'Border Tax Adjustments' Bring Fakery to Economic News
The term “fake news” has popped up a great deal recently. It’s the latest fad that will soon fade away and largely be forgotten. Far more troubling is when “fake issues” are ginned up on the political front.
Fake issues constantly plague a governmental system in which assorted special interests seek advantages – such as rent seeking and crony capitalism – by pushing for a large, intrusive government to tax, spend, subsidize and regulate. So-called crises are manufactured, and government action is demanded. For good measure, bad or muddled economic thinking contributes to the generation of fake issues.
For example, the manufactured crisis of income inequality has been around for decades, with its proponents painfully ignorant of the fact that earnings in a market economy are tied to productivity, value creation, supply and demand all within a system governed and disciplined by competition and consumer sovereignty.
And there’s the minimum wage, with the political spin telling people that an increased government-mandated minimum wage helps the poor, when in reality minimum wage hikes reduce economic opportunities for low-skilled, inexperienced, young workers.
In the end, while fake issues allow assorted activists and political players to get what they want courtesy of government, taxpayers, private-sector businesses, workers and consumers suffer due to lost investment, innovation, productivity, economic growth and job creation.
The latest fake issue is the border tax, or border tax adjustment.
Sudden concerns over border taxes came out of nowhere in recent months largely thanks to mistaken thinking on trade deficits. President-elect Donald Trump has been leading the charge in claiming that since the U.S. runs a trade deficit, then the U.S. is losing on trade – whether talking about trade deficits with particular nations, like Mexico, China or Japan, or an overall trade deficit. In reality, the U.S. trade deficit tells us no such thing. In contrast, U.S. trade deficits tend to rise when the economy is growing, and fall when economic growth falters. That’s not surprising when one understands that a rising trade deficit reflects strong domestic growth generating more imports purchased by individuals and businesses, and the U.S. attracting more international investment. As we saw during the most recent recession, a surefire way to reduce the trade deficit is to cripple economic growth.
From this mistaken concern over trade deficits has come the idea that the U.S. needs to make border tax adjustments like other nations. The argument goes that these countries provide rebates for their value-added tax for exports, while imposing the VAT on imports from the U.S. This, the argument goes, is unfair, and puts the U.S. at a disadvantage.
The obvious problem with this argument is that it ignores why these border adjustments occur, and ignores the fact that the U.S. does not impose a VAT (thankfully!).
A border VAT adjustment is not a nefarious tool, but instead, a straightforward measure that places competitors on equal footing in terms of tax treatment. Consider that a nation like Mexico that imposes a VAT on domestically produced goods (imposed at each stage of production) will adjust or remove the VAT for exports and impose the VAT on imports. In this way, domestically-produced goods and imports receive equal treatment in the Mexican market. Meanwhile, if Mexico is exporting to another country with a VAT, that nation’s VAT will be imposed at the border. In the case of the U.S., again since we impose no VAT, there is no border tax applied. Therefore, Mexican exports to the U.S. are treated the same as domestically-produced goods.
That’s it. It’s really a non-issue. But now it’s a fake issue, as the idea of a border adjustment for U.S. corporate income taxes has entered the tax reform debate, that is, not taxing exports but taxing imports. This ignores several more facts. First, the WTO does not allow for border adjustments on income taxes. Second, most other nations impose an income tax and a VAT, and since the U.S. does not inflict a VAT, this is a tax advantage for the U.S., as opposed to a disadvantage. Third, emphasizing the fake issue of a border tax adjustment actually lays the groundwork for the U.S. imposing a VAT – which would be an actual and significant negative for the U.S. economy.
As we look ahead, the new administration and Congress need to put aside the border tax fake issue, and make real changes on the policy front, such as providing substantial tax relief, and instituting clear, pro-growth tax reform focused on much lower individual and corporate tax rates and reduced tax burdens on entrepreneurship and private investment. That’s the real answer to any and all questions we have about U.S. competitiveness from a tax perspective.