I have a new paper out with David Kamin of New York University Law School—it will be formally out in Tax Notes in a couple of weeks, but given that there is a live debate on the topic, we are posting it in draft form now—and the New York Times had a related editorial linking to it earlier this week.
So this is a joint post with David Kamin.
Our paper makes two arguments.
1) Even with fairly optimistic assumptions about long-term growth and long-term interest rates and the persistence of “excess returns” from U.S. direct investment abroad, the U.S. cannot sustain trade deficits of approaching 3 percent of GDP over the long-run. The CBO’s estimates for long-run growth and the long-run nominal interest rate on the U.S. debt stock imply a sustainable long-run trade deficit of about 1 percent of GDP. That would generate maybe 20 basis points of GDP in permanent revenue. If the excess returns (“dark matter”) on U.S. foreign direct investment go away, the U.S. would need to run a small trade surplus—and the border adjustment would lose revenue over the long-term.
As a result, realistic projections of revenue from a border adjustment should show that revenue falling considerably and, possibly, entirely disappearing over the long-term.
Remember the border adjustment acts as a tax on imports (imports are not deductible as a cost) and a subsidy for exports (a portion domestic wage and other content of exports is effectively rebated, as exports are not considered revenues while domestic wages are considered expenses, creating a tax loss). So it only generates revenue in net if the revenue collected on the border adjustment on imports exceeds the revenue lost on the export rebate.