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Last Friday, President Trump issued an executive order temporarily barring entry of refugees, visitors, and immigrants—including those with green cards—from Syria, Iraq, Iran, Libya, Somalia, Sudan, and Yemen. During this delay, the government is tasked with making its screening process more extensive. The order indefinitely bans refugees from Syria.

As Henry Enten notes, we’ll have to wait until we have more polling data to ascertain how the public will judge the action, but polling over the past year gives us some clues.

Slim but Shy Support Most polls throughout 2015-2016 found about 56% of Americans opposed Trump’s call to temporarily ban Muslim immigrants from entering the United States. However, these polls tended to be conducted by live telephone interviewers. In contrast, polls conducted online by reputable firms like YouGov and Morning consult, find a plurality of Americans in support.

Aggregating over 40 telephone and online polls conducted over the past two years finds Americans opposed to the ban 56% to 39% in surveys conducted by phone, but a plurality in support 49% to 39% in surveys conducted online. This suggests that people taking surveys by phone feel uncomfortable sharing their true feelings and thus fib to the live interviewers. But, privately taking a survey online encourages people to share what they really think. In the polling world, this is called “social desirability bias” evoked by social pressure to not appear prejudiced to the live interviewer.

Of course, the difference cannot be entirely attributed to survey mode since the questions weren’t worded the exact same way. Nonetheless, it’s suggestive that there is a “shy immigration restrictionist” effect going on. (Remember the shy Trump voter?)

Americans Don’t Support an Outright Ban on Refugees Existing data suggest Americans do not support a permanent ban on refugees. Most telephone and online surveys found that Americans oppose not taking any refugees at all and a plurality (46%) say the “US should open our borders to refugees of foreign conflicts” according to an Ipsos/Reuters Jan 2017 online survey. At the same time, Americans tend to support taking fewer refugees rather than more, when given the option. For instance, both an Ipsos/Reuters Jan 2017 online survey and a Marist Apr 2016 telephone survey found 53% of Americans want the US to take in fewer refugees.

Wording Impacts Support Strength As you can imagine, survey question wording impacts responses. Support for immigration restriction increases when refugees and immigrants are described as coming from “terror prone regions” or when respondents are told that government needs time to enhance security measures. For instance, Rasmussen, measures the highest degree of support (57%) when it asked if respondents support or oppose a “temporary ban on refugees from Syria, Iraq, Iran, Libya, Somalia, Sudan, and Yemen until the federal government improves its ability to screen out potential terrorists from coming here.” This question presupposes the government screening system is already poor and the new administration could meaningfully improve it. If these are the assumptions going in, support will be higher. When national security concerns are invoked and at the top of people’s minds they are more supportive of immigration restrictions.

Support for immigration restriction decreases, however, when the described policy implies a religious test. Surveys register lower support (48%) if the policy is described as a “temporary ban on all Muslims traveling to the United States” (from Morning Consult).

Support Changes with Global Events We find that support for accepting refugees and immigrants varies with what’s happening in the news and the level of threat Americans perceive. For instance, support for banning refugees jumped from 24% in September 2015 to 38% in December 2015 after the San Bernardino attack, two NBC/WSJ telphone surveys found.

Support for a Temporary Immigration Ban Varies by Country of Origin A Morning Consult survey found that majorities of Americans support a “temporary ban on immigration” from Syria (56%), Iraq (55%), and Libya (53%). However, less than half support such a ban on immigrants from Egypt (46%), and Mexico (46%). This indicates that security fears associated with particular countries are an important factor behind people’s attitudes.

Longstanding Opposition to Accepting Refugees Frank Newport has shown using Gallup data over the past 80 years that Americans have a longstanding opposition to accepting refugees. Back in 1939, about two-thirds of Americans opposed accepting German children refugees. In 1947 after World War II, 57% opposed accepting 10,000 European refugees. A similar share in 1979 also opposed accepting Vietnamese refugees. A rare exception was a majority (66%) who supported bringing in a couple hundred refugees from Kosovo in 1999.

Americans are Conflicted A new report published by Democracy Fund Voice, Stranger in My Own Country, finds that Americans are conflicted over immigration. Longform interviews and a national survey (conducted online) found that Americans believe that our country is a melting pot, a nation of immigrants, but at the same time expressed concern that immigration from certain regions could pose a security threat and could also risk changing the culture of America.

For instance, looking at President Donald Trump’s core supporters, we find that 66% agreed that “we should follow the Golden Rule and treat others as we’d like to be treated, including people of different races, and countries.” Moreover, 4 in 10 also expressed concern that anti-immigrant sentiment could lead to violence against immigrants residing in the U.S. At the same time 58% feared that “America’s culture has been influenced by other cultures too much” and 78% felt the US was far less safe from foreign threats compared to when they were growing up.

