Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
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Trump Actions on Trade
Writing in the Washington Post's Monkey Cage blog, trade economist Chad Bown recently examined the early evidence on Trump's trade policy. Bown argues that Trump's trade actions are increasing protectionism and trade enforcement across a range of different trading partners. China is a major focus, but not the only one. The article is at: https://www.washingtonpost.com/news/monkey-cage/wp/2017/06/12/trump-is-a-new-kind-of-protectionist-he-operates-in-stealth-mode/?utm_term=.f3a31b3b34e6&wpisrc=nl_cage&wpmm=1.
Tax Corporate Earnings As Personal Income; That Would Be Real Reform
The administration and the Congress are considering reform of the federal government’s corporate income tax by reducing the top rate of the corporate income tax from 35% to as low as15%. Real corporate tax reform would treat corporations the same as partnerships are currently treated, namely, to tax the earnings of corporations as the personal income of shareholders just as partnership earnings are taxed as the personal income of their partners. Corporations are simply limited liability partnerships. The distinction of limited liability no longer since most States enable partnerships to register as limited liability enterprises. So the first real major reform would be to eliminate the corporate income tax and to tax corporate earnings as the personal income of the shareholders. There is precedent for taxing corporate earnings as personal income. The earnings of partnerships, individual proprietorships, and “S” corporations are already taxed as personal income. Moreover, there are many other good reasons to tax corporate earnings under the personal income tax.
Economists have long considered the corporate income tax a bad tax. It violates the principle that persons in equal economic circumstances should receive equal treatment. The corporate income tax falls with the same weight on the earnings of the very wealthy as it does on shareholders with lower incomes. Shareholders in lower tax brackets bear the same tax rate on corporate earnings as millionaires and billionaires. As a result their incomes at retirement are much less than they would be if their share of corporate earnings were taxed at personal income tax rates.
It violates the principle of progressivity, that those with higher incomes should pay a higher rate of tax than those of lower incomes. The case for progressivity rests on the fact that incomes are unequally distributed. The personal income of most individuals with very high incomes is attributable to monopoly power caused by differences in personal ability, to different degrees of monopoly power inherent in a free market economy, to real and sometimes illusory product differences, to location, and even serendipity. Such differences are called economic rents and progressively taxing economic rents has little or no negative economic effects.
Economists have long pointed out the negative economic effects of the corporate income tax that the personal income tax does not have. These include encouragement of corporations to rely more heavily on borrowed capital rather than equity capital because the former is deductible as an expense. Other distortions include that fact corporations are encouraged to buy-back their stock instead of paying dividends. The former creates capital gains which are taxed at a lower rate than dividends. ...
The USA Should End Its Support for Climate Agreements
Thirty-one U.S. multi-nationals and domestic corporations bought a full-page ad in the Wall Street Journal May 12, 2017 addressed to President Trump expressing their “strong support for the United States remaining in the Paris Climate Agreement.” Signers included 3M, Cargill, Cummins, Coca Cola, General Electric, Goldman Sachs, Proctor & Gamble, Tesla, and Walt Disney. What is interesting is how few of America’s leading manufacturers were represented. They do not speak for American industry. This is the “swamp” pretending to be “concerned about keeping the doors open for the global flow of American manufacturing goods at this critical time when our manufacturing sector is starting to grow from our competitive energy advantage.” Where is the evidence of that? Where were they while the U.S. chronic trade deficits decimated American manufactures and caused millions of American manufacturing workers to lose their jobs. Those were real costs. We are not even sure that the costs of global warming exceed its benefits, contrary to what the global warming fanatics have been scaring us with.
The architects of the Paris climate accord deliberately designed it to get the Congress of the U.S. to approve it by pretending it does not bind the U.S. to set emissions targets or to do anything. The authors were mindful of the Kyoto Protocol which was roundly rejected by the United States Congress because it set binding emissions targets for wealthy countries while letting most developing nations, including China, off the hook. But now, as forces within the Trump administration continue to debate whether to leave the Paris agreement, they face a far different calculus. The accord, agreed to in 2015, is alleged to be nonbinding, imposing no serious legal restraints on the United States or any other nation. If so, why have a treaty? Because it does bind the U.S. to make periodic reports of what action it has been taking to reduce CO2 emissions.
