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Martin Feldstein on border adjustment

Monday, February 27, 2017 14:48
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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.

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. policy for potentially turning our country, via rising deficits, into the next Italy, Portugal, or Greece,

Against that background, he now considers 10-year revenue balance just a political problem to be overcome? 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 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. True, he has principled reasons for liking the corporate rate cut and disliking the Democratic policy, partly reflecting his views about the effects of each on the size of the economy. But still, I don’t think he is being straight with his readers in today’s WSJ op-ed.


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