Similarly among Americans overall, a Marist Apr 2016 survey found that a plurality (50%) of Americans thought the U.S. was morally obligated to take in refugees. But in the same survey, 53% also revealed they thought the US should “take in fewer refugees than it does now.”

Education Changes Attitudes We find that concerns over immigration tend to decline as people attain higher levels of education. For instance, the Democracy Fund Voice report found that Americans with more education were far less likely to agree that the US should “stop or strictly limit Syrian refugees coming to the US.” Among those with high school diplomas, 57% thought the US should limit or stop accepting Syrian refugees, compared to 49% of those with some college experience, and 40% with college degrees.

In a media experiment I ran for the Democracy Fund Voice report, I found that videos and print media that conveyed the following significantly reduced fears over immigration and increased support for accepting Syrian refugees: showing that immigrants want to join the American way of life rather than change it, are relatable, and once they get here think of themselves as patriotic Americans. Furthermore, showing the harmful consequences of prejudice also calmed fears over immigration. For instance, this video of Muslim American millennials reading mean Facebook comments increased favorability toward Muslim Americans from 34% in the control group to 52% in the treatment group, an 18-percentage point change. Among strong Trump supporters, favorable attitudes increased from 11% to 38%, a 27-percentage point change.

The chart to the right presents more results from the experiment finding a variety of different digital and print media significantly reduced nativist attitudes among respondents.

Implications

In sum, online surveys reveal Americans are concerned about the national security risks they believe might result from the U.S. accepting refugees and immigrants from Syria, Iraq, Iran, Libya, Somalia, Sudan, and Yemen. However, Americans are unlikely to support a permanent ban on accepting refugees into the US. Support for immigration restriction increases when the issue is framed around national security risks and giving the government additional time to enhance security measures. However, support declines if such a policy is framed as a religious test for entry into the country.

The difference between telephone and online polls should trouble both journalists and policymakers alike. If Americans feel they cannot express their true opinions on important policy matters it makes it difficult for journalists, policy experts, and lawmakers to respond to these opinions, and at times push back. People won’t have a chance to change their minds if they keep their opinions to themselves and thus no one can provide countervailing evidence.

In addition, political elites would be unwise to assume that these views are simply due to nativism, xenophobia, or some other label. Some people are driven by such concerns, but others are unclear of the risks posed by refugees and immigrants from war-torn countries. Evidence suggests that respectfully explaining the risks, benefits, and showing that immigrants assimilate into US society can effectively persuade people (although not all people) to consider a more liberalized immigration policy.

For more public opinion analysis sign up here to receive Cato’s upcoming digest of Public Opinion Insights and public opinion studies. You can follow Emily Ekins on twitter @emilyekins.

Global Science Report is a feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

There is a new paper out in the journal Climatic Change that takes a look into the issue of publication bias in the climate change literature. This is something that we have previously looked into ourselves. The results of our initial investigation (from back in 2010) were written up and published in the paper “Evidence for ‘Publication bias’ concerning global warming in Science and Nature” in which we concluded that there was an overwhelming propensity for Nature and Science—considered among the world’s leading scientific journals—to publish findings that concluded climate change was “worse than expected.” We noted the implications:

This has considerable implications for the popular perception of global warming science, for the nature of “compendia” of climate change research, such as the reports of the United Nations’ Intergovernmental Panel on Climate Change, and for the political process that uses those compendia as the basis for policy…

The consequent synergy between [publication bias], public perception, scientific “consensus” and policy is very disturbing. If the results shown for Science and Nature are in fact a general character of the scientific literature concerning global warming, our policies are based upon a unidirectionally biased stream of new information, rather than one that has a roughly equiprobable distribution of altering existing forecasts or implications of climate change in a positive or negative direction. This bias exists despite the stated belief of the climate research community that it does not.

In their investigation into publication bias, the authors of the new paper, Christian Harlos, Tim C. Edgell, and Johan Hollander, looked more broadly across scientific journals (including articles from 31 different journals), but a bit more narrowly at the field of climate change, limiting themselves to a sub-set of articles that dealt with a marine response to climate change (they selected, via random sampling, 120 articles in total).

Harlos et al. were primarily interested in looking into whether or not there was a bias in these articles resulting from an under-reporting of non-significant results. This bias type is known as the “file drawer” problem—in which research findings that aren’t statistically significant are rarely published (and therefore sit in a “file drawer).  This leads to an over- (and non-robust) estimate of the number of truly significant results. The “file drawer” problem has received a lot of attention in recent years (see here for example) and it continues to be an active research area.

