Generational Dynamics World View

[Warren Dew]

(03-01-2017, 01:27 AM)Warren Dew Wrote:

(02-25-2017, 09:01 AM)Warren Dew Wrote:

(02-24-2017, 10:42 PM)John J. Xenakis Wrote: I wrote the above in 2003, so it should not surprise anyone that today
I consider the proposed "border adjustment tax" to be a very dangerous
idea.

I'm glad you feel this way, and I agree.

I do want to note that there is an underlying trade issue that the border adjustment tax attempts to address.  Specifically, the EU provides a VAT rebate on exports, and imposes a VAT on imports.  This has the effect of subsidizing exports and putting a tariff on imports.

However, the border adjustment tax is the wrong way to respond, for the reasons you mention, and also for reasons having to do flaws in its basic structure.  Because it isn't based on the actual tax content of exports, it would distort economic incentives to manufacturers.  For example, companies will have an incentive internally to subsidize exports by charging lower prices for exported goods than they charge to Americans for the same goods.  It is also likely to run afoul of WTO rules.

Edit:  and let's not forget the increase in the value of the dollar, estimated by some at 25%, relative to other currencies.  This is said to 'cancel out' the effects of the border adjustments, but it also provides a huge windfall for overseas holders of dollars like China and Japan, with no benefit to Americans.

The right way to address this issue is to attack the VAT based subsidies and tariffs.  This might be possible to do under existing WTO rules.  If not, the US should pressure the WTO to change the rules to prevent the abuse of VAT rebates and tariffs.  In addition, the US should probably negotiate aggressively with the EU; the EU has become a de facto protectionist region, which runs strongly counter to US interests.

We could also shift the US federal government from being income tax supported to being VAT supported, but that would be a much heavier political lift, likely requiring repeal of the 16th amendment.

I have to change my position on this, because I didn't fully understand the proposal.

In fact, the proposal actually is to shift at least corporate taxes to a VAT instead of a corporate income tax, at a lower percentage tax rate.  This permits us to take advantage of the same border adjustment that the WTO has already ruled to meet its rules by states that already use a VAT, including for example most EU states.

That also means that, rather than initiating a trade war, all this does is put our policies in line with, for example, EU policies.

Given there will likely be an exchange rate adjustment that largely cancels the border adjustment, this will essentially make the corporate tax rate lower in the US, encouraging production in the US, in exchange for giving foreign holders of US currency a one time windfall, and in the longer term reducing the foreign holdings of US currency on which the US charges an effective inflation "tax".

I'm neutral to mildly positive on this deal.  In an ideal world, we would fix the WTO ruling that permitting border adjustments of VAT, but that would be harder to fix.

Paul Ryan needs to do a better job of explaining this package.

I just wanted to note that without the border adjustment tax, we're now imposing much less well thought out tariffs that are already causing threats of retaliation and counterretaliation.  We should have done this the sensible way when we had a chance.