A Republican-backed border tax proposal that drew some praise from U.S. President Donald Trump would actually dampen both exports and imports, research co-authored by an economist at the Federal Reserve Bank of New York said.
The research, which does not represent the central bank's view, suggested that the U.S. dollar may not appreciate by the full amount of the tax, as proponents expect. This is in part because trading counterparts could respond with their own taxes, and because pricing for the vast majority of contracts governing U.S. trade is preset in dollars, it said.
"An unintended consequence of the proposed border tax is that it is likely to depress rather than stimulate exports, (while) the tax exemption on export revenue will mostly boost exporters' profit margins rather than increase their export sales," said the research published by the New York Fed.
Republicans in Congress have proposed a border tax adjustment in which U.S. firms would pay a 20-percent tax on all imported goods and be exempt from paying taxes on export revenue. In an interview with Reuters on Thursday, Trump, who has promised tax reform, said "it could lead to a lot more jobs in the United States."
The research authors are Mary Amiti, assistant vice president in the New York Fed's research unit, Oleg Itskhoki, an associate economics professor at Princeton University, and Jozef Konings, an economics professor at the University of Leuven.
"If the U.S. dollar does not appreciate by the full amount of the tax, we argue that the effect of the tax will be to lower both U.S. imports and exports in the short to medium run," they wrote. "Both firms and households will be faced with higher prices for imports and domestically produced goods alike."
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