From their examination, however, the Harlos team did not find firm evidence that the file-drawer-type bias was strongly manifest. But, importantly, they did find that several other types of bias were manifest, including bias in how scientific findings were being communicated:

However, our meta-analysis did find multiple lines of evidence of biases within our sample of articles, which were perpetuated in journals of all impact factors and related largely to how science is communicated: The large, statistically significant effects were typically showcased in abstracts and summary paragraphs, whereas the lesser effects, especially those that were not statistically significant, were often buried in the main body of reports. Although the tendency to isolate large, significant results in abstracts has been noted elsewhere (Fanelli 2012), here we provide the first empirical evidence of such a trend across a large sample of literature.

The authors note that, in particular, this bias was worst in the high impact journals (like Science and Nature), and that:

[O]ur results corroborate with others by showing that high impact journals typically report large effects based on small sample sizes (Fraley and Vazire 2014), and high impact journals have shown publication bias in climate change research (Michaels 2008, and further discussed in Radetzki 2010).

Ultimately, importantly, and significantly, they conclude:

…[M]ost audiences, especially non-scientific ones, are more likely to read article abstracts or summary paragraphs only, without perusing technical results. The onus to effectively communicate science does not fall entirely on the reader; rather, it is the responsibility of scientists and editors to remain vigilant, to understand how biases may pervade their work, and to be proactive about communicating science to non-technical audiences in transparent and un-biased ways. Ironically, articles in high impact journals are those most cited by other scientists; therefore, the practice of sensationalizing abstracts may bias scientific consensus too, assuming many scientists may also rely too heavily on abstracts during literature reviews and do not spend sufficient time delving into the lesser effects reported elsewhere in articles.

Despite our sincerest aim of using science as an objective and unbiased tool to record natural history, we are reminded that science is a human construct, often driven by human needs to tell a compelling story, to reinforce the positive, and to compete for limited resources—publication trends and communication bias is a proof of that.

These findings are yet another impelling reason (recall the problem with the bias in climate model tuning) why a re-examination of our government’s previous assessment reports of climate change (such as those underlying the EPA’s endangerment finding) should be undertaken by the new Administration at the soonest possible opportunity.

References

Harlos, C., T.C. Edgell, and J. Hollander, 2017. No evidence of publication bias in climate change science, Climatic Change, 140, 375-385, doi:10.1007/s10584-016-1880-1

Michaels, P.J., 2008. Evidence for “Publication bias” concerning global warming in Science and Nature. Energy and Environment, 19, 287–301, doi:10.1260/095830508783900735

Yesterday, the New York Times ran a column that claimed to illustrate the issues at the heart of the current debate over the so-called “fiduciary duty rule,” which is slated to affect retirement accounts in the coming months. Except the column completely avoided one of the most important issues—access to financial advice—and instead ruminated on the troubles afflicting movie star Johnny Depp. Mr. Depp may be profligate and his money managers may have been asleep at the wheel, but the fiduciary duty has nothing to do with the ultra rich or their expensive advisors. Quite the opposite. Its impact will be felt almost exclusively by moderate income Americans precisely because they have only moderate incomes.

The rule was proposed and implemented in 2015 and 2016; if left unchanged, it will become effective in April 2017. Its stated intent is to ensure that investors receive quality financial advice by requiring that brokers selling certain retirement savings products conform to a “fiduciary duty” standard. In legal terms, acting as a fiduciary means handling another person’s business with the care that a prudent person would take in handling his or her own affairs. Specifically, the rule is intended to address situations in which brokers act as advisors, providing information to investors about the pros and cons of different types of retirement accounts.

This sounds good. Why wouldn’t we want advisors to act in investors’ best interests? Isn’t that just good business? It may be, but there is a difference between deciding to act in your clients’ best interests and abiding by a regulation that imposes a legal standard. The first is essentially costless and may actually benefit the broker by promoting a reputation for customer service. The second is anything but costless. Aside from the expense of implementing necessary compliance procedures to ensure that everything adheres to the law, imposing a legal duty raises the specter of litigation. Litigation, even baseless litigation, is always extremely costly.

Which gets us to the real issue. The problem is not that brokers might have to incur additional expense. The problem is that they might decide the extra expense is just not worth it. And here’s why Mr. Depp and his problems are a terrible lead-in to the debate. I would bet a considerable amount of money that Mr. Depp’s advisors are not brokers being paid on commission. I would bet that instead they are advisers paid a fee based on a percentage of the assets they manage, and that they already abide by a fiduciary duty standard. They are willing to do that because they make huge amounts of money managing rich people’s assets.

Typical rates for this type of service are about 1 percent of assets under management. The New York Times article estimates that Mr. Depp has earned about $650 million throughout his career. If his advisers were managing even just half that amount, that would mean he was paying them $3.25 million a year to manage his money. By comparison, the average U.S. retirement account holds only $5,000. The work involved in managing $325 million is more than the work involved in managing $5,000, but not much more. Certainly not 65,000 times as much work. Considering that an account with $325 million would pay $3.25 million and an account with $5,000 would pay just $50 per year, based on a 1 percent fee, which account would you take if you were an adviser?

