Presentation done at the GTAP Conference 2017 on the US proposal of border tax adjustment. It shows the role of a Computable General Equilibrium in bringing transparency in the debate and have clear definitions and assumptions to measure a major policy change. Our conclusions show that trade impacts should be negligible but will involve major domestic redistribution between economic agents and generations. (paper forthcoming as a book chapter)

1. Modelling the Effects of Border Tax Adjustments
on Trade and Current Account Balances
David Laborde, Will Martin
GTAP Conference, 9th 2017

2. Setting the stage
• Destination-based corporate taxation (Auerbach 2010;
Auerbach and Holtz-Eakin 2016)
• Active policy proposals in the United States (Ways and Means
Committee 2016; Hufbauer and Lu 2017; Summers 2017)
• Caveat:
– exact design in tax policy matters!
– This paper is about our interpretation of current proposals
• In a nutshell: the US may adopt an untransparent quasi-VAT

3. What really matters?
• How relative prices will react?
– CGE are good at this
– In which condition GDP could really expand?
• The role of the labor market supply
• How nominal prices will react?
– Historically, monetary policies accommodates tax shock. Any CPI shock is
not monetary inflation! [see historical VAT pass-through to CPI, Benedek et
al. (2015) ]
• What about real exchange rate?
• How the net revenue will be recycled by the government?
– Model closure

4. Real Exchange rate
• 𝑅𝐸𝑅 =
𝑒𝑝∗
𝑝
– but does not think simply about CPI!
– Law of one price
– Balassa, Dornbush…
– RER is about competiveness
– Producer price RER more relevant, or internal RER (tradeable/non
tradeable)
• Implications for the numeraire (and global CGEs are great: no
cheat)
• Dynamics of current account
– For the US: Save more, spend less.

5. Conceptual Background
• Detailed discussion in Martin (2017)
• Under some simple assumptions, prices will increase by
1
(1−𝑡)
[20% cash
flow tax  25% price increase for the consumer]
• No change in profits
Initial profits
𝜋 = 𝑝𝑜. 𝑞𝑜 − 𝛴 𝑝𝑖. 𝑞𝑖 – 𝑤. 𝐿
Domestic sales
𝜋 = 1 − 𝑡 . (
1
1−𝑡
. 𝑝 𝑜. 𝑞 𝑜 −
1
1−𝑡
. 𝑝𝑖 𝑞𝑖) – w.L = po.qo - Σ pi.qi – w.L
External sales
𝜋 = 𝑝 𝑜. 𝑞 𝑜 − 1 − 𝑡
1
1−𝑡
. 𝑝𝑖 𝑞𝑖 – w. L = po. qo − Σ pi. qi – w. L

6. The Role of Labor Market
Source: Author.
D2
D3
Employment
Employee
wage
D0
D1

7. The MIRAGRODEP CGE
• Multi sector-Multi country dynamic CGE.
– Trade: Nested CES functions
– Final Demand: CES-LES with Nested CES for sub-categories
– Supply: Nested CES functions (both for factors and inputs)
– Intermediate inputs: CES function
– Imperfect labor mobility between primary and other sectors
• Recursive dynamic
– Current account fixed in percentage of GDP
– Public savings and public expenditures constant in percentage of GDP,
lumpsum tax adjustment
• Data source: GTAP 9.1 + minor adjustment between 2011 and 2016 to
improve US tax structure

8. Implementation and Instruments
• The tax package includes in our model:
– A tax on domestic sales
– A tax rebate on inputs
– A tax rebate on investment expenditures
– A tax rebate on wages
– A reduction in corporate tax
• Tax on Taxes
• Exclusion of Rents for land and natural resources
• Non homogenous effective existing tax rates, inc. on corporation in
the dataset

9. Illustration
• For a domestic sale
PD(i,r,t,sim) *(1-BDTCONSO(i,r,t,sim))
=e= PY(i,r,t,sim)*(1+TaxP(i,r,t,sim))
• For an imported good
PDEM(i,s,r,t,sim) *(1-BDTCONSO(i,r,t,sim)) =e=
PCIF(i,s,r,t,sim)*(1+DD(i,s,r,t,sim) )
• Effective input prices faced by firms
EQ_PIC(i,j,r,t,sim)$ICO(i,j,r)..
PIC(i,j,r,t,sim)
=e= PDEMTOT(i,r,t,sim)*[1+taxicc(i,j,r,t,sim)]
*(1-BDTINTER(j,r,t,sim));

10. Impacts by instruments: Consistency check
-0.9
-4.2 -2.3 -2.7
-37.3 -40.4
-0.2
3.7 2.9 0.6
16.0
20.2
0.0 0.2 0.1 0.0
4.5 4.9
0.0
0.0 0.0
0.0
25.0 25.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
GDP Exports Imports RER SkilledWage UnskilledWage
Cash flow tax Input tax rebate
Investment tax rebate Wage tax rebate

11. Overall effects
0.0 0.9
-1.4
0.9
-0.3
5.7 5.9
-10.7
-14.4
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0

12. Total export variation by partner
-0.014
0.271
-1.397
0.128
0.508
-0.025
0.083
-0.09
0.195
-0.207
-0.545
-0.041
0.567
0.429
0.035
-1.5
-1
-0.5
0
0.5
1
CAN MEX USA ROW China Japan Korea ASIA LAC CAFTA CARICOM EUROPE CIS MENA SSA

13. Dynamics with basic closure
0.9
-1.4
0.9
-0.3
-3.2
-5.1
-1.5
-1.0
-4.4
-6.1
-2.2
-1.2
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
WELFARE Exports Imports RER

14. Alternative closure and coverage
0.0
-1.4
0.9
-0.3
5.7 5.9
-10.7
-14.4
0.0
-1.7
0.8
-0.6
4.9 5.8
-10.2
-12.0
10.9
7.5 6.3
1.3 0.0 0.0
-7.3
-2.3
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Full package, baseclosure
Exclusion Public Sector
Fixed Real Wage (Labour supply)

15. Concluding remarks
• CGE: a transparent instrument for transparent policies
• Limited trade implications
• Important domestic implications in dynamics