But the evidence is irrefutable that the U.S. has already spent billions on alternative energy, subsidies to producers of alternative evergy, subsidies to millionaire buyers of expensive electric autos, and subsidies to those who install insulation or heat panels without having any effect at all on global warming. Why continue to waste billion of taxpayer money? ...
Rosenstein's huge favor to Trump
by Raymond Richman and Howard Richman
[Note: This piece appeared in American Thinker blog this morning.]
Rob Rosenstein, Trump’s new Deputy Attorney General, did the Trump agenda a huge favor on Wednesday when he appointed former FBI director Robert Mueller as Special Counsel to investigate the Trump-Russia connection.
His action has already taken the wind out of the Democratic media’s sales. They were running story after story in an attempt to keep the pretend-scandal on the front pages. Now, they must await the outcome of the investigation. Congressional investigations will also be put on hold, so as to avoid interfering with the special counselor’s investigation.
The press will be forced to cover Trump’s ground-breaking trip to the Middle East. They will be forced to report the new job-creating trade deal with Saudi Arabia and the new alliance that Trump is shepherding between Israel, Egypt, Jordan and the Gulf Arabs against Iran and ISIS. Trump will come home from the Middle East a hero.
Our prediction of a positive outcome runs counter to the opinion of knowledgeable Trump supporters Dick Morris and Pat Buchanan. Both predict a negative outcome based upon their past experiences with independent prosecutors. Some Trump underling could even find himself falsely convicted of perjury (as was Scooter Libby, by the last special prosecutor).
But the difference here is that the 72-year-old Mueller is close to retirement, so he does not need to take scalps to further his career. Furthermore, no crime has been committed (except by Trump opponents who leaked and published classified data).
So Trump will be exculpated, which would put an end to the Trump-Russia allegation. We predict that Mueller’s investigation will end within 6 months.
Then, turnabout will be fair play as Attorney General Sessions prosecutes the Obama Administration for real crimes, perhaps beginning with their improper use of IRS power and NSC data for political purposes.
The Changing Balance of International Power
One of the key facts of the twentieth century is that the balance of international power is not the same as it was during most of the 20th century. A key contrast is the relative power of the United States and China. The graph shows the CINC (Composite Index of National Material Capabilities) for the United States and China. Through nearly the entire 20th Century the United States was clearly the more capable party. But over the last two decades, China has taken a clear lead. In part this may be driven by an index that puts substantial weight on population -- that may bias China's power up. But it also likely reflects a reality.
Cutting the Corporate Income Tax Will Not Create Jobs, Jobs, Jobs
The corporate income tax cut being considered by the Congress will accomplish none of the goals claimed for it. It will not stimulate the economy and create jobs, it will not do anything to balance trade, it will cause the federal budget deficit to grow, it will worsen the already unequal distribution of income. The President seems to have bought the ideas of some economists called supply-siders who assert that the economic growth stimulated by the tax cut will more than offset the initial loss of revenue. Most economists disagree asserting that if growth occurs, it will because of other forces. Most economists agree that the corporate tax lacks interpersonal equity, has negative economic effects, and worsens the distribution of income. These negative characteristics can be avoided by eliminating the corporate income tax and taxing corporate earnings as the personal income of the shareholders, just as partnership earnings are currently treated.
One of the criticisms economists make of the corporate income tax is that shareholders of modest incomes pay the same rate of tax as those in the highest personal income tax bracket pay. In fact, those in the top personal income tax bracket are favored because corporate earnings are now taxed at a top rate of 35% compared with 39.6%, the top rate of personal income tax. Corporate stock is highly concentrated in the hands of the wealthy. Thus the corporate income tax makes it easier for the wealthy to become more wealthy than if they paid the personal income tax rate on corporate earnings, while those of middle income find it more difficult to provide enough for their retirement. The pension funds owned by middle income families are invested mostly in corporations whose incomes are taxed at 35% by the corporate income tax when they as individuals may be in the 20 percent personal income bracket. How much faster their retirement funds would grow if their share of corporate earnings were taxed at the rate of 20% instead of 35%/, as they would be if corporate earnings were taxed as personal income.
