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Pragmatic Capitalism

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border-adjustment tax

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Cullen, what are your thoughts on the border-adjustment feature of the House Republican tax plan? I read an op-ed piece in yesterday’s WSJ by Martin Feldstein – who seems to think we have little to worry about in such a plan. He is amazingly confident that the dollar will rise precisely enough to offset the tax on imports. On the other side of the trade equation – exports – he is equally confident that the “subsidy” will have the same neutralizing effect.

I’m no expert on currency trades – but will say that changes in taxes often produce unintended consequences – which makes me think there are risks that professor Feldstein might not be considering.

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Posted by Steve W
Posted on 02/28/2017 1:46 PM
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I share your skepticism. The market for foreign exchange is dominated by those revaluing assets traded in the financial markets. In other words, if there is a marginal price setter for exchange rates it is probably big banks and central banks exchanging currencies based on financial market changes. Trade is a relatively miniscule portion in comparison.

One thing that i do kinda like here is that we’re simplifying the tax code a bit. The corporate tax has become a mess that is largely avoided. So any transfer of taxes from the corporate tax to some other form of corporate tax is an improvement in my mind. The question is who will really bear the burden of this tax? Will it be consumers who eat the tax as it’s passed along or will it be shareholders who earn more because they are earning higher profits? I don’t know and it’s largely contingent on the currency changes which are unknown.

One thing we do know is that a plan like this is likely to increase govt revenues. This means govt saving will increase which, net net, is not likely to be good in this environment.

It’s a strangely progressive plan with a balanced budget tilt. So there’s some good and bad. On the whole I would probably oppose the plan without an offsetting budget increase or tax cut, which, I think might actually be the way this all plays out when Trump ends up blowing the budget out more than some people expect….

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Cullen Roche Posted by Cullen Roche
Answered on 02/28/2017 3:01 PM
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    Wait a second. If the corporate tax rate on profits is lowered, and the lost tax revenue is made up by taxing products that are imported, then the tax burden has just been transferred from the multinational corporations to the consumers. The idea is to encourage jobs in the USA, but this will take years and years for companies to make changes in the location of their facilities and employees. This plan will no doubt cause tremendous new economic burdens on consumers and their spending, especially among the middle class and lower paid workers who will be penalized. Most of us know that the US economy is powered by consumer spending. This plan will have little or no effect on jobs and instead may cause workers to move out of here.

    The jobs goal is good, but the method is completely wrong. A compelling alternative is needed.

    What if the tax rate on profits was left unchanged BUT each company was entitled to a tax deduction for each full-time employee working in the US. This would lower the effective tax rate on US companies that provide US jobs but would keep the higher tax rate for the multinational corporations that have high US profits but provide few US jobs. The tax deduction could be significant, several dollars per hour for each full-time US employee, thus encouraging full-time work rather than subcontracted or part time jobs. This could work and would have an impact as soon as it is enacted.

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    Posted by Dennis
    Answered on 02/28/2017 8:32 PM
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      Well, I’m a big fan of eliminating the corporate tax in its entirety because it is largely avoided in the first place and misguided in the second. This at least takes a step in that direction. I would prefer to see a different form of tax in its place such as higher taxes on secondary market trading as ordinary income or a higher rate than it presently incurs.

      Also, this would mostly fall on the shoulders of the top 1% of income earners so it’s a surprisingly progressive policy. I can’t find much to criticize about it to be honest. It’s perhaps not ideal, but it’s not as bad as many other options….

      https://taxfoundation.org/what-distributional-impact-destination-based-cash-flow-tax

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      Cullen Roche Posted by Cullen Roche
      Answered on 03/01/2017 2:27 AM
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        Letters to the editor in today’s WSJ are generally critical of Feldstein’s ideas on the border-adjustment tax. The esteemed Phil Gramm was one of the letter writers. He suggests that the tax would imperil American investments abroad, then goes on to quote Feldstein: “a 25% rise in the dollar value would cause a one-time reduction in the value of Americans’ net foreign assets equal to about 3% of their household net worth.” Gramm goes on to share some of his own number crunching: “…household net worth in the U.S. is $90.2 trillion according to the Federal Reserve. That one-time 3% destruction of household wealth would be some $2.7 trillion. According to Marty (Feldstein) the border-adjustment tax would collect some $100 billion a year. At that rate it would take 27 years for the government to collect in border-adjustment taxes the amount of money that American households would lose…”

        Another letter writer brought up points that came to mind for me (at least in part), such as the uncertainty that price elasticities of supply and demand for hundreds of thousands of traded goods and services (often will parts from multiple countries) can be projected with confidence – as well calling in to question the notion that trade flows are the primary determinant of currency values. Uneconomic policy objectives by other governments and central banks, capital flows, fear and greed (trade wars) are a few possible factors that don’t fit neatly in to professor Feldstein’s border-adjustment tax description.

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        Posted by Steve W
        Answered on 03/01/2017 11:35 AM
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          My thinking on corporate taxes appears mostly in line with Cullen. Why should Corporations pay any tax? This would be simple if all dividends and capital gains on US equities were taxed on the recipients tax returns. A complication is how you treat dividends and cap gains paid to non-US entities. If I have an LLC in the Bahamas that is the beneficiary of a US company how are taxes collected? The BAT perhaps compensates for this possibility. I really don’t know, but it’s important to recognize that with capital being flexible worldwide old world thinking no longer applies.

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          Posted by John Daschbach
          Answered on 03/08/2017 8:54 PM
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            I actually like a DCBFT. I like it as a way to encourage firms who’ve offshored for marginal financial factors to onshore manufacturing. I think it’d be very good for growth.

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            Posted by Suvy Boyina
            Answered on 03/10/2017 8:56 PM
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              The biggest risk I see is implementation timeline. I thought it was really interesting that David Tepper thinks that the currency adjustment may happen faster than the new taxes come into full force. In his example, suppose that a 20% boarder tax was phased in over 4 years, at 5% per year. His guess is that the currency markets would react much faster than that, pushing up the currency lets say 8% immediately. For that first year, exporters would actually be worse off, since the currency would have gone up more than the tax to offset it. Ditto to retailers, who would pay the 5% but get the 8% higher currency for imports. I hadn’t thought of it that way, and weirdly would have the implication that in the first years it might actually be BAD for manufacturing. Given Trump’s extreme tolerance for patience, I imagine a year of manufacturing downturns would render this policy unworkable for the WH perspective. And god help us if they do 20% all at once.

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              Posted by advt
              Answered on 03/13/2017 10:44 AM
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                Corporate tax isn’t largely avoided — only by the top 1%. The average effective rate paid by many industries is in the 15%-25% range. That’s burdensome.

                I’m not sure how a BAT would replace a corporate income tax, but it sounds interesting — IF it works as promised. The import tax and export subsidy are supposed to offset each other, relying on the currency to go up and down in value to do so. The problem with this is prices tend to be sticky; i.e. Starbucks raises coffee prices but doesn’t lower them when their raw material costs go down. So who gets shafted?

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                Posted by MachineGhost
                Answered on 03/28/2017 11:07 PM
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                  Effective Tax Rates

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                    Posted by MachineGhost
                    Answered on 03/28/2017 11:12 PM
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