Under an idealized version of the transition, the dollar would appreciate enough to offset the impact of the tax change, resulting in no impact on prices, margins, or trade flows. Even in this case, a large and abrupt change in exchange rates would deliver a sizeable hit to US residents’ foreign wealth and could create risks of dollar-denominated debt problems abroad. An alternative transition scenario featuring partial dollar appreciation, higher inflation, a hit to the profit margins of US net importers, and higher net exports appears more likely. Industries with low margins and high import shares such as apparel would be particularly vulnerable to the change.The “idealized version” is that standard proposition of the Mundell-Fleming model that trade protection under floating exchange rates would have no net effect on net exports. Of course the transfer pricing implications are a bonus for highly profitable US based multinationals who want to do massive income shifting and declare it all “perfectly legal”. This is a horrific idea which should not become law.
Friday, December 9, 2016
Goldman Sachs Economists Critique the Auerbach Tax Proposal
In my latest comments on Auerbach’s Destination-Based Cash Flow Tax, I noted how it was indeed trade distorting. It seems a lot of its proponents virtually concede this. It also seems that economists Goldman Sachs have drawn the appropriate conclusion: