The Corner

Politics & Policy

Phasing in the Border-Adjustment Tax Will Increase the Trade Deficit

As I mentioned last week, bad ideas never die in Washington. Take, for example, Ways and Means Committee chairman Kevin Brady’s terrible idea of phasing in the border-adjustment tax (BAT) over five years.

Apparently, Brady now recognizes (after denying it for months) that the BAT will be harmful to many. But instead of getting rid of the tax measure that has fractured the corporate world and has been getting in the way of pro-growth tax reform (we are now in June — with still no clear political path for tax reform), Brady is now proposing to phase-in the import tax slowly, hoping that people won’t feel the pain as much . . . or as quickly. It reminds me of the parable of the boiling frog:

The boiling frog is a parable describing a frog being slowly boiled alive. The premise is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death.

The moral of this story is that, despite a slow or fast boiling, the frog is still dead. Well, phased-in or not, the border-adjustment tax is still a bad idea.

Leaving aside the distortions and uncertainty that phasing in the tax will introduce, I doubt that it makes adopting the border-adjustment tax more politically feasible. Let’s talk about the trade deficit for a moment.

What do you think importers will do when they know that the tax today is at a lower rate than the tax tomorrow? They will anticipate tomorrow’s rate hike by importing more today and still raising costs tomorrow. How about exporters? If they think it is advantageous to delay exporting to benefit from a bigger export subsidy tomorrow, they will. You end up with a bigger trade deficit, at least in the short term. I am pretty sure that won’t fly with the trade-deficit obsessed Trump administration.

Again, a bad idea is a bad idea, no matter how quickly or how slowly it is implemented.

Meanwhile, I predict that we will spend the next few months arguing about this new idea of a phase-in of the border-adjustment tax. The arguments will fail to persuade the Senate to adopt the measure and the White House will continue to oppose the it, but the House Republican leadership will insist on it. Summer will turn into fall and soon 2017 will be over and tax reform will still be months away from being implemented. Way to go!

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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