Pedro da Costa tells us in Business Insider that the Republican tax proposal, with its border adjustment, is going to be really bad news because it will lead to a spike in inflation. The story is that the 20 percent tax imposed on imports will lead to a one-time jump in the core inflation rate of between 1.4 and 2.1 percentage points.
The implication is that the tax will be almost fully passed on to consumers. With imports at 15 percent of GDP, these numbers would be plausible.
While this is not an impossible scenario, it is worth thinking back to what Neil Irwin told us in the New York Times last week. He warned that the tax would lead to a 25 percent rise in the dollar, which could lead to a financial crisis as a result of the increase in the size of the dollar denominated debt held by developing countries. This is also a plausible scenario, although the prospect of a 25 percent increase in the value of the dollar seems a bit out of line, as I noted at the time.
Anyhow, it is worth stepping back for a moment and thinking this one through. Both Pedro da Costa and Neil Irwin are very good reporters. Neither is just making things up, but they are telling us completely opposite stories about the impact of the Republican tax proposal. In da Costa's version, the dollar moves little, with almost all the adjustment being in price. (It's worth noting that this would lead to a large reduction in the trade deficit.) In the Irwin version, the dollar fully adjusts leaving import prices essentially unchanged for people living in the United States.
My guess is that the Irwin version is closer to reality (not the crisis part), but the more fundamental point is that we actually have very little idea what will happen if this tax is implemented. It seems that many folks are prepared to shoot at this tax because they don't like the people pushing it.
I'm not terribly fond of them either, but this does seem like a serious proposal, which deserves a serious look. For the record, it did not originate with either Trump or Republicans in Congress, but rather Alan Auerbach, a Berkeley professor who I have always taken to be a serious economist. (I don't know his political leanings.)
My main interest in reforming the corporate income tax is to strike a blow to the tax avoidance industry. This industry has created enormous wealth for a small number of people. It is a complete waste from the standpoint of the economy as a whole, since it is pulling resources away from productive uses and commits them to gaming the tax code. This is largely what private equity (think Mitt Romney and Peter Peterson) is all about.
Anyhow, whether or not an actual proposal will be a real hit to the tax avoidance industry will depend on the specifics, which we have not yet seen. But it seems worth keeping an open mind to the proposal until we actually have something on paper to evaluate.
Remember, it took Nixon to go to China. I doubt the Dems will be able to pull off a serious corporate tax reform, at least in my lifetime. The Republicans may not be able to either, but let's give them a chance. (By the way, for my money, this is still the best plan for reforming the corporate income tax.)