Under a destination-based VAT, imported goods are subject to tax while exported goods are exempt (‘zero-rated’). To implement these principles, tax is imposed at the border on imported goods, and in the case of exports either a border adjustment (tax rebate) is provided or in the case of a ‘credit-invoice’ VAT, the exporter is allowed a refundable credit (to offset the VAT paid on the goods purchased by the exporter). These border adjustments are consistent with the General Agreement on Tariffs and Trade (GATT), to which the United States recenly became a signatory party.
On the other hand, rebating the flat tax on exports (as well as allowing a deduction for wages) would not be allowed under GATT rules. That the flat tax is an origin-based consumption tax has been widely criticized as an apparent impediment to U.S. businesses exporting their goods. Because of the border-adjustments, a destination-based VAT appears to subsidize exports and create a protective barrier from imports, while an origin-based tax appears to put domestic producers at a relative disadvantage compared to foreign producers. But economists argue that it really makes no difference. In the case of an origin-based tax such as the flat tax, there will be a corresponding adjustment in currency rates and/or rates that in the long run will correct for the absence of border adjustments, p. 275