The risk the new rule presents is that average investors will lose the access they currently have to financial advice from real people. (There are some computer algorithms that can devise investment strategies and these services will likely pick up much of the slack, but there are still things only a human being can do—have a phone conversation and answer questions, for one.)

It’s not that the column was entirely wrong-headed. It did highlight one of the central questions of the debate, which is whether average people are smart enough to deduce that advice from someone paid on commission must be taken with the appropriate level of salt. But by focusing on someone who will be unaffected by the rule, whose wealth insulates him almost entirely from such “protective” measures, it obfuscates the real problem. The problem is that regulation aimed at “helping” or “protecting” investors usually just protects them right out of the market. Which is to say that it’s no protection at all.

In an op-ed for the Boston Herald last week urging the Trump administration to uphold the Iran nuclear deal, I noted that the precise posture that the Trump White House will have toward Iran is not yet known. Today, we got our first insight into just how confrontational that posture will be. And it doesn’t look good.

Trump National Security Advisor Michael Flynn said in a White House briefing that, “As of today, we are officially putting Iran on notice.” According to Flynn, Iran’s recent test of ballistic missiles, which he said is “in defiance of UN Security Council Resolution 2231,” along with an alleged attack on a Saudi naval vessel “conducted by Iran-supported Houthi militants” in Yemen, serve as evidence of “Iran’s destabilizing behavior across the entire Middle East” and make clear that the nuclear agreement signed by Iran and the P5+1 has “emboldened” Iran to act nefariously in the region, “plac[ing] American lives at risk.”

Flynn’s statement amounts to heated, combative rhetoric over rather trivial issues. Only one of the incidents cited by Flynn was an Iranian action. While it’s true that Iran supports the Houthi rebels in Yemen, it has never been clear exactly how much support they give and it is doubtful Iran has the kind of leverage over the militants that make them qualify as strategic proxies. At the end of the day, whatever instability is caused by Iranian support for the Houthis, it doesn’t hold a candle to the regional instability caused by Sunni jihadists, like al-Qaeda-linked groups and ISIS, that have been supported with funds coming out of Saudi Arabia and other Arab Gulf states. Rather than berate the Saudis with threatening bombast in a White House briefing, though, Washington continues to aid the Saudi military as it relentlessly bombs Yemen, killing thousands of civilians, putting millions at risk of starvation, and committing acts that a United Nations panel said could amount to crimes against humanity

With regard to Iran’s ballistic missile test, the reality is far less alarming than Flynn’s words suggest. The nuclear deal itself doesn’t prohibit these missile tests. And as Dan Joyner, professor of international law at the University of Alabama School of Law, explains, “the assertion that Iran’s ballistic missile tests…violate UN Security Council resolutions is incorrect because, as of Implementation Day, all UNSCR’s adopted prior to that date regarding Iran are terminated except for Resolution 2231. And the language that Resolution 2231 employs in addressing Iran’s ballistic missile activity is legally nonbinding language…[T]here can thus be no violation of a legal obligation that doesn’t exist.”

As The Wall Street Journal reports, “UN Security Council Resolution 2231, which endorsed the deal, ‘called upon’ Iran to avoid any activity related to missiles designed to be capable of carrying nuclear warheads.” It’s hard to confirm one way or the other, but for what it’s worth Iranian Foreign Minister Javad Zarif told the Journal that none of Iran’s missiles are designed to carry a nuclear warhead and the tests involved “conventional warheads that are within the legitimate defense domain.” Given that Iran has verifiably rolled back its nuclear enrichment program over the past year, it makes sense that they would have little interest in designing missiles that can carry nuclear warheads, especially given the added international scrutiny it would needlessly attract.

Flynn’s statement indicates an eagerness to stir up tensions with Iran over relatively innocuous issues. This will undoubtedly be perceived in Tehran as threatening, thereby bolstering the more hawkish voices in Iran and undermining the future viability of the Iran nuclear deal, despite the fact that, as the International Crisis Group recently reiterated, “It has delivered so far on its narrow objective: effectively and verifiably blocking all potential pathways for Iran to race toward nuclear weapons.” 

At an AEI forum this week, Naomi Schaefer Riley discussed her insightful new book on Indian policies, The New Trail of Tears. I was pleased to take part in the forum alongside Robert Doar of AEI, Rep. Rob Bishop, and Keith Moore, who headed the Bureau of Indian Education (BIE).

I focused on the bureaucratic failures of the BIE and Bureau of Indian Affairs (BIA), as well as the institutional factors that deter growth on reservations. All of the panelists agreed that the lack of individual property rights on reservations is a key problem.

