In a recent New York Times interview, Donald Trump was pressed on whether he was a fan of the House GOP’s proposed border-adjustment tax; the President responded, “I am. I’m the king of that.”
If President Trump has in fact changed his position on the border adjustment tax, we had better hope his tax plan achieves the same success as his health care bill. The House GOP’s border tax would be a disaster for American consumers and the global economy.
In exchange for cuts to the corporate and personal income tax rates, Speaker Paul Ryan’s plan calls for a new 20 percent tax on all imported goods and services into the United States.
While some argue the “Buy America” sentiment behind this plan helped Trump win the election, the reality is President Trump won’t score any points with the public when the costs of food, clothing, and gasoline rise due to this tariff.
Good luck explaining to low-income families why they have to pay more at the pump so we can obtain deeper cuts to the corporate tax rate.
Of course, if you ask Speaker Ryan, such price increases will never materialize. The architects of this legislation claim their proposal will cause the dollar’s value to appreciate by 25 percent, thus offsetting any additional costs on consumers. However, one must heed the advice of Milton Friedman when a politician promises them a free lunch.
While not dismissing the notion that Ryan’s bill would cause the dollar to appreciate, the claim that the dollar’s increase can be pegged at 25 percent is highly dubious. Any economist or politician who purports to have such infinite knowledge of the dollar’s future value ought to be making millions investing in the currency market. There are countless factors that determine the dollar’s value on any given day.
Furthermore, when currency markets weigh the impact of Paul Ryan’s tax plan, all gains to the dollar will come in spite of mitigating factors from enacting protectionist policy. Three worthy of mention include the effects on industries heavily reliant on imports, the effects on exporters whose goods become more expensive to foreign markets via a stronger dollar (will foreign markets “Buy America” less?), and how an escalation in global currency wars will impact growth worldwide.
If the chalkboard economist’s currency gamble proves incorrect (or slow to materialize), consumers will find their paychecks aren’t going as far as they used to. Our ability to purchase goods from a global market tremendously increases our standard of living, as evidenced by Walmart’s low prices.
Despite the constant evidence that trade enriches us, some have embraced protectionist policies over a misguided fear of “trade deficits.” However, as RealClearMarkets editor John Tammy brilliantly noted, we all run trade deficits in our daily lives:
I run a trade deficit with my landlord, Dewar’s Scotch, Popeye’s Fried Chicken and with my drycleaner. Thank goodness I do because I could never brew my own whiskey, let alone build my own apartment, cook fried chicken, or iron/clean my own shirts.
Happily, I don’t have to. Thanks to my trade surplus with my employers, I’m able to “import” and be in deficit with those who don’t employ me. Absent this ability to trade, I would be impoverished; that or I would suffer from a lack of Scotch, fried chicken, ironed shirts and an apartment with a roof that leaks and which lacks air conditioning and running water.
As these examples show, we are all natural free traders. Americans continue to embrace the benefits that global trade has given us, and we should enact economic policies that support more trade, not less. Attacking free trade with a massive import tariff will punish consumers, and make our ‘Kingdom’ less prosperous than it could be.
Photo credit: Wonderlane via Flickr, CC BY 2.0