From destination- to origin-based consumption taxation: A dynamic CGE analysis

This paper discusses the macroeconomic adjustment and the intergenerational and international incidence of a switch from the current destination-based value-added taxation to a origin-based VAT within a dynamic general equilibrium framework. Such a reform will affect the welfare levels of individuals via changes in their net tax burdens, factor and asset price repercussions and efficiency effects due to endogenous labor supply. We isolate the quantitative importance of these effects in a numerical Simulation exercise. The analysis highlights the crucial importance of the initial balance of payments conditions and tax rate levels for the short and long run results. Countries with a trade balance deficit will experience an intergenerational redistribution towards the elderly via the changes in the generational specific tax burdens. A short run international income effect will favor high tax countries with a large foreign ownership in domestic equity capital. Income effects due to factor price repercussions and substitution effects due to variable labor supply are quantitatively significant especially when the tax reform is preannounced.