21
Feb
2017
Understanding the Economic Commentary on the Border Tax/Subsidy
I was so happy with Scott Sumner’s post that tried to explain the border tax/subsidy issue, that I spent 45 minutes on an episode of the Lara-Murphy Show walking through its logic.
Scott’s post made it click for me, and I did my best to convey that extra comprehension to all of you folks too. So, if you’re ready to super geek out, then (a) read Scott’s post and (b) listen to my podcast.
Really enjoyed this one, Bob! Anytime Carlos and yourself need a “filler” episode, you should just pick whatever topic is hot in the economic news and walk through it in both theory and practice like you did with this one.
thanks!
Good explanation in LMR, but here’s my push back explaining why your scenario doesn’t fit what’s really going on.
Let’s start with the USA exports $1 billion of “stuff” to Mexico, while at the same time importing $1 billion of “stuff” back the other way. The tax will be 20% of the first billion and the subsidy will be 20℅ of the second billion… thus government makes no actual money on this whole border adjustment plan.
But wait! The USA runs a trade deficit with Mexico, and not just Mexico either. The USA runs a total trade deficit, and even after the government has paid out those subsidies, it will still end up ahead on tax collection. Well it can’t be a wash, if government ends up with a whole chunk of tax money collected at the ebd of tge day. This has to effect someone’s behavior, because someone somewhere now has less money to spend.
But it gets worse! The USA doesn’t import and export homogeneous goo in equal amounts. What would be the point of doing that? Clearly every country imports different goods than what they export… that’s the whole point of international trade.
So does the guy in Mexico who is buying subsidised goods from the USA particularly care about some completely different Mexican producer who want to export goods into the USA? Maybe he does care, but quite likely he doesn’t. At least there’s no particular reason to believe that Mexico operates as a single decision making entity.
In effect this system takes money away from some Mexicans and gives that money to different Mexicans. If you did that within a single county (e.g. take $100 a day in tax away from every officially “black” person inside the USA… then distribute that money amongst all the remainder of people in the USA) the outcome could not possibly be neutral (we can argue about what the effect would be, but I doubt anyone would argue that it’s just a wash, so don’t worry about it).
Looking forward to parts 2 and 3. There’s something not quite right with Dr. Sumners analysis. Trade in goods which cross borders isn’t balanced. If we can trade government bonds for BMWs forever then we have to consider how border taxes will affect the relative prices of all traded items. A subsidy on Chevy Suburbans but not on US government bonds will make Suburbans more desirable to foreigners as compared to government bonds. An increase in the value of the dollar will not change how a subsidy would make foreigners want more Suburbans and fewer government bonds. An import tax on BMWs but not on German bonds ought to make Americans want fewer BMWs and more German bonds. Again, a change in the value of the dollar won’t decrease the price of BMWs relative to German bonds. So, even if the value of the dollar increases it won’t cancel out how import taxes and export subsidies work to increase Suburban exports relative to the no tax basline and decrease BMW purchases by Americans relative to the no tax case.
This is pretty interesting. I could not understand how “exports pay for imports” and the tax on gas had anything to do with the effects of this policy, but now I get it.
Most people’s concern with this stuff is less to do with quantities of stuff being traded, and more directly with wages. The only reasonable way I see to get wages up is to deepen the division of labor & increase the availability of other factors (especially accumulation of capital), which is only tangentially related.
I guess I can see “well, since nothing changes, nothing changes, including wages and capital, even though I didn’t actually say anything about them.”
But it seems like this is kind of a big jump, like there might be a non-sequitur buried in there somewhere — like that example the other day about removing the SS tax and wages falling rather than the worker getting all of it because of value product type arguments. But I can’t see what it is right now.
Anyway, I will have to think about it more. Good podcast Bob.