Friday, January 27, 2017

Tariffs or sales tax and corporate tax reduction?

The announcement, and backtracking, on a 20% tax on Mexican imports caused a lot of confusion yesterday. I assumed like most that this was a proposal for a tariff, which would both ditch NAFTA rules and run afoul of the WTO rules. The wall and the tariff led to a cancellation of the Mexican president's trip, and a souring of the diplomatic relations. But in all fairness, it seems that this had little to do with Mexico.

The Republican Tax Plan basically is to eliminate the corporate income tax, and to substitute if with a destination based cash flow tax (DBCFT, is the clumsy acronym of the beast; on this see Jared Bernstein). The idea is that this would reduce the incentive of US corporations to relocate abroad to scape the income tax, and to basically introduce a national sales tax. The tax is border adjusted, so to speak, since imports sold in the US would pay taxes, but exports wouldn't.

So it seems to me that Trump was trying to use the GOP tax plan, that already existed, and is still in place, as far as I understand, and use it to claim that as Mexican imports will be taxed, they will be paying for the wall, that it seems he really plans to build. They seem to at least temporarily backtracked on the proposal, mainly I think to avoid jeopardizing the tax plan, which seems to me to be regressive, sales taxes after all hit everybody, and solving the problem of corporate tax evasion, by making the US a tax haven, and shifting the burden to consumers (just a hunch, I'll wait for tax exports to do the hard work of calculating the effects).

The impact of such a policy, by the way, is less clear than one would think. Josh Mason wrote something about it here. Like him I'm skeptical that a sales tax on imports would bring a lot of manufacturing jobs back. But even if this reduces the trade deficit, with Mexico and other countries (China?), which again I doubt, the problem of the quality of jobs here (and manufacturing matters among other things because of the quality of jobs) in the US does not depend fundamentally on the trade deficit per se. On that front, what will be done with labor regulations, the minimum wage, and the overall macroeconomic picture seems to be more relevant, and there are reasons to be concerned.

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