NOURIEL ROUBINI BLOG tracks the media appearances of Dr Nouriel Roubini his interviews articles debates books news speeches conferences blogs etc..Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
Monday, March 6, 2017
Roubini: America’s Bad Border Tax @Nouriel
NEW YORK – The
United States may be about to implement a border adjustment tax. The
Republican Party, now in control of the legislative and executive
branches, views a BAT – which would effectively subsidize US exporters,
by giving them tax breaks, while penalizing US companies that import
goods – as an important element of corporate-tax reform. They claim that
it would improve the US trade balance, while boosting domestic
production, investment, and employment. They are wrong.
truth is that the Republicans' plan is highly problematic. Along with
other proposed reforms, the BAT would turn the US corporate income tax
into a tax on corporate cash flow (with border adjustment), implying
far-reaching consequences for US companies' competitiveness and
sectors or firms – especially those that rely heavily on imports, such
as US retailers – would face sharp increases in their tax liabilities;
in some cases, these increases would be even greater than their pre-tax
profits. Meanwhile, sectors or firms that export, like those in
manufacturing, would enjoy significant reductions in their tax burden.
This divergence seems both unwarranted and unfair.
The BAT would have
other distributional implications, too. Studies indicate that it may hit
consumers among the bottom 10% of income earners hardest. Yet it has
been promoted as a way to offset the corporate-tax cuts that Republicans
are also pushing – cuts that would ultimately benefit those at the top
of the income distribution.
Making matters worse,
the BAT would not actually protect US firms from foreign competition.
Economic theory suggests that, in principle, a BAT could push up the
value of the dollar by as much as the tax, thereby nullifying its effects on the relative competitiveness of imports and exports.
balance-sheet effects of dollar appreciation would be large. Because
most foreign assets held by US investors are denominated in a foreign
currency, the value of those assets could be reduced by several trillion
dollars, in total. Meanwhile, the highly indebted emerging economies
would face ballooning dollar liabilities, which could cause financial
distress and even crises.
Even if the US dollar
appreciated less than the BAT, the pass-through from the tax on imports
to domestic prices would imply a temporary but persistent rise in the
inflation rate. Some studies suggest that, in the BAT's first year, the
new tax could push up US inflation by 1%, or even more. The US Federal
Reserve may respond to such an increase by hiking its policy rate, a
move that would ultimately lead to a rise in long-term interest rates
and place further upward pressure on the dollar's exchange rate.
Yet another problem
with the BAT is that it would create massive disruptions in the global
supply chains that the US corporate sector has built over the last few
decades. By undermining companies' capacity to maximize the efficiency
of labor and capital allocation – the driving motivation behind
offshoring – the BAT would produce large welfare costs for the US and
the global economy.
The final major
problem with the BAT is that it violates World Trade Organization rules,
which allow border adjustment only on indirect taxation, such as
value-added tax, not on direct taxes, like those levied on corporate
income. Given this, the WTO would probably rule the BAT illegal. In that
case, the US could face retaliatory measures worth up to $400 billion
per year if it didn't repeal the tax. That would deal a serious blow to
US and global GDP growth.
So how likely is the
US to enact the BAT? The proposal has the support of the Republican
majority in the House of Representatives, but a number of Senate
Republicans are likely to vote against it. Democrats in both houses of
Congress are likely to vote against the entire proposed corporate-tax
reform, including the BAT.
The executive branch
is also split on the issue, with President Donald Trump's more
protectionist advisers supporting it and his more internationalist
counselors opposing it. Trump himself has sent mixed signals.
Disagreement over the
BAT extends to business as well, with firms that export more than they
import supporting it, and vice versa. As for the general public, low-
and middle-income households should oppose the BAT, which would drive up
prices of the now-cheap imported goods that these groups currently
consume, though Trump's blue-collar constituents, particularly those who
work in manufacturing, may support the measure.
Ultimately, the case
for the BAT is relatively weak – far weaker than the case against it.
While this may be enough to ensure that it doesn't pass, there are
strong protectionist forces in the US government pushing hard for it and
similar policies. Even if the BAT is rejected, the risk of a damaging
global trade war triggered by the Trump administration will continue to
Nouriel Roubini, a professor at NYU's Stern School of Business and
Chairman of Roubini Macro Associates, was Senior Economist for
International Affairs in the White House's Council of Economic Advisers
during the Clinton Administration. He has worked for the International
Monetary Fund, the US Federal Reserve, and the World Bank.