Jason Furman and Olivier Blanchard on the Border Adjustment Tax

Net revenues from border adjustment taxes and subsidies will be positive so long as the United States runs a trade deficit. But if foreign debt is not to explode, trade deficits must eventually be offset by trade surpluses in the future. Net revenues that are positive today will eventually have to turn negative. Indeed, any positive net revenues today must be offset by an equal discounted value of negative net revenues in the future.

Suppose that higher border adjustment revenues today are used to decrease other taxes—corporate tax cuts for example—leaving the budget unaffected in the short run. As trade deficits eventually turn into trade surpluses, and thus border adjustment net revenues turn from positive to negative, the other tax cuts it initially financed will still be on the books. Sooner or later, taxes will have to increase, or spending will have to be reduced, to compensate for the shortfall. Just as when the government issues debt, taxpayers get a break now, but they will have to pay off the cost of the debt in the future.

What if the exchange rate does not adjust fully? The story becomes more complicated, but the bottom line is the same. Depending on the demand and supply elasticities of imports and exports, the incidence of taxes will fall partly on US consumers, partly on foreigner producers; the incidence of subsidies will fall partly on US exporters, partly on foreign consumers. In fact, with incomplete exchange rate adjustment, it is plausible that in the short run US consumers will pay more than 100 percent of the net taxes raised—effectively financing a transfer to foreign producers as well. In any case, as trade deficits turn to surpluses, the roles will be inverted. What foreigners paid, they will get back. What US taxpayers received, they will have to give back. In the end, just as for debt finance, whatever tax breaks they got now, they will have to pay for later. On net, again, foreigners will not contribute.

Here is more of interest, self-recommending…


Wait, this is b.s.: "Net revenues from border adjustment taxes and subsidies will be positive so long as the United States runs a trade deficit. But if foreign debt is not to explode, trade deficits must eventually be offset by trade surpluses in the future."

OK, how is this different from no border tax? Eventually, the USA cannot continuously run a trade deficit, forever, can it? So a border tax just accelerates this, yes? Please walk me through it, small words. I am amazed how these economists on the one hand say a perpetual trade deficit is no problem (something about the Triffen paradox) then on the other hand, a tax all of a sudden makes this an issue.

I think you are missing the basic claim. The authors are saying that the border adjustment tax will inevitably fall on somebody, and that the somebody will ultimately be U.S. citizens, rather than foreign exporters. So creating a border adjustment tax either raises taxes on all Americans (by effectively creating a new tax), or it simply shifts taxes around in a shell game (if you reduce other taxes to offset the new tax you created).

What it does not do is lower Americans' tax burden by shifting the burden onto foreign payers. It doesn't turn Chinese factories into a source of American government revenue. And the reason why has to do with the shift in imports and exports, which is why they discuss the trade deficit--the authors are discussing the import-export balance as a mechanism, rather than as a topic. The topic is whether or not a border adjustment tax will alter the tax burden of U.S. taxpayers. They say "no."

@JCW - thanks for the reply. Indeed that is one interpretation, if the border adjustment tax eventually goes from positive (imports > exports) to negative (exports > imports). But at that point Trump will simply drop the tax (when exports > imports). Your analysis ignores this key sentence "But if foreign debt is not to explode, trade deficits must eventually be offset by trade surpluses in the future". Explain please why foreign debt has not exploded to date, and why the border tax will make foreign debt worse? Perhaps the authors are being alarmist for the sake of publicity. There's a number of papers out there that claim a current accounts deficit is very bad, see the works by Maurice Obstfeld and GM Kenneth S. Rogoff (2001, 2005, 2007; does anybody know his peak Elo rating?) and the above explosive claim ignores the Ricardo Hausmann and Federico Sturzenegger argument of "Dark Matter" exports. What is interesting to me is that the border tax, if anything, will cut down on the increase of foreign debt (at the cost of a decrease in living standards and/or increase in inflation for Americans, at least theoretically though not so much in practice IMO), so, if you really fear the imbalance of the current accounts deficit, and how the rest of the world are savers while the USA is a spender, you should be in favor of the tax. I myself favor a consumption tax, and a border tax is probably a good idea as both a revenue enhancer and a means to balance the trade deficit, but I am somewhat against this border tax on personal reasons, as I own WMT (Walmart) stock, and would not be surprised if many of the analysts on this topic are being funded by either Boeing (pro-border tax) or Walmart (anti) or some equivalent lobby.

