Office of Tax Analysis

U.S. Treasury Department

Washington, D. C. 20220 

Issued: December, 1976 

DESTINATION PRINCIPLE BORDER TAX ADJUSTMENTS FOR THE 

CORPORATE INCOME AND SOCIAL SECURITY TAXES 

G. N. Carlson 

G. C. Hufbauer 

U. S. Treasury Department 

M. B. Krauss 

New York University 

OTA Paper 20 November, 1976 
TABLE OF CONTENTS 

I. 

11. 

I11* 

IV. 

Introduction . . . . . . . . . . . . . . . . . . . , 1 

Theory of Sectoral Effects . . . . . . . . . . . . *3 

Direction of Change in U.S. Sectoral Trade Balances. 13 

A. Calculation of Sectoral Tax Burdens. . . . . . . 13 

B. Industry Rankings . . . . . . . . . . . . . . 15 

C. Sectoral Effects: Destination Principle

Corporate Income Tax . . . . . . . . . . . . . . 15 

D. Sectoral Effects: Destination Principle

Social Security Tax . . . . . . . . . . . . . . 17 

Revenue Impact . . . . . . . . . . . . . . . . . . . 22 
I. INTRODUCTION 

The General Agreement on Tariffs and Trade (GATT) provides that destination principle border tax adjustments can be 

applied to indirect taxes, such as sales or value added taxes, 

but not to direct taxes, such as the corporate income or social 

security tax. In other words, indirect taxes can be imposed 

at the border on imports, and remitted on exports, but no 

explicit adjustments can be made for direct taxes. 

This differential treatment of direct and indirect taxes 

served to focus attention in the United States on the border 

tax issue in the late 1960's and early 1970's. Noting the widespread adoption of the value added tax in Europe and the concern 

in the United States over the performance of the U.S. trade account, 

numerous authors questioned whether the substitution of a value 

added tax for the corporate income tax would improve the U.S. 

trade balance.L' The typical analysis combined assumptions about 

tax shifting and aggregate price elasticities to estimate the 

impact of various tax substitution packages on the U.S. trade 

balance. In the last few years, the realignment of currency 

values and wider realization that our trading partners also 

have substantial corporate income taxes have served to dampen 

interest in the aggregate trade balance aspects of the border 

tax issue. 

The border tax issue, however, was revived by section 

121(a)(5) of the Trade Act of 1974 which directs the President 

to seek revision of the GATT articles providing for differential 

treatment of direct and indirect taxes. This paper does not 
-2-

examine the aggregate trade balance effects, but rather the 

sectoral trade balance effects and revenue effects of extending 

the destination principle to the corporate income tax and the 

employer portion of the social security tax. This paper adopts 

the proposition that the method of border tax adjustment will 

not affect the overall trade balance (assuming an adjustment 

mechanism), but it can affect the composition of trade. Ohlin, 

for example, has suggested that the impact of taxes on trade 

can be significant. 

The costs of production also include 

taxes and social welfare fees, many of 

which bear an important relation to 

international trade.... It has long

been a mystery to me why existing 

accounts of international trade pay so 

little attention to these problems.

So many books and articles discuss the 

impact of a certain type of taxation,

viz., tariffs levied at the border. 

when goods are imported, yet they

devote no space to the question of how 

other kinds of taxation can affect 

trade. -2/ 

The remaining sections of the paper develop the theory 

of sectoral effects; describe the data used; and present 

industry ranking and revenue impact results. 
-3-

11. THEORY OF SECTORAL EFFECTS 

A completely general tax applied uniformly either to the 

consumption or to the production of all goods in an economy 

will not affect the allocation of resources. In an open 

economy this implies that the choice of either origin or 

destination principle border tax adjustments is irrelevant 

to resource allocation; this result has been noted in the 

Tinbergen Report and elsewhere 3' and is based on the observation 

that a uniform tax on the consumption of goods leaves the relative 

prices which consumers pay unchanged, while a uniform tax on 

the production of goods leaves the relative prices which producers receive unchanged. Thus, for any particular industry, 

a uniform tax, no matter what the method of border tax adjustment, will leave domestic consumption, domestic production, and 

therefore, the industry's trade balance unchanged. There is a 

monetary difference between the two principles in that a general 

tax imposed under the origin principle will initially worsen 

the countryvstrade balance, causing an offsetting devaluation 

in its currency, whereas a general tax imposed under the destination principle will have no trade balance repercussions. -