Keith Moore’s comments impressed me. Keith grew up on, and nearby, the Rosebud reservation in South Dakota. He served as BIE head from 2010 to 2012. Here are a few of his observations:

  • On the effects of subsidies: “Ingenuity, and the innovative, and creative parts of life have been pretty squelched for a long time because the government has provided.”
  • On reservation land being held in trust: “We’re not going to get where we need to go in Indian country until we have freedom, autonomy, and the ability to buy land and own it and create wealth.”
  • On the federal bureaucracy: “You look at the BIA system, it’s a nightmare. Bottom line, I lived it, I was in it, I left it … I don’t know how you move this bureaucratic titanic to get to a spot where it could have a positive effect. ”

The answer, as I think Keith would agree, does not lie in the BIA/BIE, but in Congress and the tribes making fundamental institutional reforms in areas such as property rights and education.

For background on how federal policies toward American Indians have been failing for two centuries, see this study.

My first choice from the president’s fabulous list of terrific judges – they’re all winners, believe me (no really, solid list) – was probably the judiciary’s twitter laureate, Texas Supreme Court Justice Don Willett, but Judge Neil Gorsuch of the Tenth Circuit was right up there. As you can see by my statement to CNN, I’m pleased as punch with the selection. 

There’ll be time enough to analyze Judge Gorsuch’s work, but after reading a stack of his opinions over the weekend, the most salient parts of his judicial record are as follows:

  1. A keen appreciation for constitutional structure as a guarantor of our rights and liberties.
  2. A real devotion to originalism – probably more than the self-described “faint-hearted originalist” Antonin Scalia – and textualism.
  3. Strong support for the freedom of speech and religion, and the First Amendment more broadly.
  4. Skepticism of the administrative state.
  5. Like Scalia, he construes criminal statutes narrowly, so people aren’t convicted and punished without the government’s meeting its evidentiary burden or establishing that it didn’t violate constitutional rights in arresting and prosecuting defendants.
  6. Really, really good writing, which even Justice Elena Kagan has praised.

Gorsuch also maintains a good relationship with Cato and has published a Policy Analysis with us. In short, Donald Trump has managed to pick a nominee who should please everyone other than progressives: social conservatives, libertarians, legal elites, and I imagine the populists who trust him to pick “the best judges.” Left-wing activists are already talking about how Gorsuch is extreme and is anti-women, workers, yada yada – they have to raise money somehow – but I find it hard to see how Senate Democrats will muster 40 votes to sustain a filibuster against someone who was unanimously confirmed in 2006, particularly with a tough 2018 map.

For more analysis, see my short piece in the New York Post, plus Andrew Grossman and David Rivkin in the Wall Street Journal, as well as these excellent essays by Ramesh Ponnuru and Ed Whelan.

There are numerous causes of federal government expansion, including special-interest pressures and the ability to borrow-and-spend endlessly.

Another cause was highlighted in a recent story about a Bush-Obama education program: politicians are excessively optimistic and hopelessly naïve about their ability to solve society’s problems top-down from Washington.

Neal McCluskey mentioned the failure of the School Improvement Grant program the other day, but I wanted to highlight the Washington Post summary because this is such a classic failure:

One of the Obama administration’s signature efforts in education, which pumped billions of federal dollars into overhauling the nation’s worst schools, failed to produce meaningful results, according to a federal analysis.

Test scores, graduation rates and college enrollment were no different in schools that received money through the School Improvement Grants program — the largest federal investment ever targeted to failing schools — than in schools that did not.

The Education Department published the findings on the website of its research division on Wednesday  hours before President Obama’s political appointees walked out the door.

The School Improvement Grants program has been around since the administration of President George W. Bush, but it received an enormous boost under Obama. The administration funneled $7 billion into the program between 2010 and 2015 — far exceeding the $4 billion it spent on Race to the Top grants.

The school turnaround effort, he told The Washington Post days before he left office in 2016, was arguably the administration’s “biggest bet.”

He and other administration officials sought to highlight individual schools that made dramatic improvements after receiving the money. But the new study released this week shows that, as a large-scale effort, School Improvement Grants failed.

It is excessively optimistic and hopelessly naïve to think that a new federal spending effort would turn around the nation’s schools after that approach has not worked for five decades. But the Post reveals how deep the blind optimism was in this case:

Some education experts say that the administration closed its eyes to mounting evidence about the program’s problems in its own interim evaluations, which were released in the years after the first big infusion of cash.

The latest interim evaluation, released in 2015, found mixed results, with students at one-third of the schools showing no improvement or even sliding backward.

Even then, Duncan remained optimistic about the School Improvement Grants, which he said had — along with the Race to the Top grants — unleashed innovation across the country.

For more on the causes of government growth and failure, see here and here.

First Doubts” dealt with predictions that a 25% rise in the dollar could make a 20% tax on imports disappear with only temporary effects on trade but a $1.2 trillion increase in tax revenues (which would supposedly be paid by foreigners, and without complaint).  