Some questions:

1. If, as some predict, the US dollar appreciates by the same percent of the proposed border adjustment on imports, what is the net "tax effect" on US consumers?

2. If, contrary to 1, the US dollar does not fully appreciate, what might those foreign exporters do to remain competitive in the US market? Might one reaction be to cut prices to maintain the current price to US consumers thereby reducing their profit margins? Is that one instance in which the foreign producers actually do bear some of the "tax cost" of the border adjustment?

3. If, as the authors state, this is equivalent to debt financing and that debt will ultimately have to be repaid by US consumers, when will that repayment occur ("sooner or later" is a bit vague) and what will be the effective interest rate US persons will have to pay on that foreign financed debt when it is actually repaid? If the rate of interest is zero or lower than current market rates, is that a bad deal?

4. Now, take out a piece of paper and assume the following (numbers for illustrative purposes only). Assume that absent their 20 percent + border-adjusted VAT, the corporate tax on German widget producers (exporting to the US) would need to be at least 20 percent higher than it is today (in order for Germany to collect the same revenue). The US rate on domestic widget production is 35 percent. How is the competitive widget landscape between German exporters to the US market and US widget producers changed if tomorrow the US corporate rate is reduced to 20 percent (as well as a reduction in tax on US labor) and German widget imports are taxed at the same 20 percent rate at the border? Would the German widget producer perhaps take a haircut on its profit margin to maintain its current export position? How would that landscape change if, instead *Germany* eliminated its VAT and increased its corporate income tax by 20 percent?

If this inevitable "sooner or later" reversal occurs (when???) what is the effective rate of interest paid on that "loan"?

Part of the problem here is that we are operating from a baseline US statutory rate of 35 percent corporate income tax that is proposed to be reduced to 20 percent. Does one's view (including the WTO) of things change if we rather assume that one day before the 20 percent border tax is introduced the US eliminates the corporate income tax completely and then, the next day, that is, the same day the BAT is introduced, we impose something called a 20 percent GST on US producers?

5. How long have the Germans maintained a positive trade (im)balance with the US? "Sooner or later" does that have to reverse itself under the Furman/Blanchard accounting rule?

6. Where was Olivier Blanchard when the EU adopted its VAT and, in the intervening years until today, very substantially increasing that rate of it? Was he warning them as he is now warning the US?

The idea, apparently, is that the U.S. consumer pays more so more people get employed in the U.S. making things for export. It's basically a new tax for working class welfare. It's nuts, but that's what they want.

"If the rate of interest is zero or lower than current market rates, is that a bad deal?"

That was my thinking. The effective interest rate on this transaction should be low. If it's zero, then the basic time value of money says the US should do this. I don't find this paper persuasive at arguing against a Border Consumption tax on these grounds.

It seems to me that the excess imports are funded with US profits on foreign investments. They have already been paid for. They don't need to be paid for with future exports. So when the dollar rises and those foreign profits are worth less in dollar terms, it will be global US firms that pay the tax through lower foreign profits.

Somewhat (but not quite given your post) OT, what do you think of Ricardo Hausmann and Federico Sturzenegger's argument of “Dark Matter”? True or false?

I agree with it. Everyone who treats the trade deficit as something that needs to balance or that requires American borrowing needs to explain how our net foreign profits have grown at the same time the trade deficit has.

"Some supporters of the border adjustment to the cash flow tax being considered by Congress maintain that they have finally found a way to tax the fellow behind the tree: Namely with revenue coming from foreign producers. As a result, they say, these additional revenues can be used to pay for reductions in other taxes, in particular corporate tax rates, with American taxpayers getting off free."

