Tyler Cowen recently made a rather unusual misstep:
He posed the question of whether EU resources should prioritize exports. His assertion was that exports are exempt from VAT, while intra-EU sales generally incur this tax. Therefore, by this logic, there exists an implicit incentive for exports. In contrast, the United States employs sales taxes, albeit at typically lower rates than VATs in Europe. Hence, one could argue that Europe is more supportive of its exporters than America is. This line of reasoning can be extended to various other European government interventions as well. For example, Germany’s infamous Sunday closing laws could be interpreted as a way to bolster exportsâimagine sending goods to the US for Sunday sales, but alas, not in Paramus, NJ.
From an American perspective, I find no fault in this notion of an âexport subsidyâ (though I wouldnât label it as such in a straightforward analysis; weâre merely steelmanning here).
It’s important to note that Cowen did not explicitly label VAT as an export subsidy; rather, he suggested it encourages exports. However, I struggle to see the validity in that claim. Take, for example, a 20% VAT on goods exported to a country that also imposes a 20% VAT. Clearly, thereâs no competitive edge there. But what happens when we export to a VAT-free nation?
Consider a product priced at $100 in Europe, which retails for $120 due to VAT. According to Purchasing Power Parity (PPP), that same item would cost $100 in a VAT-exempt country. Thus, the supposed encouragement to export becomes less apparent. (Admittedly, PPP may not hold under various circumstances, but that does not negate the argument regarding VATs and export incentives.)
I’m not denying that one could construct a case suggesting that VATs foster exports. For instance, if we contrast a VAT system against a scenario lacking VAT but featuring a larger budget deficit, introducing a VAT might lower the real exchange rate, potentially leading to increased exports. Yet, this logic applies to any tax revenue-raising mechanism, and I fail to see Cowen articulating this perspective. The fact that intra-EU transactions are VAT-exempt seems irrelevant unless Iâm overlooking something significant.
Another point, which is not a critique of Cowen’s post: If VATs were indeed akin to export subsidies, they would inversely correlate with tariffs. European tariffs inhibit US companies from exporting to Europe. In contrast, export subsidies would encourage US firms to target the European market, effectively making export subsidies equivalent to import subsidies. Thus, if we equate VATs to export subsidies, we inadvertently position them as the antithesis of import taxes.