4/ 

This is another way of saying that currency depreciation and 

destination principle border tax adjustments produce the same 

results in the model. -

5/ 

These effects are illustrated for the U,S, steel market 

by Figure 1. The United States hypothetically imposes either 

a general income tax of 10 percent or a final stage sales tax 
-4-

of 10 percent on all products. The following conditions are 

assumed: (1) exchange rates are either free to float or are 

adjusted from time to time; (2) prior to the tax the United 

States has neither a balance of payments surplus nor deficit; 

and (3) the United States adopts the origin principle. The pretax long run domestic supply curve for steel is represented by 

S. The domestic demand curve is shown by D. The world demand 

for steel is assumed to be perfectly elastic and is given by 

W. 6/ In the absence of international trade, the United States 

would produce and consume quantity q of steel at price po. 

Because the world price of steel, p1, is higher than the domestic 

price, po, under a system of free trade the United States consumes quantity eo of steel, produces quantity a,, and exports 

quantity coao. 

Since, in the long run, any tax will shift the supply 

curve upwards (decrease supply), the general income or saleg 

tax of 10 percent shifts the U.S. supply curve upwards by 

10 percent to S*. The tax on steel does not, of course, affect 

the steel demand curve. But because a 10 percent tax is imposed on all other commodities (or all other income), all these 

other U.S. goods will be 10 percent more expensive as well. 

With the price of all other U.S. goods 10 percent higher than 

before, steel users will be willing to pay 10 percent more for 

any given quantity of steel. In other words, the steel demand 

curve is positioned with respect to the relative price between 

steel and other goods, not with respect to the absolute money 

price of steel. The steel demand curve, therefore, shifts upwards 
Price of Steel

(Do1lars) 

W* 

p2 

P1 W. 

PO 

Quantity of 

Steel 

(tons) 

Figure 1, General equilibrium effect of a general 

tax on an exported product under either 

the origin or destination principle of 

border tax. adj ustments . 
-6-

by 10 percent to D*. Because all U.S. prices are now 10 percent higher, the dollar must depreciate by 10 percent to restore 

balance of payments equilibrium. The world demand curve for 

steel, expressed in terms of dollars, therefore, shifts upwards by 10 percent to W*. The U.S. continues to consume 

quantity eo of steel, produce quantity ao, and export quantity 

coilo. Nothing has changed except that all U.S. prices are 10 

percent higher than before the tax. 

Now suppose that the U.S. switches from the origin to the 

destination principle of border tax adjustment. Figure 1 can 

also serve to illustrate this situation. The domestic supply 

and demand curves for steel shift upwards by 10 percent as before. The world demand curve as it appears to U.S. sellers of 

steel, also shifts upwards by 10 percent, not because of a 

currency realignment, but rather because the 10 percent tax is 

rebated on steel exports. 7’ As before, U.S. consumption, production, and exports of steel remain unchanged. 

This analysis underlies the argument that there is no real 

difference between origin and destination principle border tax 

adjustments for perfectly general income or sales taxes. In 

the words of Meade and his colleagues, 

provided the tax rate is the same for 

all commodities and the same principle

of tax treatment [destination or origin]

is applied to all commodities, neither 

the treatment actually chosen nor the 

level of such a tax in any particular 

country will affect the relative production and consumption of commodities. -

8/ 
-7-

But perfectly general taxes are so rare that they 

scarcely exist. Most income taxes, such as the corporate 

profits tax, or social security taxes, operate unevenly across 

sectors. A nonuniform tax will, of course, affect an economy's 

allocation of resources, either through its effect on relative 

prices paid by consumers or through its effect on relative 

prices received by producers. 

In this situation the method of border tax adjustment chosen 

becomes critically important for determining the impact of the 

tax system on industry or sectoral trade balances. In an open 

economy, the method of border tax adjustment serves to determine 

the character that any given tax will take in the domestic economy. 

