The Macroeconomics of Border Taxes

Abstract

We analyze the dynamic macroeconomic effects of border adjustment taxes (BAT), both when they are a feature of corporate tax reform (C-BAT) and for the case of value-added tax (VAT). Our analysis arrives at the following main conclusions. First, C-BAT is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic. The basis for neutrality of VAT is even weaker. Second, in response to the introduction of an unanticipated permanent C-BAT of 20% in the United States, the dollar appreciates strongly, by almost the size of the tax adjustment, and US exports and imports decline significantly, while the overall effect on output is small. Third, an equivalent change in VAT, in contrast to the C-BAT effect, generates only a weak appreciation of the dollar and a small decline in imports and exports, but has a large negative effect on output. Last, border taxes increase government revenues in periods of trade deficit; however, given the net foreign asset position of the United States, they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.