Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
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- When a Tax on Imports is a Tax on Exports
When a Tax on Imports is a Tax on Exports
One of the most counterintuitive ideas in tax economics is the theoretical result that taxes on imports are equivalent to taxes on exports over the long run, and vice versa. They both can have the same effect of reducing international trade in general, but neither theoretically nor empirically can the two be separated. The American Enterprise Institute covered this issue in a publication a few years ago.
Exports and imports are a quid pro quo relationship. Something for something. We build goods for foreigners on the promise – codified by the exchange of currency – that they will build goods for us later. Ultimately, these are inseparable. Americans aren’t going to sell things to foreigners without ever spending those earnings. By the same token, foreigners won’t keep building things for us forever without us building things for them in return.
So it doesn’t matter whether you tax the quid or the quo. Both will be affected in the end.
The standard economics of international trade are very clear - that trade has welfare-improving qualities. This is especially strong conventional wisdom for a comfortable, well-developed country like ours. Exports give us job opportunities to share our talents – like aircraft construction – with the rest of the world. Imports give our consumers opportunities to buy goods – like coffee – that might not be available in our own climate.
There is little reason to believe these activities should be favored or disfavored by the tax system. But regardless of how you feel about each of them, know that they run together over the long term. You can’t have one without the other.
The end result of this model is a reminder of how counterintuitive taxes can be, and how the true incidence of the tax is not always just on the people or activities that immediately pay them.
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