Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

Prof. Martin Feldstein Makes a Poor Case For the Border Fax
Raymond Richman, 2/28/2017

Martin Feldstein, professor of economics at Harvard, former chairman of the Council of  Economic Advisors, and a recognized tax expert, writes in an opinion piece in the Wall Street Journal, 2/27/2017, that the border-adjustment tax proposed by some House Republicans “would not hurt American consumers and businesses,” nor affect the overall trade deficit. He gave the following reason for his astonishing conclusion:

Retailers and importers understandably fear that the tax would raise the cost of their products, ultimately increasing the prices to consumers. But the border tax would also cause the international value of the dollar to rise, reducing the cost of imports by enough to offset the tax.

Here’s why the dollar would rise: Without a change in the currency’s value, the border adjustment would cause imports to fall and exports to rise, reducing the overall trade deficit. But it is a fundamental fact of economics that the size of a country’s trade deficit equals the difference between national investment and national savings. Since the border adjustment tax would not alter either investment or saving, there must be no change in the trade deficit

Economic theory does not support Feldstein’s analysis. A country’s investment and savings are affected by trade deficits and surpluses but private investment and savings depend on rates on rates of return and rates on borrowed capital and government investment depends on Congressional and administration decisions while savings depends on the amount of income after tax of individuals and corporations. The author’s conclusion confuses an accounting identity with a statement of causes and effects.

Gross Domestic Product is such an identity: GDP = C + I + G + (X – M), i.e. gross national product is the sum of Consumption, Private Investment, Government consumption and investment, and Exports minus imports, the foreign trade balance. While changes in its components, called variables, will affect the GDP and other components, they cannot be said to cause or determine the changes observed in the other variables. The following identity can be derived from this identity; (S(P) + S(G) - I = (X – M) i.e., private savings and government savings minus investment equals the trade balance. This identity-- it is still an identity—lies at the basis of the professor’s analysis. They are identical but they are basically independent of the others. Savings and investment could just as easily be said to determined by net exports. But the components of the identity are basically independent of one another.

What is more egregious of Feldstein’s defense of the border tax is that 1) we already have sales taxes at the State level which are border taxes. So the proposed rate of 20% is more like 27% or so, 2) giving the federal government another tax is undesirable, 3) the burden of the border tax falls entirely on the middle class, and widening the inequality of wealth, 4) it falls with equal weight on countries with which we have trade surpluses and those with which we have huge chronic trade deficits, 5) the border tax violates international law..

The best way in our opinion to balance trade is to impose the single-country-variable-tariff as we indicated recently on this blog. We believe it can be imposed under international law. It is not a protective tariff; it is a remedial tariff and is reduced as trade with a particular country is balanced.


Your Name:

Post a Comment:

  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Jan 2022
    Dec 2021
    Nov 2021
    Oct 2021
    Sep 2021
    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017

    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term

    Environmental Regulation
    Last 100 Years
    Real Estate Taxation

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]