"Some supporters...maintain..." is a strawman argument. Who are these "some supporters"? The majority of supporters maintain that a consumption tax (my favoured would be a Europe-style VAT) would allow a reduction in corporate income tax and taxes on labor and therefore a more economically efficient means of raising tax revenue. But, revenue does *not* come from foreign producers and I'm not aware of any serious person who claims there is a free lunch here. Revenues from consumption tax comes from US consumers (as does, currently, a large chunk of corporate income tax) and that is as it should be. And, corporate income taxes currently account for 9 percent of overall US tax revenues (somewhat more if one includes all business "entities"). I can see the sky crashing already.

And, this:

"As trade deficits eventually turn into trade surpluses, and thus border adjustment net revenues turn from positive to negative, the other tax cuts it initially financed will still be on the books. Sooner or later, taxes will have to increase, or spending will have to be reduced, to compensate for the shortfall".

Paraphrasing a famous economist, "sooner or later we are all dead" (why is that quote used by economists so often, but not here?). Even so, there seems to be a fallacy being pushed here that if US trade deficits turn into surpluses, that automatically means that tax revenues will on net decline. Not sure that follows if the net result is more exports *and* more imports with additional revenues also coming from improved revenues from employment activity and increased saving and investment. And, wouldn't it be just terrible if "sooner or later" the US were to (finally!) turn from a massive net importer to a net exporter of goods and services, if only modestly so. If that terrible outcome were to "sooner or later" materialise, I wouldn't really mind if the US government were to be able to reduce its spending.

"But, revenue does *not* come from foreign producers and I’m not aware of any serious person who claims there is a free lunch here."

What about making the Mexicans pay for the Wall by tazing their exports? I guess it depends of one's definition of "serious".

I'm not sure what you expect to accomplish by tazing their imports. I can see tazing their people as they sprint over the border. Maybe taze their diplomatic corp before expelling them.

I guess "serious" might not include using a non-existent verb "to taze." "Taze" does mean to discharge electric energy but this seems "unserious." Show me a "tazed" export.

What is the policy objective here: is it to discourage imports by requiring the American consumer to pay more for imported goods or is it to tax American companies which have heretofore shifted production to places like China and avoided U.S. tax on the profits by deflecting income to tax havens via tax avoidance schemes? Or to be blunt, is the policy objective to penalize consumers by requiring them to pay higher prices for that Samsung television or is it to penalize tax cheats? If it's the former, I don't believe the American consumer would be very happy about it, but if it's the latter, I suspect the American consumer would agree. https://www.nytimes.com/2017/03/09/business/economy/corporate-tax-report.html Let the American consumer decide whether to buy a television made in a sweatshop in Vietnam by Vietnamese labor or a more expensive television made in America by American labor.

But will the good stuff that magically appears when we run trade surpluses (side glance at Krugman) outweigh the loss in tax revenue from border adjustment?

Also, while the trade deficits that the US persistently run have occurred without the border adjustment tax, I think the onus is still on those who assert "trade deficits must eventually be offset by trade surpluses in the future". So long as the US is a good place to park foreign money, we can run perpetual trade deficits till the cows come home. Why do people (economists, especially) fail to talk about the current account when discussing trade deficits.

Even if we start to run trade surpluses in the future, it will be because we are producing more in the US than we are consuming. Unless all of that production is coming from the imminent robotic army, that will mean that employment in the U.S. is likely higher. So, as a tool to optimize employment, the idea has at least enough merit to consider thoughtfully.

What Mr. Blanchard is explaining can also be said using the "self-limiting" concept from other branches of knowledge. Then, if the tax is successful, tax revenue will disappear. If the tax is not successful in reducing imports, it's just a unnecessary cost increase. Thus, Mr. Blanchard is just pointing that for budgeting purposes this tax revenue is almost a mirage.

But, this is also a law issue. I'm not a lawyer, it would be great if someone with law knowledge could assess this piece "Possible Unilateral Actions (tariff/quotas) under US Law" https://www.whitecase.com/publications/article/possible-unilateral-actions-under-us-law @rayward, does this makes any sense?