A tax treated under the origin principle becomes a production 

tax, no matter what its legal form, since goods are taxed where 

produced, not where consumed. Thus, a nonuniform tax which is 

imposed on the origin basis will alter sectoral trade balances 

primarily through its impact on production patterns. A tax 

treated under the destination principle becomes a consumption 

tax since goods are taxed where consumed, not where produced. 

Thus, a nonuniform tax imposed on the destination basis will 

alter sectoral trade balances through its impact on consumption 

patterns. Whether a tax is treated under the origin or destination basis can be important in determining a sector's level of 

net exports. 

This principle is illustrated in Figure 2. -

91 Consider the 

situation where the United States imposes a 10 percent tax on 
-8-

steel, but an "average" five percent tax on all other comi 

10/ modities. - The average tax on all commodities, including 

steel, is six percent. The United States adopts the origin 

principle. In Figure 2, S is the pre-tax steel supply curve 

and S* is the post-tax supply curve shifted upwards by 10 percent. 

The pre-tax steel demand curve is D. Because the average tax on 

all commodities except steel is five percent, and because the 

demand for steel is expressed in terms of relative prices, the 

steel demand curve shifts upwards by five percent to D*. 

Initially, the world demand curve is W. Because the average tax 

of six percent raises prices of all commodities including steel 

on average by six percent, the dollar must depreciate by six 

percent to restore equilibrium in the balance of payments. Hence, 

the world demand curve for steel, expressed in terms of dollars, 

shifts upwards by six percent to W*. The domestic supply curve 

has shifted by more than the world demand curve. In addition, 

the domestic demand curve has shifted upwards. Steel exports 

therefore decline -11/ from the pre-tax quantity of coao to the 

post-tax and exchange rate adjustment quantity of clal. This 

result may be generalized. The origin principle usually serves 

to decrease net exports (increase net imports) of any commodity 

which is taxed more heavily than the average. Conversely, the 

origin principle usually serves to increase net exports (decrease 

net imports) of any commodity which is taxed more lightly than 

the average. 
S* 

Price of Steel 

(Dollars) 

p2 

P1 

W* 

W 

,

I Quantity

of Steel =1=0 al a. (tons1 

Figure 2. General equilibrium effect of a tax on 

the exported product which is higher

than the average tax under the origin

principle of border tax adjustments. 
- 10 -

Now consider the same situation with a destination 

principle border tax adjustment. The simultaneous upward 

shift in Figure 3 of the domestic supply and the world demand 

curves by 10 percent leaves U.S. production unchanged at ao. 

However, because the domestic demand schedule increases by 

only five percent, U.S. consumption of steel falls, and exports 

are increased from coao to ciao. This result can be generalized. 

The destination principle serves to increase net exports (decrease 

net imports) of any commodity which is more heavily taxed than 

average; it serves to decrease net exports (increase net imports) 

of any commodity which is more lightly taxed than average. 

The changeover from an origin to a destination principle can 

thus exert significant compositional effects. It will expand 

exports and reduce imports of goods taxed more heavily than 

average and reduce exports and expand imports of goods taxed more 

lightly than average. -12/ 

The analysis, so far, has been presented solely with 

reference to the United States. But if the United States adopts 

the destination principle for the corporate income tax or the 

social security tax, it is reasonable to expect that other 

trading countries will follow suit. Foreign adoption of the 

destination principle could moderate the sectoral trade balance 

effects resulting from adoption of the destination principle 

in the United States alone. A switch from the origin to the 

destination principle will tend to expand net U.S. exports of 

the products of sector i, provided sector i is taxed more heavily 

than average. But if sector i is also taxed substantially more 
price of Steel 

(Dollars) p2 

P1 

Figure 3. General equilibrium effect of a tax on 

the exported product which is higher 

than the average tax uncicr the destination principle of border tas adjus';ment. 
- 12 -

heavily than average in France, but less heavily than average 

in the United Kingdom, it is likely that the U.S. trade balance 

in sector irs products will improve only with respect to the 

United Kingdom. Even in that market, an improved U.S. trade 

balance might be foreclosed by increased U.K. imports from 

France of sector i's products. 
111. DIRECTION OF CHANGE IN U,S, SECTORAL TRADE BALANCES 