Second Doubts will focus on a key claim that border adjustability is needed because “exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost.”   And we’ll question whether border adjustability is justified because corporate “cash flow” taxes under the House GOP plan are more like value-added taxes than corporate income taxes in other countries.

A Better Way” (a House Republican discussion document of June 24, 2016) says, “In the absence of border adjustments, exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost. This amounts to a self-imposed unilateral penalty on U.S. exports and a self-imposed unilateral subsidy for U.S. imports [emphasis added].”  

That statement makes the case for “border adjustment” – which means the costs of imports (unlike equivalent domestic costs) would cease to be tax-deductible for business and rewards from selling exports would cease to be taxable.  

Since all countries have corporate income taxes, what could it possibly mean to say only our own corporate income tax is an “implicit” tax on exports?  Who pays this “implicit” tax?

What could it mean to say that failure to impose U.S. income tax on foreign factories is a “subsidy to imports?”  

To claim U.S. exports “implicitly bear the cost of the corporate income tax” suggests the incidence of the corporate tax falls on consumers (foreign and domestic) in the form of higher U.S. prices.  Were it not for corporate taxes, the argument implies, cheaper U.S. exports could easily undercut the competition.  This is terrible economics. It makes no more sense that saying workers can avoid income and payroll tax by demanding a higher wage.

 The notion that businessmen simply charge extra to cover the cost of income taxes is rejected by all academic studies of who bears the corporate tax.  The Congressional Budget Office, for example, estimates that owners of capital bear 75% of the corporate tax and labor bears 25% through reduced productivity and real wages.  The Tax Policy Center estimates capital bears 80% of the corporate tax, labor 20% and consumers zero.  

The other Better Way complaint – that “imports into the United States do not bear a U.S. income tax cost” – is true yet strange.  It is likewise true that Australian imports of U.S. goods do not bear an Australian income tax. 

Corporations exporting from other countries have their own national income taxes to pay. It is bizarre to describe failure to tax profits of foreign firms as a “subsidy” to imports. Countries don’t tolerate foreign taxation of their businesses income unless occupied by a foreign army. 

Any alleged pro-import or anti-export bias of U.S. taxes clearly has nothing to do with corporate taxes, except that our high tax rate hurts business. But what about those Value-Added-Taxes (VAT) the border-adjusters seem to covet?

Just as all countries tax income of their corporations, all countries also impose “border adjusted” sales taxes on their consumers.  U.S. federal excise taxes and state sales taxes are border-adjusted just as foreign VATs are, and they bring in about 4% of GDP.  

VATs in Europe are typically near 10% of GDP.  But high taxes are nothing to envy.  Some our biggest trading partners collect only 5-7% of GDP from VATs – including Japan, Australia, Korea, Canada and Mexico.

Sales and excise taxes amounted to 3.7% of GDP in the U.S. from 2010-2014, according to the OECD, while Mexico’s VAT amounted to 4.6% of GDP.  Neither country imposes such sales taxes on exports, and both impose them on imports.  Yet Trump advisers complained, mysteriously, that Mexico’s VAT gave it some sort of unfair trade advantage over the U.S.

The House GOP plan tries to argue that two hoped-for changes in the corporate income tax – immediate expensing for investment and denial of interest deduction – magically transform their border-adjustable corporate tax (BACT) into a consumer sales tax, like the VAT.

 Tax Policy Center economist Bill Gale says the BACT “is essentially a value-added tax (VAT), but with a deduction for wages.”  No, it isn’t. 

A VAT taxes each firm’s revenue from sales minus the cost of goods bought from other companies.  Like a corporate income tax, by contrast, the GOP’s “cash flow” tax falls on revenue minus virtually all the usual business expenses except interest.  Call it what you like, this is essentially an income tax with a quicker write-off for capital investments (not land), and no deduction for interest expense (just as there is no deduction for dividends).  It’s no VAT.

Disallowing a deduction for imports would raise more tax revenue for the same reason disallowing a deduction for wages would raise more revenue. But for firms with high import costs, the Better Way tax bill could be higher than it is now, despite the deceptive 20% rate.

According to Carolyn Freund of the Peterson Institute, “The cash-flow tax proposed in the House is discriminatory. The tax on domestically produced goods would be less than the tax on imports, and it would vary across sectors. Unlike the sales tax, the cash-flow tax with border adjustment would favor domestically produced goods. In particular, it would have the odd feature that home goods would be taxed on total value added, less the wage bill; in contrast, foreign goods will be taxed on total value added.”  A football produced in the U.S. with imported leather would face a tax, while a football produced with U.S. leather would not.

