Domestic taxes and international trade

This entry examines how domestic taxes affect international trade and how trade, in turn, shapes tax systems. Consumption taxes such as value-added taxes (VAT) are designed to be neutral with respect to trade, but in practice could function as quasi-tariffs or export taxes in the presence of common administrative challenges. Corporate taxes affect trade, particularly through their impact on foreign direct investment and on tax avoidance strategies that rely on manipulating intrafirm trade prices. Globalization also shapes domestic tax systems through multiple channels. Increased trade openness has led to declining corporate tax rates in developed countries through a ``race to the bottom." In developing countries, trade liberalization has expanded the corporate tax base, leading to an increase in effective taxes on capital. Globalization has also impacted personal income taxation, with evidence of both increased demand for redistribution and a reduction in progressivity due to the increased mobility of high earners.