Tag Archives: Subsidy

Border Adjustment Tax

On VoxEU, Mary Amiti, Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki discuss a border adjustment tax and its consequences.

… a border adjustment tax … would make export sales deductible from the corporate tax base, while expenditure on imported goods would not be deductible … Therefore, if the border adjustment extends to all imports and exports, it is akin to a combination of a uniform import tariff and an export subsidy on all international trade …

… it would limit the incentives for profit shifting across countries by means of transfer pricing towards lower tax jurisdictions … the border adjustment tax is a destination-based tax, linking the tax jurisdiction to the location of consumption, rather than the location of production.

Under certain circumstances … the border adjustment tax has no effects on economic outcomes … Lerner (1936) symmetry [implies] … that a uniform tariff on all imports is equivalent to a uniform tax of the same magnitude on all exports. As a corollary … a combination of a uniform import tariff and an export subsidy of the same magnitude … [has] no effect on imports, exports and other economic outcomes … results in an increase in the home relative wage and domestic cost of production by the amount of the tariff. … the relative cost of domestic production increases proportionally with the cost of imports, as well as with the subsidy to exports, leaving no relative price affected, nor the real wage. … As a result, tax policies that feature a border adjustment, such as the value added tax (VAT), do not have to systematically promote or demote trade.

Amiti, Farhi, Gopinath, and Itskhoki discuss several conditions for neutrality:

  • Flexible wages. If wages are sticky, a nominal exchange rate appreciation may partly substitute.
  • Uniformity of the border adjustment tax. This condition would likely not be met. Exchange rate fluctuations thus would affect some sectors more than others. And imports by non-incorporated businesses would be favored.
  • Foreign currency denomination of gross foreign assets and liabilities. (Not met, see below.)
  • Unexpected, permanent policy change, to prevent anticipation effects and currency appreciation before the fact.
  • Unchanged monetary policy stance, also in other countries, in spite of the exchange rate shock. This condition would likely not be met.

If the conditions for neutrality are met the border adjustment tax generates no international transfer. The fiscal implications depend on the sign of the trade balance. A home country exchange rate appreciation (that keeps relative trade prices and flows unchanged) generates a lump-sum transfer from households to the public sector when households hold net external assets which they use to pay for imports. When households have net external debt and thus, export on net, then the fiscal implications are reversed.

Since the US has currently a negative net foreign asset position, the US must run a cumulative trade surplus in the future. … the overall transfer would be away from the government budget and towards the private sector …

When some gross positions are denominated in domestic currency an appreciation transfers wealth internationally.

Since for the United States, the foreign assets are mostly in foreign currency, while foreign liabilities are almost entirely in dollars, this would generate a massive transfer to the rest of the world and a capital loss for the US of the order of magnitude of 10% of the US annual GDP or more.

US imports and exports are predominantly invoiced in dollars. With sticky pricing a border adjustment tax would raise the relative cost of imported inputs and consumer prices.

US exports … will likely fall together with US imports in the short run, with no clear effect on the trade balance. As trade prices adjust over time, both imports and exports will recover, resulting in a neutral long-run effect of the border adjustment tax on trade.

Does the Swiss Agricultural Sector Add Value?

In December 2016, the Swiss Federal Council concluded that in international comparison, government support for the Swiss agricultural sector is very high. But critics point out that the government report might understate the social cost of government support. In a separate study the lobby group `Vision Landwirtschaft’ had presented estimates according to which the Swiss agricultural sector adds negative value, on the order of 1 billion CHF per year.

NZZ reports by Désirée Föry: February 9, 2017 and April 2, 2017.

Research Funding in Economics

In the Journal of Economic Perspectives, Tyler Cowen and Alex Tabarrok question whether NSF funds are allocated efficiently. They write:

First, a key question is not whether NSF funding is justified relative to laissez-faire, but rather, what is the marginal value of NSF funding given already existing government and nongovernment support for economic research? Second, we consider whether NSF funding might more productively be shifted in various directions that remain within the legal and traditional purview of the NSF. Such alternative focuses might include data availability, prizes rather than grants, broader dissemination of economic insights, and more. …

Public goods theory tells us that the National Science Foundation should support activities that are especially hard to support through traditional university, philanthropic, and private-sector sources. This insight suggests a simple test: to the extent that the NSF allocates funds to genuine public goods as opposed to subsidies on the margin, we ought to see a large difference in the kinds of projects the NSF supports compared to what the “market” sector supports. But what stands out from lists of prominent NSF grants … is how similar they look to lists of “good” research produced by today’s status quo.

Explicit and Implicit Subsidies for Swiss Farmers

In the NZZHeidi Gmür discusses some of the many forms of government support for agricultural producers in Switzerland. She lists:

  • Direct payments: CHF 2.8 billion for 53’000 farms in 2016 (roughly CHF 50 thousand per farm).
  • Tariffs and other protectionist measures: According to the OECD, the value for farmers of these measures amounts to CHF 2 billion annually, while the value for the country is negative (CHF -0.5 billion).
  • Multiple tax breaks: Lower capital gains tax on land sales; no value added tax on sale of produce; lower tax on notional rental value; lower effective tax on gas consumption.