In order to predict how the change from the origin to 

destination principle might affect the composition of U.S. 

trade, it is necessary to know the sectoral tax burdens both in 

the United States and in the principal trading countries. An 

understanding of the magnitude of the composition of trade 

effects would also require estimates of sector demand and supply 

elasticities in each country. Such estimates are beyond the scope 

of this paper. The relative sectoral tax burdens presented for 

each country should therefore be interpreted as providing a 

rough indication of the direction, but not the magnitude, of 

change in sectoral trade balances, The next section explains how 

the sectoral tax burdens were calculated for certain important 

trading nations, namely Canada, France, Germany, the United 

Kingdom, and the United States. 

A. Calculation of Sectoral Tax Burdens. The calculation of 

sectoral tax burdens involved two steps: (1) classifying the 

data into consistent industry sectors across countries; and (2) 

determining the appropriate measure of a sector’s tax liability. 

For each of the five countries, the data are classified according to the system used in the standardized input-output table 

of the European Economic Community (EEC). In principle, this 

implies a 51-sector classification. Because of difficulty in 

matching tax data with the standard classification sectors, a 

less-detailed classification of 32 sectors was used. 
- 14 -

For a particular tax, each sector's tax burden was 

calculated by dividing the taxes paid by that sector by its 

total sales.L?/ Thus, with respect to the corporation income 

tax, the corporate tax burden in sector i was calculated by 

dividing the corporate tax paid by producers in sector i by 

the total sales of sector i. This measure is obviously not

-

the same as the corporate income tax rate (corporate income 

tax paid divided by corporate income). However, the ratio 

of corporate tax paid by sector i to total sales of sector i 

indicates the proportion by which the price of the product of 

sector i is affected by the tax. 

For example, if only sector i is taxed, a ratio of 10 

percent in sector i indicates that the price for the good 

received by producers in sector i would be reduced by 10 percent under the origin principle. This is true because application of the origin principle to a tax means that consumers 

pay the world price for the good in question, while producers 

receive the world price less the tax.%/ Alternatively, if 

the destination principle is applied, the price paid by consumers of sector i's output would be increased, in this 

instance, by 10 percent. Application of the destination 

principle means that producers receive the world price, while 

consumers pay the world price plus the tax. In brief, switching from the origin to destination principle means that both 

the price received by producers and the price paid by consumers 

increase in proportion to the ratio of the tax to sales in 
- 15 -

industry i.g/ The same procedure of dividing industry tax 

liability by industry sales was used to calculate the industry 

tax burdens for the employer portion of the social security 

tax. 

B. Industry Rankings. The industry tax burdens, for the 

corporate income tax and the social security tax, for each country 

are presented in Table 1 (page 19). Since, within a country, it 

is the relative tax burdens that are significant, industry 

rankings are placed in parentheses adjacent to the percentage 

calculation showing an industry's actual tax burden. Average 

tax rates, for each country and each tax, are shown at the top 

of the table. Thus, for the United States, the agricultural, 

forestry, and fishery products industry has a corporate tax 

liability of 0.18 percent of sales which ranks it 28th, last 

(the lowest tax liability) in this instance, among United States 

industries. The average corporate tax liability in the United 

States is 1.41 percent of sales. 

C, Sectoral Effects : Destination Principle Corporate 

Income Tax, Many inferences could be drawn from Table I, but 

only a few of those will be suggested here. In the United 

States, the five industries producing manufactured goods which 

are taxed most heavily under the corporate income tax are, in 

order : 

Tobacco products 

Office and data processing machines; 

precision and optical instruments 

Chemical products 
- 16 -

Motor vehicles 

Electrical equipment -16/ 

A switch from the origin to destination principle would 

tend to increase the net exports (decrease net imports) of 

these industries. However, four of these industries also 

are taxed relatively heavily in some of the other countries: 

Tobacco products (Canada, United Kingdom) 

Office machines, etc. (France, Germany) 

Chemical products (Canada, France, Germany) 

Electrical equipment (France, Germany, United Kingdom) 

Thus, U.S. trade balances in the four sectors would not 

necessarily improve with respect to these particular countries. 