Whatever the logic behind the proposed Border-Adjustable Corporate Tax (BACT), the politics of getting it enacted look doubtful.  What BACT economists dismiss as an ignorant belief that import taxes will injure import-dependent companies nevertheless motivates those companies to lobby hard against it.  And they include the largest private employers in the country, such as Wal-Mart and Target.

Regardless whether World Trade Organization official could be cajoled into approving this scheme (quite unlikely), what would our best trading partners say and do? Could anyone suppose Canada would sit back and smile if U.S. oil refiners had to pay 20% extra for Canadian crude?  Is Canada expected to feel happier about that deal if our greenback then rose 25% against the Canadian dollar?

This Border Adjustable Corporate Tax is not just a technical challenge for professional Treasury Department tax obfuscators, it would also pose huge diplomatic problems for the Commerce and State Departments.

Suppose the textbook model worked perfectly and the import tax and export subsidy left imports and exports just the same, sooner or later. Then why do it?  Because it’s a huge tax increase disguised as a tax cut.

Martin Feldstein has repeatedly advocated a lower dollar every couple of years, such as here and here and here.  Yet he now counts it a blessing that the dollar would rise by 25% with border adjustability. Why? He argues that because trade supposedly remains unaffected, the tax on U.S.  importers exceeds the subsidy to exporters, generating a huge tax windfall which is supposedly painless.   “Because U.S. imports are about 15% of GDP and exports only about 12%,” writes Feldstein, “the border tax adjustment gains revenue equal to 20% of the 3% trade imbalance or 0.6% of GDP, currently about $120 billion a year.” 

In the Feldstein view, future trade deficits are assumed stuck at 3% of GDP for a decade –regardless of tax incentives for investment or saving– and Congress is advised to use the BACT to manipulate the currency and thereby raise $1.2 trillion over a decade, ostensibly at other countries’ expense.

If the BACT shrinks the trade deficit as its supporters claim, then the Feldstein and Tax Policy Center estimates of a $1.2 trillion 10-year revenue windfall are wrong.  Proponents can’t have it both ways: The 20% tax or tariff on imports and matching subsidies for exports either reduces future trade deficits or it raises $1.2 trillion – it can’t do both.   

“The burden of the $120 billion annual revenue gain is not borne by U.S. consumers or companies,” says Feldstein.  That’s a hard sell for U.S. consumers and companies, and they’re unlikely to buy it.  

The corporate tax rate is much too high, producing nothing but corporate relocation, excess tax-deductible debt and accounting tricks to move expenses here and profits offshore. There is no need to devise bad tax increases to “pay for” a lower tax rate. Other countries collect much more revenue with much lower rates.  Try it. It works.

Keep it simple: Prioritize lower marginal tax rates on new investment.

Utopian tax reforms that become too pushy and divisive always fail.  

Monday saw President Trump force through another executive order - “Reducing Regulation and Controlling Regulatory Costs. The headline was the introduction of a new “one-in, two-out” rule for new regulations:

for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.

Anything that can be done to focus regulators’ minds on the costs imposed on private businesses and groups of new regulation is probably, on net, positive. But the UK has had a policy like this since 2005, first adopting a “‘one-in, one-out” rule, then a “one-in, two-out” rule and now a “one-in, three-out” variant. The results are widely acknowledged to be mixed. Here are 4 lessons from the UK the Trump administration should bear in mind.

1. Focus on costs, not counting regulations

What really matters is not the number of regulations but the costs imposed on private businesses and civil society organizations. A “numbers” approach could be gamed: a department could introduce a new regulation, and remove a defunct one, while imposing new business costs. Thankfully, both the UK government and Trump’s executive order now recognize this. Section 2, part c) of the order says:

any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations

In the UK though, “one-in, one-out” eventually meant that for every new regulation introduced with a net cost to business, regulations up to an equivalent net cost would be eliminated. It would be better named a “pound-for-pound” rule. When upgraded to “one-in, two-out” every new regulation with net costs to business had to be compensated for by regulatory removal or revision at double the monetary cost of the new regulation. And so on. Whether badly drafted or otherwise, Trump’s version reads more like the “one-in, one-out” rule on cost, albeit having to find the cost compensation across two regulations. If implemented in this way, it could become messy to implement for many agencies. Judging regulation by pure cost rather than numbers, as the UK has done, would be a stronger constraint.

2.  Judge by net costs rather than gross costs

Any new measure, whether regulatory or deregulatory, will generate some costs to private businesses and civil society. If Trump is serious about deregulation, it therefore makes much more sense to assess “net” costs, rather than “gross” costs as a target for the new rule. This was recognized in Britain which now carries out the net cost methodology. Otherwise perverse incentives are created: departments or agencies will be cautious about ever proposing deregulatory measures where benefits to business exceed new costs, because they would still have to find gross cost savings elsewhere. As Stuart Benjamin outlines, steps taken to make pipeline construction easier, for example, otherwise might end up delayed as the agency scrambles around finding existing regulations with gross costs to remove to compensate for the very small costs of a deregulating measure. This might seem an obvious point, but at the moment the order is ambiguous – simply stating that the Director of the OMB will provide guidance “for standardizing the measurement and estimation of regulatory costs.”