Corporations would pay the Treasury the top rate of personal income tax on its earnings and shareholders would be credited with the tax paid by the corporations on their behalf. The most wealthy taxpayers would pay more than the 35% to corporate rate, 39.6%. Less wealthy taxpayers, say those in the 20% personal income tax bracket would get a tax credit for the excess tax paid to use as a credit against their other taxable income. To illustrate how this would work, in 2016 Amazon Corporation had 474 million shares of stock outstanding and had net earnings before tax of $3,892 million or $3.25 per share. Suppose all the earnings were taxed at 39.6%, Amazon would pay $1,541 billion to the federal government as withholding of personal income tax or 3.25 per share. If a shareholder owned 100 shares, he would report income from Amazon of $821 and receive a tax credit of $325, while those in the 20% personal income tax bracket would pay $164 and apply the excess paid as a tax credit against his other income. The result is a substantial increase in progressivity. ...
Why Conservatives should Support Raising the Gas Tax
By Jesse Richman, Howard Richman and Raymond Richman
[This piece was also published in the American Thinker on May 8.]
On May 1, President Trump mentioned that he might be willing to support raising the gasoline and diesel tax to pay for infrastructure improvements. Bloomberg News reports:
“It’s something that I would certainly consider,” Trump said Monday in an interview with Bloomberg News in the Oval Office, describing the idea as supported by truckers “if we earmarked money toward the highways.”
However, the next day Grover Norquist, President of Americans for Tax Reform, tried to quash Trump’s openness on this issue. He told Fox Business that the current rate of taxation would be sufficient if certain other changes were enacted.
In contrast, to this “conservative” defender of taxpayers, the lobbyists for those who would pay the tax actually favor raising its rate, so long as the revenue really goes toward improving the roads. For example, in 2015 the American Automobile Association and the American Trucking Association joined the U.S. Chamber of Commerce in a letter to lawmakers which stated:
Americans are frustrated with our nation’s crumbling infrastructure, including increasingly congested highways and deficient roads and bridges. Thirty-two percent of major roads are in poor or mediocre condition. This neglect costs the average driver $324 each year in additional vehicle repairs and operating costs.
In this case, the taxpayers are right, and this “conservative” defender of taxpayers is wrong. User taxes are an appropriate and efficient way to pay for highway spending. They fall directly on those who benefit from such spending. Each purchase of fuel to run an automotive vehicle helps pay for the roads on which that vehicle will drive.
War on Drugs Killed Thousands Here and Abroad and Cost Taxpayers Trillions
The immense cost of the U.S. war on drugs is unbelievable. Its cost in money and resources has been hundreds of billions of dollars. It cost in lives lost and careers ended runs into the hundreds of thousands. In spite of its costs, the drugs problem is worse than ever. It is not only a national, state, and local government problem but an international problem, involving many countries around the world, the UN, and numerous international bodies as well. Thousands of persons have been incarcerated whose only crime is marketing substances that drug users demand, a market response to a failed anti-drug policy. And the drug user is seldom prosecuted although he is the one governments are trying to save from addiction and spends billions trying to rehabilitate. Are we crazy or what?
Drug users, who include a number of Hollywood and society celebrities as well as ordinary people seeking a high while engaging in private sexual activities, ordinary thrill seekers, caused the death of thousands of innocent people, including judges, soldiers, and an army of black and white workers growing, marketing and distributing the drugs. You would think that the USA would have learned from its experience with its prohibition of alcoholic beverages. The eighteenth amendment to the U.S. Constitution was enacted in 1919 and repealed in 1933. It caused thousands to become rum-runners, to engage in selling drugs, to open speakeasies, and to become racketeers like Al Capone.
