Peter J. Solomon on House Republicans' proposed Border Tax

  • January 31, 2017

In the letter below, PJ SOLOMON Founder and Chairman and former Counselor to the United States Treasury, Peter J. Solomon, responds to views put forward by Economist Martin Feldstein in his January 5, 2017 article in the Wall Street Journal concerning House Republicans' proposed border tax adjustment that would exempt exports and tax imports. Mr. Solomon points specifically to the implications of such a tax on retailers and ultimately U.S. consumers.

Professor Martin Feldstein
George F. Baker Professor of Economics
Harvard University
National Bureau of Economic Research, Inc.

Dear Marty:

Happy New Year. We have not seen each other for quite some time.

I read your Wall Street Journal article on the border tax. I would never presume to dispute your economic analysis. But I do have some experience on how such a tax will affect retail goods sold in the US and maybe employment.

I feel confident that a tax on imports will result in US consumers paying higher prices and the price increases will be across the board. Manufacturing companies that export and import might need to adjust production to capitalize on the export tax benefit while minimizing the import tax. Perhaps they can maintain margins.

Retailers, however, will not benefit from the export tax benefit for obvious reasons but will be hit hard by the import tax. Notwithstanding your conclusions, retailers will raise prices if they can. That is the real life effect on Americans. One might say, "Who cares?"

The macro benefits you outline may outweigh the inflationary impact and higher prices.

First, isn't the combination of a border tax, higher prices and lower corporate tax rates shifting a tax burden from corporations to consumers?

Is the reason underlying the proposal that gross margins may suffer but many retailers' earnings will not be hurt because they have high federal tax rates and will offset any margin pressure from a reduction in federal corporate tax rates?

Additionally, while you don't say it, is an underlying premise that the border tax will be a catalyst to move manufacturing jobs back to US soil.  But decades ago, the US decided it didn't want to invest in "cutting velvet" and unskilled labor manufacturing commodity products.

Finally, at a moment when the distribution business in America is experiencing a seminal downshift (caused, in my opinion, because of too much selling footage -not the arrival of e-commerce alone), isn't the border tax an ill-timed policy which might accelerate contraction? How many more closed stores or empty shopping centers does Congress want?

For President Trump and his constituents, a border tax will cost them jobs in retailing and raise the prices they pay. It won't increase net employment, so it runs counter to President Trump's promise.

Just one man's opinion ...

With best wishes,