Monday, February 27, 2017

Martin Feldstein on border adjustment

Today in the Wall Street Journal,  a Martin Feldstein op-ed on border adjustment argued that its flaws are purely "illusory," since "[f]oreign exporters would pay for the Republicans' proposed trillion-dollar tax cut."

Whatever one thinks about the merits of border adjustment, this op-ed does not appear to be an entirely above-board intellectual exercise. Two problems in particular:

First, he treats the estimated $100 billion revenue gain, by reason of switching to the destination basis in an era when current-year imports (which would be newly taxed) exceed current-year exports (which would be newly exempted) as borne by foreign exporters.  He notes that, once the dollar appreciated relative to foreign currencies such as the Euro, foreign exporters to the U.S. would suffer a reduction in the U.S. goods and services that they could purchase in exchange for their exports to us.

But what about the fact that, as he admits "a rising dollar would reduce the real value of foreign investments owned by Americans"? He dismisses this by looking at it as a percentage of Americans' household net worth. That's a rather different metric than he uses for the foreign exporters.

He also fails to mention that a rising dollar would increase the real value of U.S. investments held by foreigners. That could be a much bigger item than the one that he emphasizes with regard to foreign exporters.

Feldstein is therefore being unexplainedly selective and inconsistent in his treatment of the effects of dollar appreciation, relative to other currencies, on U.S. individuals and foreign individuals.

Second, Feldstein lauds the ten-year revenue gain on the ground that it would "produce enough revenue to make cutting the corporate tax politically feasible .... That revenue is enough to finance almost all of the proposed reduction in the corporate tax."

Here's the problem with this argument. It treats revenue over the next ten years as merely a political constraint that we need to overcome in order to pass what he considers desirable legislation. Fair enough, up to a point. But - less than a year ago Feldstein wrote a piece entitled "America's Exploding Deficit."  It denounced U.S. policymakers for potentially turning our country, via rising deficits, into the next Italy, Portugal, or Greece. (But that, of course, was during Obama's presidency.)

Against that background, he now considers 10-year revenue balance just a political problem to be finessed? He realizes, I presume, that the estimated $1 trillion revenue gain might be considered a temporary, rather than a permanent, revenue gain if we think in terms of infinite horizon trade balance.

I wonder - or rather, I really don't much wonder - what Feldstein would have said had a Democratic Administration proposed to use $1 trillion (over 10 years) in temporary border adjustment revenue to pay for something he didn't like - e.g., expanding the social safety net. Thirty years ago, unlike today, he was above this sort of contemptuously and tendentiously partisan sleight of hand trickery.


Stuart Levine said...

I haven't read the op-ed. (I cancelled my WSJ subscription when the comments to articles became so openly racist that I couldn't stand it any longer. Yes, I know, the reporting is still decent and I probably should not have cancelled based upon the bigoted loud mouths who populate the comments, but it was simply too much.) Query: Did Feldstein address the fact that the border tax will be regressive?

Daniel Shaviro said...

No, of course not. BTW. I don't subscribe to the WSJ any more either.

Unknown said...

Have you been following Tony Nitti on the border adjustment tax? Very interesting at his forbest and Surgent lectures with a Trump Tracker