The War on Drugs" began in 1914 with passage of a law to forbid prescribing drugs for addicted patients. Between 1915 and 1938, more than 5,000 physicians and pharmacists were convicted and fined or jailed. Hardly any patients were prosecuted. The Federal Bureau of Narcotics was established in 1930. In 1971, it was reported that ten to fifteen percent of the servicemen in Vietnam were addicted to heroin. In the 1980s, while the number of arrests for all crimes had risen by 28%, the number of arrests for drug offenses rose 126%. Prisons became a booming business. In 1994, the New England Journal of Medicine reported that the "War on Drugs" resulted in the incarceration of one million Americans each year. What was their crime? Meeting the demand of their fellow-citizens for drugs. ...
Pres. Trump Makes His Worst Deal Ever, the Pivot Toward China and Away From Russia
Chinese President Xi Jinping taught Pres. Donald Trump a lesson in how to make a deal last week. The deal will do little to reduce the huge trade surplus China enjoys with the USA. China promises what amounts to a trifling increase in imports of coal from the USA at the expense of N. Korea. Germany and Japan the second and third of our trade partners having a huge trade surplus with the USA, can get the same “deal” by promising to export fewer cars to the USA. They can make them in U.S. plants with the dollars they acquired by decades of huge chronic trade surpluses. Japan has already engaged once in this ploy. S. Korea, another trade surplus country can make the same deal. The deal will not reduce our enormous trade deficits. China succeeded in getting Trump to tone down the anti-China rhetoric of his election campaign. What did the USA get in return?
China promises to curb North Korea's nuclear program. The deal ensures China that it will be able to maintain a huge trade surplus with the USA. The deal will make Trump’s promise to Make America Great Again impossible because eliminating our trade deficits is essential to restoring economic growth and manufacturing employment. And During the campaign, Donald Trump promised to reduce our foreign involvements.
And there are other important considerations. Non-Communist Russia has always been a U.S. ally. Even as a Communist nation, she was our ally in World War II. Now we choose to ensure that the only country challenging U.S. economic power, Communist China, is enabled to continue its growth at the expense of the American worker, except for a few coal-miners! China’s economy became second in the world as a result of our misguided trade policies and multi-nationals, like Goldman Sachs, Apple, Hewlett-Packard, Caterpillar, and others, sharing their capitalist technologies with it. U.S. universities trained the creators of the atomic bombs in China and Russia. Russia as an ally did more to win World War II than any other country. So why are we turning on Russia and pivoting toward China, a huge mistake that guarantees the decline of American power and weakens us against former enemies Germany and Japan. ...
Trump is Right: Keep the Export-Import Bank -- we're published in American Thinker this morning
To read it, go to:
Economist for the WallStreet Journal Has It Wrong on Trade
Greg Ip, chief Economics Commentator of the Wall Street Journal, wrote an article (3/16/20!7) entitled, “Deficits are a Flawed Guide to Unfair Trade”. First the term “unfair trade” is seldom if ever used by economists. They usually speak of countries employing mercantilist practices (i.e., tariff and non-tariff barriers to trade including export subsidies). Second, economic theory maintains that balanced trade is always beneficial to both trading partners, even when one of them imposes barriers. Third, when trade is not balanced, it is surely beneficial for the trading partner with the trade surplus. It gains jobs for its workers, it contributes to economic growth, and it gains reserves in the form of foreign currency and government bonds. It is probably not beneficial for the party experiencing the trade deficit, depending on what the party with the surplus does with the currency it receives in exchange for the trade surplus. What is important to all trading partners is their balance with the world. The U.S. has been running a trade deficit with the rest of the world for decades which has converted the U.S. since about 1970 from the world’s leading creditor to the world’s leading debtor.
Mr. Ip states that U.S trade deficits “result from a combination of saving, consumption and investment behavior". To his credit, Mr. Ip does acknowledge that unfair practices, including subsidized exports, benefits the American consumer at the expense of American factory workers. However, fixing unfair practices, he writes, “won’t necessarily correct the overall deficit…Persistent trade deficits reflect structural factors.” That is a statement which on its face is incorrect. There are many causes of chronic trade deficits including artificial barriers, exchange rates that do not equilibrate, inappropriate government policies which is what he probably meant by “structural factors”, etc. He writes, “The U.S. has a trade deficit because it consumes more than it produces. Lacking sufficient savings, the U.S. sells assets…to foreigners to finance consumption and capital spending.” He ignores the fact that U.S. multi-nationals have been saving but invest much of their savings abroad and many export some or most of their product back to the U.S. As for financing capital spending, that’s what moving factories abroad means. The trade deficits are not caused by American consumers who buy very little directly from foreign countries but by foreign and domestic corporations that import autos and consumer goods much of whose value is produced abroad. ...
Do Trade Deficits Matter - The Debate Heats Up -- We're published in today's American Thinker
In today’s American Thinker, we discuss the debate about whether trade deficit’s matter between Trump’s National Trade Council director Peter Navarro (an economic nationalist) and the Wall Street Journal editorial page (economic globalists). We conclude:
The Wall Street Journal continues: “Perhaps the best way to think about the U.S. trade deficits is not to think about it.” It’s true; they’re not. If the economic globalists at the WSJ win, America will be the big loser. If President Trump enacts the suggestions of Peter Navarro and the other economic nationalists, America will benefit immensely.”
To read the commentary, to to:
Trump Must Give Priority to Reducing the Trade Deficits
Pres. Trump has his priorities wrong. Repealing Obamacare, building the wall on the Mexican border, improving education through school choice, lowering the rates of corporate income tax, reform of the personal income tax, strengthening our military capabilities, etc. are desirable but none of them attacks the real long-term malaise of the U.S. economy, the huge annual U.S. trade deficits. One cannot restore America’s greatness without reducing our international trade deficits which have been the primary cause of the wage stagnation and unemployment in manufacturing, restoration of which must be given the highest priority.
The ideology of free trade has permeated the media like the Wall Street Journal and Barron’s, the New York Times, the Heritage Foundation, and many others including most of the economists in academia. Fortunately, a few like Prof. J. M. Keynes put free trade in perspective. A free trader in principle, he asserted that when the U.K. trading partners pursued “beggar-thy-neighbor” policies, the U.K. should retaliate. For over a century, economists have pointed out that even when countries pursued mercantilist practices, all trading partners gained in welfare so long as trade was balanced. But both parties do not gain if trade is unbalanced. ...
Wall Street Journal Suggests Not to Think About the Trade Deficits
The editorial writers of the Wall Street Journal, 3/10/2017, wrote an editorial entitled “How to Think About the Trade Deficit”, which they considered an answer to Prof. Peter Navarro’s piece on 3/6/2017, “Why the White House Worries About Trade Deficits.”
Were I still a Prof. of Economics, I would give the WSJ an “F” in the economics of international trade. In the second paragraph, one reads “a trade deficit isn’t a debt that must be repaid. It is often a sign of economic prosperity.” A trade deficit results in the accumulation abroad of U.S. currency, every dollar of which recites that “This note is legal tender tor all debt, public and private.” The U.S. does not have to pay it back but it can be used to buy U.S. government bonds, to purchase Rockefeller Center as the Japanese did, buy real estate as many Germans have done, buy U.S. companies, or keep our IOUs as reserves for future use. The consequence of the trade deficit wherein our trading partners do any one of the above is to create jobs in the trade surplus country and none in the U.S.
In the third paragraph, the WSJ equates balance of payments with balance of trade, capital flows vs. trade in goods. The former is exchanging a $20 bill for two 10s. When we experience a trade deficit, our trading partners gives us goods in exchange for our $20 bill. It takes labor and capital in the exporting country to produce the goods we import while all it takes is paper and ink to produce our evidence of debt. Why would anyone want to exchange goods for a printed piece of paper – are they stupid? No they are buying our promise to let them gain ownership of productive assets in our country in exchange for the paper we used to pay for their goods.
In the 7th paragraph WSJ writes that if trade surpluses were a sign of success, the 1930s might been different, quoting Prof. Don Boudreax of George Mason U, “For only 18 of the 120 months of that dreary decade did the United States run a trade deficit. For each of the remaining 102 months of the decade of the 1930s the U.S. ran a trade surplus.” No one claims that trade deficits have much if anything to do with cyclical fluctuations. That the U.S. ran trade deficits during periods of prosperity has nothing to do with the argument that trade deficits have caused the loss of millions of good-paying jobs in manufacturing. ...
