The economics of the Border Adjustment tax

Lastly, border taxes increase government revenues in periods of trade deficit, however, given the net foreign asset position of the U.S., they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.

That is from a new working paper by Omar Barbiero, Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki.  By the way, this does mean the idea doesn’t actually work.


From the paper - 'The economic consequences of these adjustments are poorly understood and highly politicized in the public debate.' American debate, one can correctly assume. A country like Germany has been doing this for literally decades in terms of MwSt, but then, Germany does not have much recent experience in being a net deficit importer. The EU too has managed to handle this, as all trade within the EU, along with all EU exports, also deals with different VAT frameworks.

Whether such experience meets the undoubtedly rigorous standards Prof. Cowen applies to his observation 'By the way, this does mean the idea doesn’t actually work.' is hard to judge.

Remember "guns and butter"? That was the metaphor economists used to identify the policy that caused the inflation of the 1970s, the guns being the war in SE Asia and the butter being the domestic social programs. Politicians wanted both "guns and butter" but did not want to impose the taxes necessary to have both simultaneously. I've been thinking about "guns and butter" lately as Trump flails away at China over trade and the usual suspects publish op/eds warning that we must cut social security and Medicare now or we will soon become Greece. It's true we have a policy today of "guns and butter", but it's not a metaphor, the guns being all those guns owned by mostly fat Americans. "Guns and butter" in the 1960s and 1970s led to inflation and high interest rates in the 1980s and to misguided op/eds in 2018. "Guns and butter" today result in the death of thousands of Americans, some from all those guns and others from the butter consumed by the overweight owners of the guns.


OK, on a glance, they find the conditions where repricing does not keep up with tax reform adjustment. Take this:

Border adjustment associated with the corporate proit tax
is neutral if the equilibrium path of all real macroeconomic variables does not depend on whether the border adjustment is implemented or not, that is whether ιt = 0 or ιt = 1.

OK, they mean corporations have a liquid cash swap process during tax cjanges. They do, by definition, really.
Then symmetric pass thru, important because asymmetry flows warp term structure, the two period condition is not met.
They end up with a flow network, what they flowing? Variance, who gets it at equilibrium.
Variance is congestion. At stability the flow network is stable via queue structure, the pricing really a comparison of queue size along their flow map.

Think of the Profit guy on TV. This machine that finds flow equilibrium works because they got matrix operators that do the profit guy action, and they really measure him against an arbitrary clock as a test of stability. What is the insurance cost of keeping this thing in sync with the farmers, how much yuield need for time drift.

Some equivalently negative comments about VATs, though, the abstract (since VATs are also all border adjusted.) In some ways worse, since VATs imply very large reductions in output. Does that mean that VATs also don't work?

"By the way, this does mean the idea doesn’t actually work." - The paper claims a very large immediate increase in the dollar, which I thought was was advocates were claiming. Weren't you and others previously claiming that the risk was that exchange rates wouldn't adjust?

In fact, your point seems entirely backwards, but then again I've been listening to more sophisticated advocates of the DBCFT like the Tax Foundation.

It's true that if your goal is to be protectionist, like the Trump Administration, then this paper demonstrates that the DBCFT is not protectionist, so it won't work in that sense. This also means that many of the direct and naive criticisms of border adjustment were wrong.

It's quite the case that some people were selling the DBCFT to the Trump Administration as a protectionist idea, while knowing that it really wasn't. Too clever by half-- but then again, opposing the BAT only to result in Trump going to his next alternative of imposing tariffs was perhaps even more two clever by half for you and others! We could have had much less protectionist policy if so much hadn't been concentrated against border adjustment (inaccurately.)

Are there any similar size economies that don't have tariffs or import taxes?

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