Several European countries have recently envisaged to implement fiscal policies that
constitute alternatives to monetary devaluation in the context of a monetary union.
Social value-added tax is one of these alternatives: it consists to shift fiscal revenue
from payroll tax to value-added tax, with the objective to address simultaneously competitiveness and employment problems. We analyze the consequence of such a policy in
a model of international trade with heterogeneous firm
à la
Melitz. We depart from the
CES case for taking account of the way changes in the tax rates may mo dify competition
between producers, their margins, and the way these changes are refefected in prices. We
first show that social VAT is neutral for zero trade balances. Then, in a two-country
model, we show that, after the introduction of the social VAT, intensive and extensive
margins increase in the net importing country regardless of the country that implements
the policy. Both margins decrease in the net exporting country. Considering non-CES
utility functions, the effects of social VAT are attenuated (amplified) if love for variety
increases (decreases) with quantities
