January 28, 2017

TAX WHAT YOU DON'T WANT, NOT WHAT YOU DO:

How a Clever GOP Tax Plan Managed to Baffle Everyone (Ramesh Ponnuru, 1/27/17, Bloomberg View)

The idea is to tax all domestically consumed goods, whether those goods are produced here or abroad.

This "border adjusted" tax wouldn't be a tariff, because it wouldn't discriminate between imports and goods produced in America for Americans. It therefore wouldn't bias a consumer's choice between a domestically produced good and a competing import.

Some Republicans think that other countries' VATs help to reduce their trade deficits and that we could reduce ours by adopting a border-adjusted tax. They are probably wrong about that: Most economists believe that when countries adopt such taxes, their currencies appreciate and their total imports and exports end up roughly unchanged. (How fast this happens is an open question.)

But since we import more than we export, applying taxes to imports but not to exports also raises money for the federal government. The economist Martin Feldstein estimates that border adjustment could raise $120 billion a year. That's another reason House Republicans like it: They could use the revenue to offset some of the tax cuts they want to enact.

The best argument for border adjustment is that it is a way for free traders to tell Trump that they are going to discourage imports and encourage exports, while at the same time they avoid outright protectionism. That rationale depends on Trump's not quite grasping what's going on.

Posted by at January 28, 2017 10:00 AM

  

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