The sectoral trade balances for the United States could be 

expected to improve with respect to all countries where these 

industries are taxed relatively lightly. This improvement, 

however, would be moderated by increased net exports from the 

enumerated countries which also tax the particular industries 

rather heavily. 

Some industries in the United States could, of course, 

expect to observe an increase in the volume of their net 

imports. These industries, taxed relatively lightly in the 

United States and moderately or even heavily elsewhere, are: 

Crude petroleum, natural gas and 

petroleum products 

Non-ferrous metals and minerals 

Coal, lignite and briquettes 
- 17 -

D. Sectoral Effects: Destination Principle Social 

Security Tax, Similar analysis can be applied to determine 

the sectoral effects of treating the employer portion of the 

social security tax on a destination rather than origin basis. 

The United States industries which are taxed relatively heavily, 

both with respect to other industries in the United States and 

with respect to the same industry in other countries, and 

which therefore could expect to observe an increase in their 

net exports, are: 

Non-metallic mineral products 

Rubber and plastic products 

Textiles and clothing 

Metal products except machinery and 

transport equipment 

Leather, leather and skin goods, footwear 

Finally, those United States industries taxed relatively 

lightly, both with respect to other industries in the TJnited 

States and with respect to the same industry in other countries, 

and which therefore would tend to experience an increase in 

net imports are: 

Motor vehicles 

Office and data processing machines; 

precision and optical instruments 

Electrical equipment 

Timber, wooden products and furniture 

It is interesting to note that three of these U.S. 

industries, namely motor vehicles, office machines, etc., 
- 18 -

and electrical equipment, would tend to experience the opposite 

effect, an increase in net exports, from changing the border 

tax treatment of the corporate income tax to the destination 

principle. Thus, for these three industries, simultaneous 

application of the destination principle to the corporate income 

tax and employer portion of the social security tax would have 

offsetting trade balance effects. 
Table 1 

Corporate incon TAX md Social Security Tax Chployer Portion) Liabilitier am a Percent of Total Induetry Salem 

Selected Countrier 

(Indurtq Rmhkinp for Each Tax nnd Each Country in Parenthcrir) 

1 Corporate Income Tnx 

t U.8. &I : Cannda zf : Frnnce 2f a Germany 3-1 I U.K. 2f : a Canadn 2/ : France 21 : Germany 21 I U.K.

I 

U.S. Af Social Security Tax (hployer Portion) 

Indurtry lhbrt and title I (Percent of Total Indurtry Saler) I 

Aver880 Rate 1.41 1.30 0 e95 0.54 2.24 1.01 

1. Agricultural, f otertry

and firhery productr 0.18 (28) 0.89 (24) 0.01 (19) 0.38 (26) 0.32 (24) 

2. Coal, lf8nite and 

briquettea 0.90 (21) 1.58 (14) 0.28 (11) 2.31 (1) 

3. PtodUCtB Of cokin~ 1.63 (12) 0.28 (11) 1.26 (19) 

4. Crude pstreleum, natural 

gae and petroleum

productr 0.67 (24) 

3. Electric power, ear, 

ateom and water 2.67 (5) 0.96 (22) 0.54 (23) 2.34 (1) 0.72 (20) 

6. Ierreuo wtalr and 

minerele 1.21 (19) 1.27 (18) 0.38 (25) 0.17 (16) 1.45 (17) 1.41 (10) 

7. Ikn-frrrwr rtalr and 

8iMNf# 0.89 (22) 1.27 U& 0.89 (15) 0.17 (16) 1.69 (15) 1.41 (10) 

8. WtalliC 8bOtBl 

productr 2.13 (12) 1.90 (8) 0.28 (11) 3.27 (5) 1,70 (3) 

91 ChaiCrl kodUCtB 3.17 (3) 2.55 (5) 1.46 (6) 0.77 (5) 2.51 (9) 0.84 (15) 

(Percent of Total Indurtry Saler) 

1.32 4.93 1.30 

1.30 (16) 0.97 (29) 

0.64 (21) 15-47 (2) 5.39 (1) 

0.92 (19) 21.44 (1) 2.06 (13) 

0.86 (20) 1.33 (28) 0.25 (25) 

