Tag Archives: border adjustment

“Border Adjustments” Tariffs Whatever

19 Feb

I do not understand why Mr. Trump and his GOP want to raise taxes on the American people.

Mr. Trump wants to hike import tariffs. His congressional Republican lackeys call it a “border adjustment.” Either way this tax will make goods and services more expensive for American consumers while their touted “benefits” are murky.

For example, a fall in the trade deficit is touted as one such “benefit”. However, this fall will ALWAYS be balanced by a fall in foreign capital investment in the US. Thats just how national income accounting works. Well that’s also fewer American jobs.

Another effect might be a devaluation of the US dollar because of a fall in demand for US assets. That makes our exports more competitive while making imports more expensive. Since many of the goods we make in the US have foreign inputs the net effect of all of this on American jobs and wages is murky.  Moreover, a fall in demand for US assets like T bills puts upward pressure on interest rates. Higher interest rates translate into less US capital investment and fewer American jobs. These higher interest rates could be neutralized by asset purchases by the Fed. But that could end up being inflationary.

Supporters of the “Border adjustment” claim that any inequity in the border adjustment will be negated by a rise in the value of the dollar. Well thats not so certain given the possibility I raise above. In fact anyone who claims they know exactly what will happen to exchange rates is at best wildly optimistic!

Advocates also keep talking about the border adjustment as “trade neutral”. Thats a lie. The whole argument for the border adjustment is that it helps import substitute and export industries while penalizing American businesses which use imported inputs. In fact even advocates say that prices of all goods will rise (see https://taxfoundation.org/understanding-house-gop-border-adjustment/). Which of course it would! In other words it is a tax on the American people.

Of course, US tariff increases will be matched by other countries. This trade war will impoverish everyone.

Not so long ago Republicans understood that government intervention in business decisions was a bad idea because the economy is complicated. As a result, policies have complex and often unintended effects. This was one argument for small government that did not promote grandiose policies with ever cascading unintended consequences. Republicans need to remember that idea. Executive orders or even legislation cannot repeal economics.

How about a flat destination based corporate income tax without any border adjustment? That would encourage American businesses to relocate to the US. It would increase demand for American goods and American workers. And all without the inevitable price hikes from so called “border adjustments.”

Advertisements
%d bloggers like this: