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 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. ...

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Free Trade Has Been a Disastrous Policy for the USA
Raymond Richman, 2/26/2017

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.  ...

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Against the High Tech Luddites
Jesse Richman, 2/24/2017

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....  

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The Border Tax and the Value-Added Tax Are Bad Proposals
Raymond Richman, 2/17/2017

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. ...

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Border Adjustable Tax
Jesse Richman, 2/17/2017

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).

"Both an origin-based tax and a destination-based tax are trade-neutral and switching from one to another does not impact the trade balance. This is because exports and imports are two sides of the same coin. Exports are needed to pay for imports and imports are the returns to exports. As such, taxing exports ends up reducing imports and taxing imports ends up reducing exports."

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.  

"There are actually some non-economic advantages that may make the switch to a destination-based tax worthwhile. Paired with other aspects of a DBCFT, the border adjustment would make many strategies of profit shifting under current law impossible. It would also be possible to lift some of the complex anti-base erosion provisions that typically come with origin-based tax systems. Lastly, a border adjustment in a DBCFT raises a significant amount of revenue in the budget window, which can be used to finance other important reforms such as full expensing and lower marginal tax rates."

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...

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Paul Ryan’s Border Adjustment Tax vs. Donald Trump’s Targeted Tariffs -- we're published in American Thinker this morning
Howard Richman, 2/10/2017

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.

http://www.americanthinker.com/articles/2017/02/paul_ryans_border_adjustment_tax_vs_donald_trumps_targeted_tariffs.html

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Socialism Causes Slow Growth and Is Prone to Violence
Raymond Richman, 2/7/2017

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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Comments on the news 2/5/2017
Raymond Richman, 2/5/2017

1) The big news was that the Federal Appeals Court of San Francisco temporarily at least supported the lower court judge’s  ruling staying the administration’s 90 day ban on immigration from seven countries with Moslem majority populations. What was surprising to me as a lawyer is that they allowed the ban while they considered the arguments. Normally, the practice is to stay the judge’s ruling while it considers the arguments. The Appeals Court gives the impression that political considerations determined their ruling. An anti-Trump judiciary? If so, shame on them.

2) A very interesting article appeared in the Feb.  3,  2017 issue of Quartz magazine, entitled “What Steve Bannon really wants” by Gwyn Guilford.

Following is a quote from the article:

“Bannon’s political philosophy boils down to three things that a Western country, and America in particular, needs to be successful: Capitalism, nationalism, and “Judeo-Christian values.” These are all deeply related, and essential. ...

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    Wikipedia:

  • [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]