Fiscal Devaluation of Gita Gopinath.

Gita Gopinath is an India-born economist at Harvard. She has revived a proposal of Keynes to escape economic discipline imposed by a common currency (such as the Euro) or the gold standard (as in the times of Keynes). Here is how it works:

A country can raise its VAT and lower its payroll taxes. The VAT applies to imports but not to exports. The higher VAT increases the tax on imports (so it is protectionist that way), while the lowered payroll taxes promote exports. This, in fact, simulates the effects of a weaker currency. The increased VAT also brings in more tax revenue and so does the increase in exports. That's how this works theoretically.

This type of change in tax policy was done in Germany in 2007 and the VAT was changed from 16% to 19%. It is being considered in France. A rigorous analysis of the effects of fiscal devaluation will take some research, but I will provide a theoretical evaluation now.

Fiscal devaluation has one desirable effect (reduced payroll taxes) and two potentially harmful consequences arising from increasing the VAT. Increasing the VAT is increasing taxes paid not only by foreign companies, but also by the taxpayers as well. Governments may view increased revenues as desirable, but tax payers do not. Thus, increased taxes may reduce economic growth. And protectionist measures will bring on retaliation. That will be a negative factor on trade.

In the end, there is no free lunch and there is no substitute for hard work, a good work ethic and keeping governments as small as possible. Capital, in the hands of private individuals will produce more revenue than capital in the hands of government functionaries. Why? Because private individuals tend to favor profit and efficiency (and if they do not they fail), whereas government functionaries have other (less profitable) ideas and their failure will be financed out of taxes.

That said, fiscal devaluation may help a country such as Greece.