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The Proposed Border Tax Would Derail Trump’s Proposals to Reduce Trade Deficits
Raymond Richman, 3/6/2017

Republicans have proposed a border tax supposedly intended to reduce the trade deficits and the budget deficits. And so-called conservative Republicans are pushing to substitute a value-added tax for the progressive personal income tax. The border tax is a modified version of the value-added tax. So both proposals are designed to add two regressive taxes since both fall on consumption and do not tax savings or wealth. We already have border taxes. Retail sales taxes do not apply to exports and most states impose retail sales taxes with rates as high as 9.45% in Tennessee,  9.3% in Arkansas, 8.9% in Alabama, Louisiana, and 8.89 percent in Washington State. The border tax would add 20% making the taxes on import as high as nearly 30%.

Under international law, retail sales taxes and value-added taxes can be exempted from and deducted from exports without violating the rules against “dumping”, i.e., defined as selling abroad at lower prices than sales at home. The value-added tax under international laws is considered a retail sales tax and may be rebated to exporters. Under international law, the border tax might not be considered a sales tax and therefore might violate international laws because the proposed tax affects only exports and imports. The issue would have to  be decided in the courts which will take years. Congress could pass a value-added tax which would be deductible, but popular opposition to a sales tax at the federal government level would prevent it ever from passing. The border tax is a modified value-added tax. Under the plan, companies wouldn't be able to deduct the cost of imports from their revenue, a move that today enables them to lower their overall tax burden. At the same time, exports and other foreign sales would be made tax-free. The plan would operate like a tax on the trade deficit and raise about $100 billion per year which could help pay for lower income tax rates.

We have three principal objections to the border tax. First, it is a new federal tax and the federal government is already too large. Second, it is a regressive tax, falling on consumption only. Third it will punish not only countries with which we have a large chronic trade deficit but punish those with which have a trade surplus.

While the border tax, which is a modified value added tax, could apply to all goods and services produced domestically and satisfy international law. Value-added is the sum of wages, profits, interest, and rent incurred in the course of producing goods and services, which equals the price of the goods and services produced and sold domestically. It is therefore equivalent to a retail sales tax. Every country that has adopted a value-added tax exempts some productive sectors, agricultural production, for example The Pennsylvania retail sales tax exempts clothing and take-home food. But as proposed, all sectors of the economy would be affected equally. And it would  not pass without some exemptions. The IMF for decades has been promoting the adoption of value-added taxes, concealing the fact that it is equivalent to a retail sales tax to make it easier to be enacted.

The border tax falls on all our trading partners, even those with which we have trade surpluses. Why would we want to hurt them? And the border tax raises the prices of all imports not merely from those from countries with which we are experiencing huge deficits. It is no secret who they are. The U.S. trade deficit in 2016 amounted to $734.3 billion. Our trade deficit with China was $347.0 billion, Japan $68.9, Germany $64.8 billion, Mexico $63.2 billion, Italy $28.5, South Korea $27.7 billion, India $24.3 billion,  France $15.8 billion. The top 5 accounted for 42.4% of the total deficit. We had trade surpluses with Hong Kong of $27.5 billion, the Netherlands of $24.2 billion, Belgium $13.9 billion, with Singapore of $9.1 billion, and Chile, Brazil, and Argentina $12.1 billion. There is no reason why we should impose tariffs or other barriers on our trade with countries with which we have a trade surplus.

Pres. Trump to his credit favors balancing trade, favoring reaching an accord with those countries which the U.S. is experiencing huge chronic trade deficits. Failing such an accord, we recommend single-country-variable tariff which rises as the trade deficit increases and falls and trade becomes more balanced. We proposed a single-country-variable-tariff, which we called the “Scaled Tariff”, in our book Balanced Trade published in 2014. 

Passage of the border tax would make it difficult to reduce the trade deficits because most people would expect it to be sufficient to cause our trade to become more balanced. But changes in exchange rates due by arbitrary governmental actions forces or by natural economic forces would tend to nullify its effects on trade. Thus Prof. Feldstein of Harvard wrote recently in the Wall Street Journal that it would provide revenue but not balance trade because of natural economic forces induced by the border tax. We believe that natural economic forces would not balance trade. In any case, it would be easy for countries to respond to the border tax by changing their exchange rates or imposing barriers to trade. And it would injure countries with which we have trade deficits.

Pres. Trump must resist attempts to enact new taxes. The budget should be balanced by reducing government expenditures. The scaled tariff is all we need to bring trade into balance and countries cannot retaliate without making their situations worse. The scaled tariff can be used by any country suffering from a chronic trade deficit.

Objections have been raised to the scaled tariff alleging that it would cause a trade war. Countries that are experiencing chronic trade surpluses can only lose by engaging in a trade war whereas they have everything to gain by importing more from trade deficit countries which will lower the tariff. Another objection is that imposing the scaled tariff with hurt consumers. Besides creating jobs, balancing trade by the use of a scaled tariff will raise revenues by an amount greater that the rise in the burden on consumers. After all, most of the products imported from any given country can be imported from countries not affected by the tariff or can be produced here.

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Comment by Bruce Bishop, 3/11/2017:

I would suggest that China can manufacture anything we can manufacture at one-third to one-tenth the cost.  There is no way to compete with that.  

Furthermore, the barriers to entry into manufacturing would be astronomical, given that our manufacturing infrastructure is mostly gone.

No sensible entrepreneur is going to risk a venture into manufacturing without the assurance that our government will continue to support manufacturing.  Our government has been adversarial to manufacturing for decades, and other than Trump, there is no reason to believe that will change.

I wish someone would step up and show me that I am wrong.  

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  • [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]