The Result of Excessive Government Is Democratic Fascism
A country in which central government expenditures account for an excessive part of the GDP can hardly be called democratic. The role of government in a democracy should be limited to defense, treasury operations, inter-country relations, a judicial system, the construction and maintenance of public infrastructure, maintaining law and order, and a limited number of specialized agencies. To the extent that the central government intervenes in the operation of the private economic system it should be limited to the grant of patents and copyrights as a reward for innovation and invention and little else. The setting of prices and wages should be beyond its powers. Even the anti-trust laws smack of crony capitalism.
The reader will recall that the Nazis professed to be socialist; indeed the term Nazi stands for National Socialist German Workers Party, dedicated to government control of all industry. Aided and abetted by Communists and communist fellow travelers, the party has been mislabeled a right-wing party but its basic orientation is socialist. Bernie Sanders self-described himself as a democratic socialist but since he proposes unlimited government expenditures of a social nature his philosophy should be more appropriately described as democratic fascism....
The Proposed Border Tax Would Derail Trump’s Proposals to Reduce Trade Deficits
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. ...
The Proposed Border Tax Would Derail President's Proposals to Reduce Trade Deficits
Our State retail sales taxes are border taxes and are not imposed on exports. Under international law, retail sales taxes and value-added taxes can be exempted from and deducted from exports without violating the rules against dumping, defined as selling abroad at lower price than sales at home. The proposed border tax seeks to impose a 20% tax on all imports. Under international law, the border tax may not be considered a sales tax and therefore might not be deductible. The issue will 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.
Congress could pass a 20% value-added tax, which amounts to a 20% retail sales tax, but there is no way such a proposal could pass the Congress or be signed by any President in his first term. The border tax is a sort of value-added tax; after all, the value of goods is the sum of value-added. 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. The IMF for decades has been promoting the value-added tax, 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 those from countries with which we are experiencing huge deficits. ...
Prof. Martin Feldstein Makes a Poor Case For the Border Fax
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. ...
Free Trade Has Been a Disastrous Policy for the USA
Many Republicans continue to espouse free trade under the impression that free trade is a conservative policy. Indeed trade is a conservative policy in the sense that both parties benefit from trade, each giving up goods of less value for goods of greater value. Adam Smith rightfully condemned mercantilist policies and favored a “free exchange”. He never used the term “free trade” and he was always thinking of a free exchange of goods for goods. It never occurred to him to prescribe a unilateral free exchange policy, which unfortunately most economists seem to favor to the everlasting shame of the discipline. The shame is that they never analyzed the consequences of a possible chronic trade deficits. Free trade is an appropriate policy 1) when both trade partners have a common currency, 2) neither imposes tariffs or subsidizes exporters, i.e., neither is pursuing mercantilist policies, and 3) labor and capital can freely move between them. These conditions are imposed upon the States by the U.S. Constitution. They do not exist in international trade. ...
Against the High Tech Luddites
Several of the United States' high technology billionaires have apparently recently fallen prey to the foolish arguments of neo-luddites. For instance, Bill Gates has recently proposed a tax on robotic automation. Economists have rightly rejected these claims. Indeed, if we want to have rising incomes the best thing is for robots to take more jobs. That's how we become more productive. And ultimately how living standards can rise. It is this kind of ingenuity which has kept Malthus' grim prognostications at bay in much of the world for the last two centuries.
At the present moment, indeed, the US is facing a crisis of low productivity growth. The robots are not being invested in rapidly enough. The graph below shows the BLS estimate of non-farm productivity growth over time. The last several years have been ones of low productivity growth. The five year average rate of productivity increase is among the lowest in the time series....
