The ITC, an independent, nonpartisan, factfinding federal agency, recently concluded the study for the U.S. House Committee on Ways and Means. The report summarizes various consumption-tax proposals which include a flat tax, several versions of a national sales tax, an unlimited savings allowance (USA) tax, and a value-added tax (VAT); reviews the economic literature that analyzes the effects of consumption-based taxes on international transactions; and provides a discussion of key technical issues affecting the relationship between U.S. federal tax policy and U.S. trade and competitiveness. The economic studies that were surveyed are largely theoretical since such a broad-based tax reform is unprecedented.

Most of the studies in the survey conclude that, in addition to attracting foreign investment to the United States, a consumption tax may also encourage U.S. firms to locate projects in the United States that might otherwise have gone abroad. Since international investment and trade flows are inherently linked, any changes in foreign investment into the United States are accompanied by short-run changes in the U.S. trade balance. To the extent that international investment flows into (out of) an economy, the trade balance moves towards deficit (surplus). In the long run, increases in investment from both foreign and domestic sources tend to enhance an economy's competitiveness by increasing its productivity and tend to increase national economic welfare.

Other highlights of the report follow.

• A broad-based consumption tax may increase the after-tax returns on domestic savings and investments. Most studies conclude that a change to a consumption-based tax system would significantly increase domestic savings and investment, with a corresponding positive impact on U.S. gross domestic product and wage rates. However, the studies differ in their predictions of the net effect on domestic interest rates.

• As noted above, a consumption tax could attract investments financed through equity capital to the United States, as well as encourage U.S. firms to locate projects in the United States that might otherwise have gone abroad. Studies also indicate U.S. multinational firms may have an incentive to shift certain investments that are financed through borrowing to other countries. While the theoretical research indicates that net investment flows into the United States could either increase or decrease, most studies indicate that net investment inflows are more likely.

• The economic analyses reviewed suggest that the tax-free status of exports under certain types of consumption tax -- such as a VAT, sales, or USA tax -- may have short-term effects but is unlikely to have a long-run effect on the overall U.S. trade balance. First, the studies in the survey conclude that such a tax-free status of exports may simply maintain a level playing field between domestic and foreign producers in domestic and foreign markets. Second, any increase in net exports in the short run is neutralized in the long run by exchange rate movements. However, the studies suggest that changes may occur in the composition of U.S. trade. For example, U.S. net exports of capital-intensive goods could increase, while net exports of labor-intensive goods could decrease.

• If consumption taxation takes a form substantially simpler than the system it replaces, then reductions in compliance and enforcement costs could occur and would likely result in efficiency gains for the U.S. economy. In addition, a consumption-based tax could enhance the status of the United States as a "tax haven" country; the more favorable tax treatment of U.S. business would mean that firms subject to foreign income taxation would tend to shift the reporting of profits to the United States to avoid higher taxes in other countries. However, a consumption tax could induce a one-time drop in asset values of pre-existing wealth, which may be perceived as inequitable. The extent of such changes in asset values, if any, ultimately depends on the nature of any transition provisions that are implemented.

Implications for U.S. Trade and Competitiveness of a Broad-Based Consumption Tax (Inv. No. 332-389, USITC Publication 3110, June 1998) will be available on the ITC's Internet server at http://www.usitc.gov/332s/332index.htm. A printed copy may be requested by calling 202-205-1809 or by writing to the Secretary, U.S. International Trade Commission, 500 E Street SW, Washington D.C. 20436. Requests may be faxed to 202-205-2104.