Dylan Matthews has an interesting, illuminating discussion of the “border adjustment” tax which is a major part of the House GOP’s corporate tax reform plan, as I discussed here a few days ago. (Sounds like a total policy bore-fest; but actually it sounds like a pretty big deal.) Matthews’s piece gets at, while not really resolving (because it may not be resolvable), the big mystery about the policy in my mind. It’s one of two things. It may be a de facto tariff which will hit importers’ profits heavily, as well as raise prices for lots of goods middle class families buy all the time, while also creating incentives for domestic manufacturing. Or it really may have no effect on the balance of trade one way or another and basically amount to a quasi-VAT tax which will shift taxes from corporations to consumers.
One of the key issues to the debate is the common sense, non-dynamic understanding of the dramatically different ways such a tax treats exporters and importers. It gives, in short, dramatically preferential treatment to exporters. Basically the costs of imports are no longer deductible, which seems ridiculous to me since the ‘costs’ of imports are most of the costs for importers. The idea that these aren’t figured in as ‘costs’ when calculating taxable profits seems kind of nuts to me.
This is the view of import-heavy retailers, not surprisingly. But standard economic theory (which Matthews explains) says these changes will have dynamics effects on currency exchange rates which will balance everything out. The importers/retailers’ argument is that life doesn’t always work like it does in econ texbooks. And in any case we may be crushed as everything is settling out.
If I were an importer, I’d think the same. It’s difficult for me to imagine that this would work just as textbook economics dictates or that there wouldn’t be a lot of disruption (largely absorbed by middle income consumers) along the way. (I’m not sure whether I’m more luddite or empiricist here when it comes to my skepticism of economists’ textbooks argument.)
My broader skepticism about this move is that House Republicans seem to selling it as a way to support President-Elect Trump’s populist/protectionist agenda. But when pressed on the harsh downsides for consumers, they point to economic theories that suggest it won’t really have any effect on trade either way. There’s some pretty major bad faith there at a minimum, which ever side of that argument is more accurate.
I’d be curious to hear from people with a solid grounding in the policy/economics side of this for guidance.
