International Coordination Problems of Substituting Consumption for Income Taxation

Worldwide interest in consumption taxation in recent years has largely been focused on domestic considerations of growth, efficiency, revenue, equity, and stabilization [Miesz-kowski (1980); Hall and Rabushka (1983); Bradford (1984); Aaron and Galper (1985); McLure (1987a)]. To the extent that international considerations have been included in the discussion, it has largely been by way of effects on the balance of payments or on the competitive trade position of the country contemplating adoption of a consumption-based tax. For instance, among the reasons given on behalf of adoption of value-added taxes in the United States and Japan has been the desire to gain comparable competitive advantage with the European Common Market [Aaron (1981); Weidenbaum et al.(1989)]. Thus the adoption of consumption-based taxation has rarely been seen in the context of an international tax order within which differences in fiscal systems might be coordinated to mutual advantage. Since the European Community has been for long involved in a process of fiscal coordination, it is appropriate and perhaps not surprising that this conference should be the first, so far as I know, to give some attention to the problem of the international coordination of consumption taxes.