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12 J. World Trade L. 452 (1978)
Alternative Border Tax Policies

handle is hein.kluwer/jwt0012 and id is 468 raw text is: Alternative Border Tax Policies
GENE M. GROSSMAN
I. INTRODUCTION
THE ISSUE OF border tax adjustments has re-emerged in recent discus-
sions of world trade. The question posed is whether or not internal
domestic taxes ought to be applied to commodities produced for export,
and to commodities imported into the taxing country. Two alternative
administrations are the origin principle and the destination principle.
The origin principle taxes goods where they are produced; thus, exports
are taxed whereas imports are exempt under this principle. Alternatively,
the destination principle taxes goods where they are consumed, exempting
export goods from the tax, and imposing the tax on imports. This pro-
cedure is referred to as making a border tax adjustment. Current GATT
rules permit a destination principle administation for all indirect taxes
while requiring that direct taxes, such as the corporate income tax, follow
the origin principle.
The controversy over the border tax adjustments stems from the
asymmetrical reliance of the European countries and the United States on
indirect taxes as a source of revenue. Virtually all the European countries
employ a value added tax (VAT), and follow GATT rules by exempting
export goods and taxing imports. The United States, in contrast, relies
extensively on the corporate income tax to raise revenue from producers,
and uses indirect taxes such as the Federal Excise Tax only to influence
the consumption of specific goods. This asymmetry has led to cries by
American producers of unfair competition and export subsidization.
Their complaints culminated in a recent court case, Zenith Radio Cor-
poration v. United States, in which Zenith contested that the border tax
adjustment constitutes an export subsidy and consequently requires the
Gene M. Grossman is currently at the Massachusetts Institute of Technology.
This paper was written while the author was at the Office of Foreign Economic Research, U.S. Department
of Labor. The views expressed are the author's, and do not necessarily reflect those of the Dept. of Labor.
The author is indebted to Jean Baldwin, Robert Baldwin, Jagdish Bhagwati, Harry Grubert, and the staff
of OFER for their comments on earlier drafts of this paper.
452
Copyright © 2007 by Kluwer Law International. All rights reserved.
No claim asserted to original government works.

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