The problem with Trump's border tax plan

Everyone seems to be talking about a border tax these days - but few people seem to know what they're talking about.

One reason is the neophyte US president's own mixed message. As he has done on multiple occasions, President Trump has taken both sides of this particular issue at various times.

On January 16, Trump said he was hesitant to impose a border tax on imported goods as part of his anti-trade push: "Anytime I hear border adjustment, I don't love it," he said at the time. It's "too complicated," Trump added.

Days later, the president had changed his mind. "If you go to another country and you decide that you're going to close and get rid of 2,000 people or 5,000 people ... we are going to be imposing a very major border tax on the product when it comes in," Trump warned during a meeting with CEOs.

So what is a border tax and how exactly would it work? My former colleagues at the non-partisan Peterson Institute for International Economics just held a conference on the subject that sheds light on the details of a potential border tax plan - and the reviews are not especially positive.

Putting aside the irony of a Republican president's first major economic initiative being a tax increase, the so-called border adjustment tax would serve as a way to punish firms for doing business abroad, even though many US companies depend on such operations for their profitability. A border adjustment tax works by "denying business deductions for imported goods and services and excluding exports of goods and services from the tax base," says trade economist and Peterson Institute senior fellow Gary Hufbauer.

The problem, says Adam Posen, a former policymaker at the Bank of England and president of the Peterson Institute, is that the costs would vastly outweigh the narrow benefits to exporters, who are now lobbying favor of Trump's proposed tax.

"From a macro perspective, from a broad tax perspective, the amount of revenue you're going to get is very low, the amount of distortions you're going to create is very high, the amount of trouble you're going to create for the US and the world economy is very large, and the distributional effects are not trivial," said Posen. "They're actually very harmful."

For one thing, the proposal is part of a broader suspicion of foreign countries that permeates Trump administration rhetoric and has already unsettled key trading partners like Mexico and China as well as long-time ally Australia. This has a depressing effect on investment as the business outlook becomes clouded with renewed uncertainty about the future outlook for taxes and potential tariffs.

The US also faces the risk of retaliation via the World Trade Organization, which could leave US exporters open to potential tariff increases from other countries on their products. That leaves open the risk that a border tax would simply be the opening salvo in a destructive trade war.