Trade and Fiscal Deficits, Tax Reform, and the Dollar: General Equilibrium Impact Estimates

William Cline

No WP17-9, Working Paper Series from Peterson Institute for International Economics

Abstract: Advocates of using a border tax adjustment (BTA) to shift the corporate profits tax to a "destination" basis argue that such an arrangement would not be protectionist, because the import tax and export subsidy would be fully offset by an induced appreciation of the dollar. To examine this claim, this study applies an updated and extended general equilibrium model from the author's 2005 book, The United States as a Debtor Nation. Cline finds that across various scenarios, the dollar appreciation typically would be less than half the amount needed to offset fully the BTA. Advocates of the BTA implicitly assume a strong, prompt expectational boost to the dollar upon announcement of the shift. Instead, market practitioners and mainstream macroeconomic models see the interest rate as the main driver of the exchange rate. Although an incipient rise in the trade balance would indeed put upward pressure on the interest rate and thus the exchange rate, it would also result in reduced investment. With the trade deficit equal to investment minus saving (I–S = M–X), reduced investment would tend to set the new equilibrium at a lower trade deficit before the interest rate would rise sufficiently to boost the dollar to a level that would completely offset the BTA.to about 12 and 14 percent of riskweighted assets, respectively. These levels are, respectively, about one-fourth to one-half higher than the Basel III capital requirements for the large global systemically important banks (G-SIBs).

Keywords: Border Tax Adjustment; Tax Reform; General Equilibrium Model (search for similar items in EconPapers)
JEL-codes: D58 F13 F31 F47 H25 (search for similar items in EconPapers)
Date: 2017-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.piie.com/publications/working-papers/t ... -general-equilibrium (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iie:wpaper:wp17-9

Access Statistics for this paper

More papers in Working Paper Series from Peterson Institute for International Economics Contact information at EDIRC.
Bibliographic data for series maintained by Peterson Institute webmaster ().