academic journal article Vanderbilt Journal of Transnational Law

The International Effects of the Adoption of a Consumption Tax in the United States

Academic journal article Vanderbilt Journal of Transnational Law

The International Effects of the Adoption of a Consumption Tax in the United States

Article excerpt

ABSTRACT

This Note concludes that through the adoption of a consumption tax the United States will benefit from both short- and long-term gains. This Note presents the advantages of consumption taxes and where relevant, discusses a specific consumption tax proposal--the Fairtax Plan. The Author responds to several critiques of consumption taxation, including whether consumption taxes are disproportionately placed on labor, the existence of efficiency gains, the international effects, increased black market activity, and cross-border tax arbitrage.

TABLE OF CONTENTS

   I. INTRODUCTION
  II. OVERVIEW OF SOME PERTINENT INTERNATIONAL
      TAX ISSUES
      A. Relevant Background
      B. WTO Rules
III. INEFFICIENT MARKETS
 IV. NEEDED CHANGE? A CONSUMPTION ALTERNATIVE
  V. CRITICISMS OF CONSUMPTION TAXES AT THE
     INTERNATIONAL LEVEL
     A. Consumption Taxation may be Unfairly
        Biased Toward Immobile Sources
     B. Are Efficiency Gains a Myth?
     C. World Reaction
        1. Foreign Response: Potential Effect
           on Tax Treaties
        2. Foreign Response: Foreign Changes
           at the Domestic Level
     D. Avoidance
        1. Black Market
VI. CONCLUSION

I. INTRODUCTION

Historically, national governments structured their tax systems without accounting for international investment levels. Until recently, tax regimes were, by and large, a purely domestic issue, but as increased globalization dissolved barriers to free capital flows, the concerns of tax policy changed. (1) Modern advances in areas such as transportation and communication have helped free capital, an important part of any government's tax base, from its geographical roots. For instance, between 1973 and 1995, global capital transfers increased by a multiple of eighty. (2) The increasingly vast resources involved in the global market required a new understanding of tax policy.

As the prior century progressed, new technologies spurred policy changes worldwide, increasing the opportunities to invest abroad. (3) The Industrial Revolution led to advances in transportation technology, such as the railroad, spurring economic growth and increasing "incentives for capital formation, industrial concentration, international specialization, and for labor and capital migration." (4) Beginning in the 1970s, developed countries instituted policies that led to the drastic reduction of limitations on the international flow of capital. (5) Developing countries have changed their policies even more drastically; once suspicious of foreign investment, most developing nations currently view foreign investment as beneficial. (6) Changes in legislation continue to show an emphatic favoring of foreign investment: 93% of legislation in 2001 affecting international investment created more favorable conditions for investing. (7)

Increasingly mobile capital has raised concerns with some critics over the continued ability of governments to use traditional means of taxation. (8) Economic studies confirm that the combination of globalization, domestic economic stress, and budgetary imperatives have led to reductions in worldwide tax rates on capital. (9) For example, as of April 2005, nine countries in Eastern Europe made themselves more attractive to global investment by lowering the rate of taxation on capital as part of a transition to a flat tax. (10) Lower tax rates on capital concern critics, such as Avi-Yonah, who worry that decreasing tax rates will lower government revenues, thereby constraining social expenditures that they deem beneficial. (11) Taxes on capital, however, create inefficiencies in capital accumulation and raise the relative price, and thereby reduce demand. Thus, this Note rejects the Avi-Yonah type concerns over tax competition and contends instead that the need for economic efficiency outweighs concerns about the ability of governments to maintain high levels of expenditures. …

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