0.51) (22) 8.63 (4) 1.09 (21) 

2.15 (5) 5.38 (10) 1.12 (20) 

2.15 (5) 2.41 (22) 1.12 (20) 

1.82 (10) 1.98 (15) 

1.52 (15) 4-15 (19) 1.29 (19) 

2.77 

1.25 (24) 

7.10 (1) 

0.80 (21) 

0.35 (28) 

2.48 (14) 

I 

2.23 (20) F 

\D 

1.31 (23) I 

2.62 (9) 

1.56 (21) 
I Cotpotate Incow Tax 

I U.S. I Canada 21 : Prance 21 : Gemany 21 I U.K. 31 : Canada 21 : France 3/ : Germany 21 I U.K. 21 I f U.S. AI Social Security Tax (Faplayer Portion) 

Xndurtry I(uder and mth : (Percent of Total Induntry Saler) I (Percent of Total Induntry Saler) 

10. Metal products except

machinery nod tranrport

equipment 1.98 (14) 1.83 (9) 1.18 (8) 

11. &ticultural and 

indurtrial machinery 0.64 (8) 2.44 (10) 1.57 (7) 2.23 (3) 5.41 (9) 2.71 (6) 2.61 (10) 

12. Office and datr 

processing machines;

preciaion and 

optical instrcrmtr 4.44 (2) 2.25 (6) 1.79 (4) 1.05 (2) 2.54 (8) 0.77 (18) 1-70 (12) 5.41 (9) 2.69 (7) 2.99 (6) 

13. Urcttical rquipment 2-46 (7) 1.52 (16) 1.19 (7) 1.05 (2) 2.78 (7) 0.78 (17) 1.91 (8) 5.41 (9) 2.78 (3) 2.89 (7) 

14. Wtot vrhicler 2.99 (4) 2.00 (7) 0.61 (21) 0.64 (8) 1.39 (18) 0.71 (21) 2.38 (2) 4.66 (17) 2.00 (14) 2.60 (11) 

u. Other Tramport equipment 1.32 (17) 2.00 (7) 0.68 (19) 0.64 (8) 0.90 (24) 1.63 (6) 2.38 (2) 6.19 (8) 2.72 (5) 3.91 (3) 

16 Hutr, rat prepamtimi I 

and presetpar 1.31 (18) 1.14 (20) 0.53 (24) 0.38 (10) 0.92 (23) 0.67 (22) 1.02 (18) 2.55 (24) 0.62 (23) 1.18 (25) 

17. Wk .ad dairy productr 1.31 (18) 1.14 (20) 0.64 (20) 0.38 (10) 0.92 (23) 0.67 (22) 1.02 (18) 2.67 (23) 0.72 (22) 1.18 (25) 0 

I 

18. Other tocd productm 1.31 (18) 1.14 (20) 1.13 (10) 0.38 (10) 0.92'(23) 0.67 (22) 1.02 (18) 3.24 (21) 1.06 (21) 1.18 (25) 

19. Bevera~er 1.31 (38) 4.94 (1) 2.74 (1) 0.38 (10) 7.11 (1) 0.67 (22) 1.52 (15) 3.44 (20) 1.30 (18) 1.33 (22) 

20. Tobacco productr 4.47 (I) 4.05 (2) 0.38 (10) 6.71 (2) 0.41 (23) 1.16 (17) 1.67 (27) 0.34 (24) 1.07 (26) 

21. 'IbXtileB and clothlog 1.55 (15) 9.52 (16) 0.81 (16) 0.21 (14) 1.55 (16) 1.65 (5) 1.76 (11) 4.68 (15) 1.90 (16) 2.28 (19) 
t Corporate Incoae Tax 

L 

I 

I U. .- Socirl Security Tax (Rployer Portion) r I Cana a : France I Germany 3 1 U.K. 3. J

Induatry #IPbar and Title 1 (percent of Total Industry Salca) 1 (Percent of Total Indurtry Salcr) 

22. 

1.44 (16) 1.20 (19) 0.92 (13) 0.21 (14) 2.21 (12) 1.47 (8) 1.68 (13) 5.13 (13) 2.09 (12) 2.49 (13) 

23 

2.01 (13) 1.07 (21) 0.69 (18) 0.24 (12) 1.11 (22) 0.88 (14) 1.82 (10) 4.67 (16) 2.21 (10) 2.34 (17) 

24. 

