I go to Econ Eddie, the go-to-guy, when the inexplicable needs explication.
“The Border Adjustment Tax (BAT) is really simple,” he says. “You’re a manufacturer and you ship something to some another country. You get paid for that shipment. But you don’t have to report that revenue on your tax return.”
“Ye gads,” I shout. “The taxes I save are a direct subsidy from American taxpayers for me as an exporter. It also gives lower prices to companies and people in that other country, if I pass along my savings. It’s forced charity! Americans can hold their heads high for their generosity to other, poorer nations.”
“Oh, it’s more than that,” Eddie says. “Because you can sell for less, more buyers in other countries will want your product. This means you could invest more in America, hire more American workers, perhaps raise wages or increase your dividends, your executive pay, or up your stock price benefiting thousands of pensioners who hold your stock in their IRAs.”
“But what,” I say, “if I don’t invest and expand my capacity, but just take the savings in taxes to make my life more interesting.”
“Economic theory says competition will keep you from doing that,” he tells me.
“Ah,” I sigh, “saved again by economic theory. I was afraid that, without increased capacity investment, domestic prices for my product would rise as Americans would have to compete with foreigners for my product.”
“Now,” Eddie says, “let’s look at the other side of the story.
“Goods you buy from abroad require a tax making them more expensive to you. And, here’s the genius of this proposal, the cost to you of those goods is not deductible as a cost of goods purchased. This increases your taxable income and your taxes.”
“I see it, I see it,” I exalt. “Importing raises my tax bill compared to producing in the U.S. It induces me to make or buy domestically what I’ve been importing. That creates more investment in the U.S. and increases jobs and wages for Americans.”
“Right,” Eddie says. “Unless, you don’t make those domestic investments. In that case, prices for American consumers will rise, wages might fall, and we’ll get some pretty high rates of inflation.”
“But that would be counter to economic theory,” I say. “Is that possible?”
“Well, there are lags and sometimes the world does not follow the economics taught in freshman classes,” Eddie admits. “But in the long-run …”
“The long-run?” I say. “This whole scheme is built on the assumptions of freshman economics. That’s all the economics many economists, business and political leaders seem to know.
“The worst part of it,” I continue, “is a new tax, probably increasing government and private employment to make the whole complex thing work. It doesn’t have anything to hold it together but assumptions about how businesses will behave.”
“If you can’t trust economic theory,” Eddie says, “what can you trust?”
Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business. Send comments to firstname.lastname@example.org.