Trump can't strong-arm Mexico or China as he did with Ford. Mexico's strategy is to chill out, or playing dumb for an indefinite period of time. What would be the motivation of Mexico and Canada to renegotiate NAFTA? Just because of Trump's charisma? So, either: A) Trump offers something interesting to Mexico and Canada in order to motivate them to renegotiate, or b) takes unilateral action in trade restriction.

Scenario A implies offering concessions, US manufacturing may win but what has to be offered to make US manufacturing win? More explicitly, which other business has to be uncovered to cover US manufacturing? Scenario B is going to be more fun because it implies the US presidential team is great at law-making. However, the last Muslim-ban fiasco shows Trump's team does not excel at law-making.

White & Case is a highly regarded international law firm. As indicated in the linked article, the most likely actions by the U.S. government are those initiated by aggrieved parties who petition the U.S. government for an investigation rather than those self-initiated by the U.S. government. The linked article is a solicitation to companies who believe they may have a claim for unfair trade practices against China (the country identified as a potential violator in the article) for, among other things, "dumping". Given President Trump's habit of direct communications with company executives, I don't doubt he could recruit one or more companies to file petitions with the government to investigate claims of unfair trade practices.

Thanks Rayward!

Another alternative is something like the "voluntary" import quotas agreed with Japanese car makers in 1981. I still don't know if a carrot, a stick or both of them were used to convince the Japanese the import quotas were a good idea. It does not help that most of people frames this event as Reagan administration successfully using a large stick.

However, before 1981 there were no Japanese assembly plants in the US. The voluntary agreement stated cars made on the US were not accounted for import quotas, and if the Japanese wanted to manufacture locally it had to be through partnerships with US manufacturers. Here things get complicate, while US car companies were saved in the short term, but Japanese assembly plants in the US got "legitimized" in the public view. Years later, the Japanese got their independence from forced partnerships with US manufacturers. In the long term, the Japanese still have plants in the US but don't have to share profits with Ford, GM or Chrysler. From 2017, it seems there was a bunch of carrots in the story of Reagan dominating the Japanese into import quotas (hindsight bias alert!!!). Present day US car marketshare: US carmakers 45% Japanese 35%. Compare to Europe where locals are 65% and Japanese are 10%.

On 2017 the problem is car assembly plants in Mexico. Trump will sell a narrative of dominating Mexico. But what concessions will he do in the way to a new "voluntary agreement"? On the surface US auto workers will benefit but nothing is free. It will take a long time to know what was offered to save some manufacturing jobs.

The car or light truck built in Mexico is an economy car that can be profitably be built to sell for around $15,000. But nobody can profitably build a $15,000 car using American labor. That is why most auto imports are economy or luxury cars. But that is exactly what Trump is asking Detroit to do. I bet the auto CEO's told Trump what he wanted to hear and went back home and did nothing. If questioned, they will say it is more complicated than they thought and they are still working on it. If the exchange rate moves to offset the Border Adjustment Tax the US will still import economy cars at $15,000 and Detroit will not try to build $15,000 small cars.

I've commented many times that globalization and trade is entering a new phase, one in which China produces goods for China firms to compete with goods produced by American firms, including goods produced in China for American firms. Legislation like the border adjustment tax were developed in the context of the expiring phase (in which China produced goods for American firms which shifted production to China to take advantage of lower costs). Rising costs in China and competition in goods manufactured by and for China firms will create an entirely different dynamic and, hence, relationship between American firms and China. I appreciate that, with the exception of soothsayers, one can only look to the past for concrete guidance as to the future, but many if not most economists moonlight as soothsayers.

Mathematically, of course the US can run current account deficits forever. If our NGDP grows 4% per year and the trade deficit is 4% of NGDP or less per year, then the ratio of the cumulative deficits to NGDP will stabilize. The most recent figure I could find (Q3 2016) showed a current account deficit of 2.4% of NGDP.

I think most people are worried about the policy, as it is obvious that no one wishes to pay higher taxes. The same thing is with work where we want to leave minimum on the table. I do Forex trading where I get excellent features and facilities that saves a lot of money for me. It is all thanks to OctaFX broker with their swap free account where I am never required to pay overnight charges, so that keeps me extremely comfortable.

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