18 Mar 2017

A Huge Problem (?) in Martin Feldstein Et Al.’s Argument for Border Adjustment Tax

Trade 4 Comments

It’s not all karaoke and Krugman bashing around here. Sometimes I roll up my sleeves and do straight econ…

Some of the rank-and-file Republicans pushing the border adjustment tax (BAT) are doing so on explicitly protectionist grounds. (If you don’t know, the BAT would tax imports at 20% and exempt exports, implicitly subsidizing them 20%.) Or rather, they are saying the current tax code unfairly privileges imports and thus the BAT will level the playing field, thereby boosting exports and hurting imports.

However, the actual economists who are for the BAT (or at least think it’s not a terrible idea, like Krugman) think that such talk is uninformed. Martin Feldstein in particular has been writing op eds and blog posts, and making TV appearances, assuring everyone that the BAT won’t hurt imports.

If you haven’t read Feldstein’s argument, you need to please read this example of his position. Otherwise my own reaction is useless.

Now that you’ve read Feldstein, read my critique.

Here’s my strategy in that blog post:

  1. I first show what Feldstein has in mind, and how his argument basically goes through if we start with a country that has equal imports and exports.
  2. Then I show that if the government of this country were to exempt one-quarter of the exporters from its subsidy, the original result would no longer hold. Rather than being a wash, on net the scheme would act as a net impediment to trade.
  3. Finally, I argue that our current situation–where the US has a third more imports than exports–is equivalent to point (2) above, except where the one-quarter of the exports are “stocks and bonds.” If you think of US operations exporting a good called “stocks and bonds,” then it becomes crystal clear that Feldstein’s analysis must be wrong. The dollar won’t appreciate enough to fully offset the direct impact of the tax on imports.

4 Responses to “A Huge Problem (?) in Martin Feldstein Et Al.’s Argument for Border Adjustment Tax”

  1. Stephen Dedalus says:

    I think there is a huge problem capitalizing “et” as it is a two-letter conjunction!

  2. Transformer says:

    I think you already won the argument at ‘However, I think there is a major problem with Feldstein (and the other BAT supporters’) argument–the dollar wouldn’t fully appreciate, and so yes indeed the new 20% tax on imports would make them more expensive for American consumers.’. If BAT doesn’t apply to all goods then this will clearly be true and everything else follows.

  3. Tel says:

    Peter Schiff came out and called every other economist wrong, and said that the BAT would cause the US dollar to fall.

    I’m aware that Schiff might be a bit of a one trick pony, but he’s been right in the past, and the US economy is kind of due for a slump. Personally I feel there’s a king of common sense factor leaning in favour of Shiff.

  4. DZ says:

    Are capital account items ever treated the same way as current account items in trade barrier proposals? I can’t imagine exchange rates have ever perfectly offset tariffs/subsidies without also having some type of perfect capital control policy as well.

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