The Macroeconomics of Border Taxes

53 Pages Posted: 11 Jun 2018

See all articles by Omar Barbiero

Omar Barbiero

Harvard University

Emmanuel Farhi

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Gita Gopinath

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Oleg Itskhoki

Princeton University - Department of Economics

Date Written: June 2018

Abstract

We analyze the dynamic macroeconomic effects of border adjustment taxes, both when they are a feature of corporate tax reform (C-BAT) and for the case of value added taxes (VAT). Our analysis arrives at the following main conclusions. First, C-BAT is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic. The basis for neutrality of VAT is even weaker. Second, in response to the introduction of an unanticipated permanent C-BAT of 20% in the U.S. the dollar appreciates strongly, by almost the size of the tax adjustment, U.S. exports and imports decline significantly, while the overall effect on output is small. Third, an equivalent change in VAT by contrast generates only a weak appreciation of the dollar, a small decline in imports and exports, but has a large negative effect on output. Lastly, border taxes increase government revenues in periods of trade deficit, however, given the net foreign asset position of the U.S., they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.

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Suggested Citation

Barbiero, Omar and Farhi, Emmanuel and Gopinath, Gita and Itskhoki, Oleg, The Macroeconomics of Border Taxes (June 2018). NBER Working Paper No. w24702. Available at SSRN: https://ssrn.com/abstract=3193786

Omar Barbiero (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Emmanuel Farhi

Harvard University - Department of Economics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gita Gopinath

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Oleg Itskhoki

Princeton University - Department of Economics ( email )

Fisher 306
Princeton, NJ 08544-1021
United States
+1 (609) 258-5493 (Phone)

HOME PAGE: http://www.princeton.edu/~itskhoki

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