Taxation of the arms trade: An overview of the issues

A number of proposals for a tax on the international trade with weapons have been made during the last 20 years. Originally, the major objectives were both to reduce the level of trade in arms and raise money for purposes such as development and disarmament. Later proposals focused on the compensation of victims of the use of specific types of weapons. Various objections have been raised against the suggestions for an arms trade tax. Major points include the difficulties of achieving sufficient levels of compliance, tax evasion through increases in domestic production and a stimulation of the illicit trade in arms. There are also fundamental objections against demeritorizing arms transfers and against differential treatment of domestic production and exports. In addition to briefly discussing the objectives and objections, the paper also addresses the question of the incidence of a possible arms trade tax. A major part of the burden would be borne by buyers of arms, who are predominantly developing countries. An arms trade tax might, depending on the shape of supply and demand functions, lead to a decrease or an increase in expenditures on arms. Transfers from a fund fed by an arms trade tax should only go to those countries which substantially reduce their spending on arms imports. In general, an arms trade tax makes more sense as a measure for disarmament or the compensation of victims than as a source of development finance.