2.29 (9) 1.33 (17) 1.00 (12) 0.23 (13) 2.32 (11) 1.00 (13) 2.00 (7) 5.28 (12) 1.52 (17) 2.56 (12) 

2s. 9 

2.14 (11) 2.75 (3) 1.82 (3) 0.43 (9) 1.86 (14) 1.68 (4) 2.18 (4) 1-12 (6) 2.23 (9) 2.41 (16) 

26 e 

2.23 (10) 2.25 (6) 2.09 (2) 0.95 (3) 3.17 (6) 1.35 (12) 1,70 (12) 7.0) (7) 2.19 (11) 2.44 (15) 

27.. 

0.59 (26) 0.94 (23) 0.71 (17) 0.14 (171 1.20 (21) 0.76 (19) 1.15 (9) 7.31 (5) 3.25 (2) 2.65 (8) 

28. 

0.49 (27) 1.76 (10) 0.58 (22) 1.44 (9) 1.80 (10) 2.52 (25) I 

29. N

0.64 (i5) 0.79 (25) 1.71 (5) 0.82 (4) 4.64 (3) 0.72 (20) 0.55 (23) 5.33 (11) 2.75 (4) 3.85 (4) I-J 

I

30. 

0.74 (23) 1.72 (11) 0.21 (26) 0.20 (15) 0.79 (16) 1.58 (14) 2.10 (26) 

31e 0.96 (20) 1.56 (15) 0.90 (14) 0.12 (18) 0.52 (25) 1.38 (11) 3.75 (1) 12.40 (3) 3.41 (5) 

32 2.56 (6) 1.72 (11) 1.01 (1) 0.67 (6) 3.83 (4) 2.22 (2) 1.58 (14) 4.36 (18) 4.07 (2) 

I/ Ua1t.d Statu d8t8 for 1973 

Canadian d8u for 1971 -31 Ironch. knuny, Unitod Un&m data for 1970-71 Source: See text 
- 22 -

IV. REVENUE IMPACT 

Switching to the destination priciple would have a 

revenue impact because the tax would be levied on imports 

and rebated on exports. In the United States, the amount of 

border tax adjustment would be each industry's corporate and 

social security tax liability as a percent of sales. This 

would adjust only for the tax levied at the final stage; it 

would ignore taxes embodied in purchased inputs. While 

adjusting for the total, direct plus indirect, effects may 

be the conceptually correct approach, such estimates were not 

made in this paper for two reasons: (1) it would be difficult 

to reach agreement on this approach with other countries; and 

(2) the input-output tables for countries other than the United 

States were unavailable. 

Accordingly, the revenue impact for the United States 

was estimated by multiplying each sector's 1974 exports and 

imports by the appropriate border tax adjustment. The sector 

revenue effects were then added to obtain a total estimate of 

revenue impact. The results, in millions of dollars, are as 

follows: 

Imports Total 

Corporate Income Tax $1,820 $ +54 

Social Security Tax 876 -64 

Total $ -10 
- 23 -

The estimate of a $10 million revenue loss indicates 

that the net revenue impact of treating both the corporate 

income and social security taxes on the destination basis 

is essentially zero. This estimate, however, must be regarded 

as rough because it does not take into account such factors 

as: (1) the possible modification of the Domestic International 

Sales Corporation (DISC) legislation; (2) any increase in corporate net exports resulting from adoption of the destination 

principle. 
--- 

the 

---- -- 

- 24 -

FOOTNOTES 

The authors are respectively associated with the Office 

of International Tax Affairs, U.S. Treasury Department,

and New York University. The opinions expressed in the 

paper are those of the authors, and should not be construed to reflect the views of either the Treasury Department or New York University. 

