Some are saying that a border adjustment tax is just the thing we need, even going so far as saying it will pay for The Wall. See Yes, Trump can make Mexico pay for the border wall. Here’s how. There Marc A. Thiessen makes it sound simple enough. To wit:
The House Republicans’ plan would lower the corporate tax from 35 percent to 20 percent and apply the tax based on the location of consumption rather than the location of production. It would do this through a “border adjustment” that exempts exports while taxing imports. Under the plan, all imports coming into the United States would be subject to the 20 percent tax, but exports would have the tax refunded — making them tax-free.
Easy money, right? Here's a more thorough explanation at the Tax Foundation Blog:
Standard economic theory states that a border adjustment ends up in a wash for both exporters and importers because prices adjust to leave the trade balance unchanged. Specifically, the value of the domestic currency adjusts upward. Standard supply and demand shows why both the import tax and the export exemption work together to push the value of the domestic currency up.
The first piece is the import tax. An import tax would raise the cost of imports and reduce domestic demand for them. When Americans demand fewer imports they also provide foreigners with fewer U.S. dollars. This reduces their supply, makes them more difficult to get, and pushes up the value of the U.S. dollar relative to other currencies.
The second piece is the export subsidy. By itself, an export subsidy would allow U.S. producers to drop their prices in foreign markets. This would increase the demand for our exports. In order to purchase those exports, foreigners will need more U.S. dollars. This drives up demand for U.S. dollars in order to purchase those exports. This increases the value of the U.S. dollar relative to other currencies.
Separately, an import tax and an export subsidy only result in partial adjustments to the value of the U.S. dollar and would impact either exporters or importers. However, the impact of both of these policies together is a full offset of each.
It sounds like a very delicate balancing act. And if it doesn't work as predicted, proponents can simply say it needs more time.
I agree with Trump -- it's complicated. I miss the good old days when they were talking about tax simplification.
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