Knock, knock: Economic ivory tower, meet retail reality

The National Retail Federation recently published an analysis concluding that the $1 trillion “border-adjustment” tax on imports proposed by House Speaker Paul Ryan (R-Wis.) and Ways and Means Committee Chairman Kevin Brady (R-Texas) could cost American families up to $1,700 in the first year. Our cost data was drawn from empirical information provided by our members, an Ernst & Young economic analysis of border adjustment and available government data on typical family purchases.

Last week, an article posted at FactCheck.org alleged our data was “baloney,” but you don’t have to get much further than the second paragraph to understand the gaping hole in their appraisal — the words “in the long run.”

{mosads}The long run is the distance between the ivory tower of economic academia and the gritty real world of the highly competitive retail sector that serves millions of consumers every hour of every day. These are the same consumers that will foot the bill for this misguided proposal. A handful of esteemed economists theorize that currency rates will adjust in the long run and mitigate the higher cost of goods. But that’s the problem with academic economists — they live in the long run and not in the real world like the rest of us.

As Sen. Tom Cotton (R-Ark.) said about the border-adjustment tax: “Some ideas are so stupid only an intellectual could believe them.” Sen. David Perdue (R-Ga.) called the border-adjustment tax a regressive tax that “just hammers” low- and middle-income consumers.

In theory, it could eventually make up for the 20 percent tax, leaving the prices of imported merchandise the same as they are now once the dollar becomes sufficiently stronger. But there is no consensus on the degree or timing of those changes, and consumers could be left to pick up the tab in the near term while hoping the economic theory proves out.

President Trump was elected by a lot of voters who have been victimized by “long run” theories. However, they have never seen the finish line and often live paycheck to paycheck.

According to a 2016 survey by GoBankingRates.com, more than half of Americans have savings account balances below $1,000. It does not take a degree in economics to understand that by raising prices on essential products like food, clothes, medicine and gas, those savings could very quickly disappear.

It would take a historically large, unprecedented 25 percent increase in the value of the U.S. dollar to fully offset the border-adjustment tax. Even if that were to happen, some experts say it could take as long as five years. And given the economic headwinds faced by the retail industry recently, many merchants would not be able to survive the inevitable downturn in sales, potentially going out of business and taking millions of jobs with them.

Retailers aren’t the only ones with these concerns.

The Federal Reserve Bank of New York issued an analysis published last week that the dollar might not appreciate as much as predicted by border-adjustment tax supporters, particularly in the short to medium time frame. In addition, they said, prices in many international contracts are set in dollars, so any savings from currency fluctuations could be “quite low.”

“Firms that rely on imported inputs and sell predominantly in the U.S. market will be worse off. The appreciation of the U.S. dollar will have only a small impact to offset these cost increases.” Higher costs for imported goods, in turn, “are likely to result in higher domestic prices” paid by consumers.

Higher prices for imported merchandise would also give domestic U.S. manufacturers room to increase their prices, meaning “households will be faced with higher prices for imports and domestically produced goods alike,” they said.

However, there is one claim that deserves a fact check. Border-adjustment tax supporters have been spreading the idea that there is some kind of “Made in America” tax imposed on U.S. products that is not imposed on imports. That simply isn’t true.

Imports are subject to corporate taxes in the countries where they are made, just the same as U.S. products are here at home. And when imports are sold in U.S. stores, they are subject to state and local sales tax the same as U.S. products.

Rather than a special “Made in America” tax on U.S. products, the opposite is true. Many imports brought into the United States — from shoes and clothing to home furnishings — are subject to billions of dollars in tariffs, which amount to hidden taxes that already increase prices ultimately paid by consumers.

Higher prices for consumers in the first year if the border-adjustment tax becomes law? True. A “Made in America” tax that increases the price of U.S.-made products? That really is baloney.

David French is senior vice president for government relations at the National Retail Federation.

The views expressed by contributors are their own and are not the views of The Hill.