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A Project of The Annenberg Public Policy Center

Border Adjustment Baloney

The anti-tax Club for Growth claims in a TV ad that a key Republican tax proposal “will” cost “middle-class families” $1,700 in higher prices.  That’s baloney.

Economists generally believe the proposal wouldn’t affect consumer prices at all in the long run. Even the lobbying group that came up with the $1,700 figure states it is a worst-case, short-run estimate.

The ad is aimed at Rep. Kristi Noem of South Dakota, a GOP member of the tax-writing House Ways and Means Committee. The CFG said it would run in the state starting immediately on TV and digital outlets, at a cost of $150,000.

It says, “Congresswoman Kristi Noem refuses to take a position on a new Border Adjustment Tax. This will raise prices by $1,700 on middle-class families; higher prices on groceries, gas, clothing, even medicine.”

In fact, far from refusing to take a position, Noem has spoken favorably of the border adjustment proposal, which is one feature of a far-reaching tax “blueprint” released last June by the House Republican leadership.

That plan would slash the income tax rate on corporations to 20 percent, from the present top rate of 35 percent. Under the plan’s “border adjustment” feature, U.S. exports would not be taxed, but imports would. The arrangement would roughly mimic the border adjustments that big U.S. trading partners apply to the value-added taxes they levy on goods consumed at home, but not on goods that are exported.

Appearing on Fox News on Feb. 2, Noem said: “All of our competitors have this kind of a [border adjustable] tax. When we stay back in the ancient plan and the way that we run our tax system today, it makes our companies, it makes America uncompetitive.”

The $1,700 figure that the ad uses — without any attribution — actually comes from a business group lobbying against it, the National Retail Federation. The NRF, which fears that store profits would be squeezed if the price of imported goods rises, said on Feb. 3 that its own analysis shows the border adjustment would cost “up to” $1,700.

But the NRF also notes that this worst-case estimate is for the first year. Over time, there’s wide agreement among economists that — in theory, at least — the net cost of imports would end up being unchanged because the U.S. dollar would strengthen against the currencies of its trading partners.

The Economist magazine put it this way: “[E]conomic theory is conclusive: unlike tariffs, border-adjustment should not affect trade. For arcane reasons, equally-sized import taxes and export subsidies should cancel each other out.”

Similarly, Alan D. Viard, an economist and tax expert at the American Enterprise Institute writes, “In a simple textbook model, a border adjustment would trigger a real increase in the value of the dollar that would raise the cost of U.S. exports and reduce the cost of U.S. imports by an amount that would exactly offset the direct effects of the border adjustment.”

And Brookings Institution economist and tax expert William Gale writes that “there should no [be] expectation that the domestic price level will change.”

To be sure, there’s concern that the expected adjustments in currency exchange rates might not offset the increase in import prices as fully in practice as they do in theory, or might take some time. But those “maybes” don’t justify a claim that consumers “will” pay anything more — much less $1,700.