The (Non-)Neutrality of Value-Added Taxation

Border adjustment taxes like the value-added tax (VAT) are commonly regarded to promote efficiency and equity due to their de jure trade neutrality. We analyse the effects of the VAT on trade in final goods in the European Union (EU) from 1988 to 2019. We find that the VAT is de facto non-neutral. A one percentage point VAT increase implies a 5.45% reduction of foreign imports relative to internal trade. These effects are not driven by institutional quality, EU accession, or preferential Common Market access.