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Exchange rate implications of Border Tax Adjustment neutrality

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  • Buiter, Willem H.

Abstract

This paper investigates the implications for the nominal exchange rate of a Border Tax Adjustment (BTA) when there is BTA neutrality. A border tax adjustment is a change from an origin-based system of taxation, that taxes exports but exempts imports to a destination-based system that taxes imports but exempts exports. Both indirect taxes (e.g. a VAT) and direct taxes (e.g. a cash-flow corporate profit tax) can be subject to a BTA. In the US, a BTA for the corporate profit tax is under discussion. There is BTA neutrality when the real equilibrium, including measures of profitability and competitiveness, of an open economy is unchanged when it moves from an origin-based to a destination-based tax. The conventional wisdom on the exchange rate implications of a neutral BTA is that the currency of the country implementing the BTA will strengthen (appreciate) by a percentage equal to the VAT or CPT tax rate. The main insight of this note is that this 'appreciation presumption' is not robust, even when all conditions for full BTA neutrality are satisfied. Indeed, plausible alternative assumptions about constancy (or stickiness) of nominal prices support a weakening (depreciation) of the currency by the same percentage as the tax rate. On the basis on the very patchy available empirical information, it is not possible to take a view with any degree of confidence on the implications of a BTA for the nominal exchange rate, even if full BTA neutrality prevailed. Whether BTA neutrality itself is a feature of the real world is also a disputed empirical issue. Therefore, buyer (or seller) beware.

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  • Buiter, Willem H., 2017. "Exchange rate implications of Border Tax Adjustment neutrality," Economics Discussion Papers 2017-10, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201710
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    Cited by:

    1. Sijbren Cnossen, 2018. "Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 808-840, June.
    2. Shafik Hebous & Alexander Klemm, 2020. "A destination-based allowance for corporate equity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 753-777, June.
    3. Gabriel Felbermayr & Marina Steininger, 2017. "Effekte der US-Präsidentschaft Trump – Neuer Protektionismus," FIW Policy Brief series 037, FIW.
    4. Allan Gloe Dizioli & Ursel Baumann & Alistair Dieppe & Allan Gloe Dizioli, 2017. "Tremendous global spillovers. Analysis and mechanisms of the destination based border adjustment tax," EcoMod2017 10520, EcoMod.
    5. Robinson, Sherman & Thierfelder, Karen, 2017. "Taxes, Prices, and the Exchange Rate in the Destination-Based Cash-Flow Tax (DBCFT) System," Conference papers 332910, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    6. Baumann, Ursel & Dieppe, Alistair & Dizioli, Allan Gloe, 2017. "Why should the world care? Analysis, mechanisms and spillovers of the destination based border adjusted tax," Working Paper Series 2093, European Central Bank.
    7. Dorian Carloni, 2018. "How Nominal Foreign Currency Depreciation Against the U.S. Dollar Affects U.S. Wealth: Working Paper 2018-05," Working Papers 53931, Congressional Budget Office.
    8. Johannes Becker & Joachim Englisch, 2020. "Unilateral introduction of destination-based cash-flow taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 495-513, June.

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    More about this item

    Keywords

    border tax adjustment; neutrality; equivalence; exchange rate appreciation; nominal price and wage rigidities;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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