What economists think about a border adjustment tax

Michael Maiello | Apr 18, 2017

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When Paul Ryan, speaker of the US House of Representatives, released a proposal for tax reform last summer, it included an idea that has become a controversial point of the House Republican tax plan: border adjustments. A border adjustment tax (BAT) would exempt US-made exports from US taxes, while imported and domestically consumed goods would still be subject to taxation.

The idea has met with some resistance, including from retailers who are concerned about the effect border adjustments would have on prices for the products they sell. “The million-plus small retail companies in the U.S. would be hit especially hard by the BAT, and many would be forced to lay off employees or even close their doors,” David French of the National Retail Federation told CNBC in March.

A poll of the Initiative on Global Markets’ US Economic Experts Panel demonstrates the lack of clarity around how a BAT might affect the US economy. A plurality of the panel was uncertain about whether a BAT would “substantially reduce the US trade deficit within the next few years,” and about how such a tax would affect US consumer prices.

A critical point of uncertainty about the trade-deficit effects is how exchange rates would react to such a tax.  In theory, a border adjustment tax would push up the value of the dollar, decreasing demand for U.S. exports and increasing demand for imports.

“I understand the exchange rate argument but am not certain of a full offset,” wrote Judith Chevalier of Yale. Chicago Booth’s Anil K Kashyap agreed that the “currency offsets are unlikely to be one for one.”

The value of the dollar also weighs heavily on the question of consumer prices. Price changes “would depend on the reaction of other variables, starting with the exchange rate,” wrote Barry Eichengreen of the University of California at Berkeley.

Markus Brunnermeier, Princeton
“Only in the short-run possibly. In the long-run, dollar appreciation will reduce the advantage of US exporters.”
Response: Uncertain

Darrell Duffie, Stanford
“I am assuming that trade retaliation and changes in foreign exchange prices are not big enough within three years to overcome the effect.”
Response: Agree

Austan Goolsbee, Chicago Booth
“It's just like a VAT. Countries with VATs do not get a trade advantage. Consumers pay [the] same rate on import/domestic. Exchange rates offset/adjust.”
Response: Strongly disagree

Anil K Kashyap, Chicago Booth
“Magnitude hard to judge, but lobbying by Walmart is not an accident, some pass through into prices likely.”
Response: Agree

Oliver Hart, Harvard
“I don't know what the effects of a destination based tax would be or whether it would improve matters. I would prefer a consumption tax.”
Response: Uncertain

William Nordhaus, Yale
“‘Substantially’ here would mean 1 percent to 2 percent on level of CPI.”
Response: Agree