Why I’m wary of the GOP’s “border adjustable tax” plan

Although I’m a trade and not a tax policy guy, I’m troubled by a number of arguments made by Heritage Foundation visiting scholar and Trump advisor Stephen Moore in his January 8 Washington Times op-ed, “The case for a border adjustable tax system.”

Moore writes that our current tax system subjects U.S. exports to Mexico to a double tax while he finds it “amazing” that the U.S. imposes no tax on imports to the U.S. from Mexico. He claims that a border adjustable tax (BAT) system will promote an industrial renaissance in the United States by making our manufactured products cheaper while raising the cost of imported products, resulting in millions of new jobs.

Count me skeptical. Under current rules, an American-made widget sold in Mexico is taxed in the same general way as a Mexican-made widget sold in Mexico. They’re both subject to the Mexican value-added tax (VAT), and they both include the cost of the corporate income tax imposed where they were made. Same for the competing widgets if they’re sold in the United States: Neither incur the Mexican VAT, both bear the cost of their home country’s corporate tax.

We could argue that our corporate tax is more damaging to domestic production than a foreign government’s corporate tax, but that’s an argument for tax reform, not border adjustment.

As for the trade impact, what confidence can we have that the BAT will end talk of additional tariffs? If the BAT is trade neutral, as most of its proponents claim, won’t the Trump trade team still seek additional tariffs as a tool of trade policy?

Moore’s op-ed seems to abandon the trade neutrality argument. He claims BAT “will help rejuvenate American manufacturing — especially in the Midwest” by making “American steel, cars, tractors, oil, and manufactured items 15 percent cheaper, while raising the cost of imported products by an equal amount.”

I’m afraid Moore is correct that the BAT will have the effect of a tariff on imports, driving up the costs of imported products compared to those made in the United States. But that is not what the Tax Foundation, Doug Holtz-Eakin, Martin Feldstein, and other proponents of BAT have been arguing. They claim it will result in an appreciation of the U.S. dollar by as much as 25 percent, which would exactly offset any effect of the tax on imports or exports.

If the Tax Foundation is right, then the BAT will lose the rejuvenating effect that Moore claims it will have. If Moore is right, then the BAT is no different in terms of trade policy than a blanket 15 percent protective tariff.

The actual result will probably be somewhere in between, with the exchange rate partially adjusting but not enough to fully offset the trade distorting effects of the tax. (BTW, the exchange rate would also partially adjust to the imposition of a direct tariff, but the tariff would still be a bad idea.)

And if the BAT does act like a protective tariff, Moore seems indifferent to the impact on American families. He employs a line that has long been a cliché among advocates of tariffs: “People can’t buy products at Walmart if they don’t have a job in the first place.” This is a non sequitur. Tens of millions of Americans shop every week at Walmart and other big box retailers without a BAT in place. They shop there because the low prices help them stretch their pay checks.

As George Will noted in a recent column, quoting trade economist Doug Irwin, far more Americans benefit from the lower prices on imports than would benefit from protective tariffs. Consider clothing. Only 135,000 Americans are employed making apparel of any kind, and BAT protectionism is not going to raise that number by any significant amount. But 45 million Americans living below the poverty line, and millions of other working class Americans, will see their real wages eroded by higher prices they will pay for the basic necessities of life.

Moore employs another myth popular among advocates of protection when he writes, “We have to make things in America to make America great again.” Contrary to that myth, we make lots of stuff in America. America is a manufacturing powerhouse in the world. Americans are globally competitive in making computers, jetliners, cars and light trucks, refined petroleum products, petrochemicals, pharmaceuticals, plastics, medical equipment, and on and on.

Manufacturing value added in America is at a record $2.4 trillion a year. Real manufacturing output is up more than 50 percent since 1993, the year before the United States entered the North American Free Trade Agreement with Mexico and Canada. According to the National Association of Manufacturers, “Taken alone, manufacturing in the United States would be the ninth-largest economy in the world.” U.S. manufacturing doesn’t need a new border tax to remain competitive in global markets.

In fact, the BAT would likely provoke a challenge in the World Trade Organization, and ultimately retaliatory tariffs against our exports. When combined with a stronger dollar, U.S. manufacturing exports will suffer. We’ll lose good-paying jobs making jet engines and computers for export in exchange for lower-paying jobs making sneakers, t-shirts, and bouncy balls. That is not a formula for national greatness.

Again, I’m not a tax expert, but there must be a better way than a border-adjustable tax to raise revenue and encourage economic growth in the United States.