The Border Tax and the Value-Added Tax Are Bad Proposals
All kinds of foolish tax ideas are being promoted since Trump proposed corporate and individual tax reforms. One is converting the corporate income tax to a tax on revenues from production and sales in the U.S. plus a 20% tax on imported inputs. This in effect amounts to a border tax of 20% on imports with exports free of tax. Our analysis of this proposal indicates that the border tax will have no lasting effect on the trade deficits. Indeed our State sales taxes are a border tax; exports are exempt from sales taxes. Another proposal is adding a value-added tax, equivalent to a retail sales tax at the federal government level. The value-added will add to the bloated federal bureaucracy. Its justification is to compensate for the loss of revenue resulting from the proposed reduction in the rate of the corporate income tax. A third proposal is to repeal the estate tax, the only measure we have that reduces wealth inequality. Wealth inequality has been increasing for decades; there is no justification for making it more unequal. None of these proposals is necessary or called for. All that we need is the Scaled Tariff, a single-country-variable-tariff which rises and falls with trade deficits, which will bring in lots of revenue until economic growth escalates as a result of trade being balanced. We do not need trade agreements or jaw-boning. ...
Border Adjustable Tax
The Tax Foundation has put out an analysis of the House Border Adjustable Tax plan. This highlights some of the key elements of the plan, but may be incomplete in particular ways. The full analysis is available here: https://files.taxfoundation.org/20170215084119/Tax-Foundation-SR234.pdf
They make a number of valuable points about the plan. However, some of the arguments made depend upon assumptions which may not necessarily be relevant in the current situation.
One key assumption is that trade is balanced (at least in the longish run).
If trade is balanced, then of course this is right. On the other hand, the US has run a remarkably robust trade deficit since the Carter administration -- four decades. In the context of a situation in which trade is not balanced, it is worth thinking about the effects of the particular proposal. The current corporate tax system taxes exports but not imports. This will tend to discourage exports. The proposed change will tax imports but not exports. This will tend to discourage imports. If one assumes that trade is balanced, then of course a border adjustable tax will have no effect on the trade balance. But if in fact a country is running a trade deficit, switching the incidence of corporate taxation in a way that taxes imports instead of exports is a prudential measure likely to improve the trade balance. It switches from a tax code that taxes exports to a tax code that taxes imports. This is a VERY GOOD IDEA likely to improve the trade balance.
The paper makes a number of good points about the benefits of the proposal.
Under the current tax system, multinational corporations engage in extensive tax shifting and tax shelter strategies. I would argue that the presence of these strategies is bad for the economy in multiple ways...
In this morning's American Thinker, we compare Paul Ryan's Border Adjustment Tax vs. Donald Trump's Targeted Tariffs.
President Trump's proposed tariffs ("targeted" upon just the countries with which the U.S. has huge trade deficits) would balance trade and bring back American manufacturing jobs and economic growth. Paul Ryan's "Border Adjustment Tax" would not.
Socialism Causes Slow Growth and Is Prone to Violence
During the recent presidential election, candidates for the Democratic Party nomination included a self-styled “democratic socialist”, Sen. Bernie Sanders. The adjective democratic is used by him to distinguish himself from totalitarian socialists like Adolf Hitler and Joseph Stalin, both noted for the number of their citizens they killed. Violence was a trademark of the Nazis, the National Socialist party of Germany, but our mixed-economy, defined as partially socialist, is not without violence from socialists. Sanders’ followers used violence to prevent a Trump rally in Chicago during the recent Republican primary for President and they organized protests at most of his rallies. Even post-election the violence continues. The violence at our Universities aimed to prevent conservatives from speaking is a manifestation of socialist intolerance for anti-socialist ideas.
Socialists seem unable to accept the reality of Trump’s election and anti-Trump protests continue. The reader may argue that many protestors are Democrats who do not consider themselves to be socialists. But to be a Democrat you have to believe in government intervention in the economy, in the mixed economy, an economy with increasing socialist tendencies.
Socialist are utopian and a world free of competition has always been attractive to young people. I believed in a cooperative commonwealth as a young man. But when I observed the co-op movement in England that created the first supermarket but failed to expand and that co-ops in the U.S. refused to branch out, I realized that co-ops and socialist governments lacked the incentives necessary to grow and develop, lacked the dynamism of a free market economy....
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