1/ See, for examp 

Before the Committee on ways ana ivieans. I b.er 

Structure, 1964, p. 3, pp.<123-149; Business Taxation, The 

Report of the President's Task Force on Business Taxation,

September'1970, pp. 61-82; Dan Throop Smith, 'Value Added 

Tax; The Case For", Harvard Busines,s Review, November-December, 1970, pp. 77-85; The Value Added Tax and Alternative 

Sources of Federal Revenue, Advisory Commission on Intergovernmental Relations, August 1973#;and Maurice Weinrobe, 

"Corporate Taxes and the UTS. Balan.ce of Trade", National 

Tax Journal, March 1971, pp. 79-86. 

2/ Bertil Ohlin, Interregional and International Trade,

Harvard University Press, Cambridge, Massachusetts, 1967, 

p. 309. 

31 See: European Coal and Steel Community, High - Authority. ..-

Reporz on the Problems Raised bv ~ __-_ Diffprpnt Tiirnn -UL.svver-Tax

Systems Applied within the Common Market, University of Chicago

Press, 1953, pp. 22 -28; James E. Meade, "A Note on Border

Tax Adjustments", Journal of Political Economy, September-October

1974, pp. 1013-1013; and C. S. Shoup, "Taxation AsDects -L nf

Internaticmal Economic Integration"';. Travaux de 1'Inst. Tn+p~na+ 

. des Finances Publiques, 9th Session, (The Hague, 1953), 

4/ This statement abstracts, of course, from differences 

between private and government spending patterns. 

5/ This idea was noted by J. M. Keynes et. al., "Macmillian 

Cormniytee Report", Committee on Finance and Industry Report,

1931, pp. 199-200, and, more recently, by Gottfried Harberler,

"Import Taxes and Export Subsidies as a Substitute for the 

Realignment of Exchange Rates", Kyklas, Vol. XX, 1967, pp. 17-23. 

6/ The unrealistic assumption of perfectly elastic world 

demana is made for purposes of expositional convenience; the 

effects of relaxing it are noted later. 
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7/ Although foreign currency prices remain the same, 

the re6ate of 10 percent increases the dollar return for 

each unit exported relative to the return in the domestic 

market. Note that, under the destination principle, goods

sell for different prices in the domestic and export markets. 

8/ J.E. Meade, H.E. Liesner, S.J. Wells, Case Studies 

in European Economic Union: The Mechanics of Integration, Oxford University Press, 1962 3 P' 331 . In this particular 

passage, the authors' remarks are directed toward indirect 

taxes. A few pages later, p. 335, they make it clear that 

the same analysis also applies to direct taxes: "Differences 

between the rates of direct taxes levied in the common market 

countries can raise the same problems as differences between 

the rates of indirect taxes." See also James E. Meade, 

Problems of Economic Union, University of Chicago Press, 1953,

PP. 2 1-23 and Paul Wonnacott, "Policy Harmonization in Free 

Trade Groupings with Special Reference to the European Economic 

Community", in Harmonization of National Economic Policies Under Free Trade, pp. 46 -51. 

9/ For an alternative graphical analysis see Robert E. 

Baldwin, Nontariff Distortions of International Trade, The 

Brookings Institution, 1970, pp. 194-195. 

1 1 10/ In practice the average" rate must be appropriately 

calculated to reflect the economic importance of different 

commodities. 

11/ It is assumed that the decline in production, measured 

by ala,, exceeds the decline in consumption, measured by clco. 

12/ For simplicity, this discussion has assumed that 

both the world demand for U.S. exports and the world supply

of U.S. imports are perfectly elastic. Since the United States 

is a large exporter and importer, however, the world demand 

for its exports and world supply of its imports are both probably

less than perfectly elastic. With a change from the origin to 

the destination principle, the imperfectly elastic demand and 

supply schedules would moderate the export increase and import decrease for more highly taxed goods and would also moderate 

the export decrease and import increase for more lightly taxed 

goods. 

13/ Industry tax and sales data were obtained from 

numeroG published and unpublished sources, names of which 

will be supplied on request. 

14/ This also assumes that the volume of trade insector i 

is sman and thus has only a negligible impact on exchange rate 

movements. 
- 26 -

15/ As stressed earlier, it is relative price changes

that mxter. If all goods or industries were taxed at 10 

percent, changing the method of border tax adjustment would 

have no allocative effects. 

16/ Two service industries have higher tax burdens than 

the electrical equipment industry.