This is an interesting little point being made about the mooted border adjustment tax. This is the idea that imports as inputs into an American company's operations will not be a deduction for corporate income tax purposes while exports will be. The detailed consideration of this is for my colleagues over on the tax desk but there's an economic implication here of this idea. That is that the US dollar will rise by about the same percentage as what the tax rate itself is. Recall, this is to fund a reduction in that corporate income tax rate to perhaps 15 or 20%. The side effect of this is that the dollar will rise against other currencies by the same 15 or 20%.
And that will mean losses of the same 15 or 20% for American investors who have sent capital overseas--and also windfall profits of the same amount for foreigners who have invested into the US. It's possible that this isn't quite what people might desire:
Wal-Mart shoppers aren’t the only ones who could suffer under a tax plan that President Donald Trump is warming up to -- U.S. investors who trade on the London Stock Exchange, the Deutsche Boerse and Euronext might also take a hit.
Stocks and bonds denominated in foreign currencies might lose as much as 15 percent of their value when their U.S. holders convert them into dollars -- one of the effects of a so-called border-adjusted tax, according to Paul Christopher, an economist at Wells Fargo & Co. That’s because economists expect that the dollar would strengthen under the tax proposal, which would replace the U.S. corporate income tax with a levy on U.S. companies’ domestic sales and imports, while exempting their exports from taxable income.
It is generally agreed (people from Marty Feldman to Paul Krugman at least, Greg Mankiw is also in there) that one effect of such a border adjustment tax is going to be a rise in the US dollar's exchange rate. That's just the way things work.
What is being highlighted here is that this will have an effect over on the capital account as well as the current account. Those foreign investments by Americans are, largely at least, denominated in not-dollars, in things like Yen, euro, Pounds and so on. And as those all lose 15 to 20% of their value against the dollar then the value, to dollar residents, of those investments must fall by that much. Which is what is being said here.
And that will mean losses of the same 15 or 20% for American investors who have sent capital overseas--and also windfall profits of the same amount for foreigners who have invested into the US. It's possible that this isn't quite what people might desire:
Wal-Mart shoppers aren’t the only ones who could suffer under a tax plan that President Donald Trump is warming up to -- U.S. investors who trade on the London Stock Exchange, the Deutsche Boerse and Euronext might also take a hit.
Stocks and bonds denominated in foreign currencies might lose as much as 15 percent of their value when their U.S. holders convert them into dollars -- one of the effects of a so-called border-adjusted tax, according to Paul Christopher, an economist at Wells Fargo & Co. That’s because economists expect that the dollar would strengthen under the tax proposal, which would replace the U.S. corporate income tax with a levy on U.S. companies’ domestic sales and imports, while exempting their exports from taxable income.
It is generally agreed (people from Marty Feldman to Paul Krugman at least, Greg Mankiw is also in there) that one effect of such a border adjustment tax is going to be a rise in the US dollar's exchange rate. That's just the way things work.
What is being highlighted here is that this will have an effect over on the capital account as well as the current account. Those foreign investments by Americans are, largely at least, denominated in not-dollars, in things like Yen, euro, Pounds and so on. And as those all lose 15 to 20% of their value against the dollar then the value, to dollar residents, of those investments must fall by that much. Which is what is being said here.