Summary and Outlook

Cf. Menner/ Haufler (1991, pp. 131–135) for a comparison of the legal and the economic perspective on VAT rate harmonization in the internal market. The legal arguments are spelt out in more detail in Menner (1992, pp. 148–165).Google Scholar

Albert/ Meckl (1992, p. 311) stress that this view of capital reallocation is both more realistic and more general since it endogenizes the size of the world capital stock in long-run equilibrium.Google Scholar

See, e.g., Dixit/ Norman (1980, p. 198). Cf. also Sinn (1987, Chapters 1–2) for an introduction to the theory of intertemporal allocation.Google Scholar

To develop an intuition for this result, Frenkel/ Razin/ Symansky (1990, pp. 137–139) distinguish two cases and confine the discussion to a two-period model. In the first case, the home country runs a current account deficit in the initial period. Since the value-added tax is levied as a tax on domestic consumption, this implies that the increase in tax receipts induced by the rise in the VAT rate is higher in the first period as compared to the second. Therefore, the income tax rate must rise in the second period to maintain tax revenues. This in turn reduces the tax incentive to investment and puts downward pressure on the world interest rate. Since the home country is a net debtor in teh world market, the fall in the world interest rate represents an intertemporal terms of trade gain. In the reverse case, the home country’s current account is in surplus initially. Income tax rates fall in both countries in the second period, leading to a rise in the world rate of interest. In this case, the home country is a net creditor in the world market so that its intertemporal terms of trade are again improved.Google Scholar