3.  Include as much as possible within the rule

The Centre for Policy Studies found that in 2011 42 per cent of all new regulations introduced fell outside of the scope of the “one-in, one-out” policy in the UK and this rose as high as 50 per cent in the first six months of 2012. Even when the “one-in, two-out” policy was introduced, it excluded regulations relating to tax collection, imposed by the European Union (unless the UK government went beyond EU requirements), for civil emergencies, that had no impact on businesses, with only indirect effects on businesses, to meet international obligations, relating to civil emergencies, relating to financial systemic risk, relating to fines, fees and charges, if the regulation had a temporary lifespan and if it was periodic adjustment of existing regulation, such as the National Minimum Wage.

These exclusions are significant. If one examines purely the regulations under the rule’s scope, then since 2005 the variants are said to have reduced net business costs by $10.8 billion. In truth, however, this pales into insignificance compared with the rise in net costs in areas outside of the scope. In conjunction with its “one-in, three-out” policy for 2015-2020, the UK government has an aim of reducing net regulatory costs on business by $12.6 billion. Since 2015 it believes it has got $1.1 billion of the way there. But the UK’s National Audit Office estimates that $10.4 billion of other new costs have been imposed on business outside of the framework in that period.

Trump’s executive order excludes regulations relating to national security and also includes provision for the Director of the OMB to make other exemptions. It has been reported that it will not cover independent agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission. The lesson from the UK is clear: if you exclude too much from the framework, you will not make overall regulatory cost savings.

4. Don’t ignore the stock

Trump’s executive order is all about the flow of new regulations. But if one is serious about deregulation then you have to re-examine much of the stock of existing regulations, even absent new regulations being brought forward. In the UK the “one-in, one-out” rule was therefore complemented with a “Red Tape Challenge” to identify and remove regulations from the existing stock.

The UK National Audit Office identified that many departments in the UK are simply unaware of the costs imposed as a result of their existing regulations. They therefore have no idea how ambitious their targets for reducing regulatory costs really are. It’s therefore essential that a major deregulatory push in the US includes continued auditing of the stock of regulations as well as reaction to the flow.

In a classic account of why prohibitions and other economic restrictions harmful to consumers arise and persist, economist Bruce Yandle noted that such restrictions are often promoted by a coalition between two groups. The first group are morally motivated do-gooders (“Baptists”) who think that the restrictions will promote the public interest. The second group are profit-motivated business people (“bootleggers”) who may adopt the language of the first group but whose aim is to profit by legally quashing potential competition. In Yandle’s example, the prohibition of liquor in the United States during the 1920s was loudly promoted by Baptists and others who considered liquor consumption sinful, and quietly backed by bootleggers whose profits from rum-running depended on the absence of legal liquor.

In today’s organized effort to restrict or prohibit the use of cash we can see the same kind of coalition. The metaphorical Baptists include leading economic advisors like Kenneth Rogoff (recently labeled by one Indian writer “the high priest of demonetisation”) and Larry Summers. They argue that banning cash would fight crime and helpfully give additional power to monetary policy-makers (by enabling negative nominal interest rates). I have criticized these arguments for currency prohibitionism before. Other presumably disinterested advocates advance the implausible claim that reducing the payment options of the world’s poor by banning cash will benefit the poor by promoting “financial inclusion.” I scrutinize this claim below.

The metaphorical bootleggers are the participating governments that expect to gain tax revenues by driving transactions into “digital” forms that are trackable by tax authorities, plus the participating payment processors — banks, credit card networks, mobile payment providers — that expect to gain transaction fees.

In the historical case of liquor prohibition the bootleggers operated behind the scenes, but in the present-day efforts at cash prohibition both parts of the coalition are openly working together under the umbrella of the Better Than Cash Alliance (hereafter BTCA). German journalist Norbert Häring has recently claimed on his blog that the BTCA was a prime mover behind India’s shock demonetization program. (See my previous commentary on that program here and here.) The evidence he provides for his claim is not wholly convincing. Even so the BTCA is a curious public-private undertaking worthy of critical examination by anyone who values freedom of choice in payment media or is skeptical of development programs that seek to impose the rule of experts on the world’s poor.

On its Twitter page, the BTCA describes itself as a “UN-based Alliance promoting the shift from cash to digital payments to reduce poverty and drive inclusive growth.” Promoting a shift sounds innocuous, but the Alliance’s literature is permeated by the idea that the goal of promoting the growth of digital payments justifies the means of forcibly restricting the use of cash. Created in 2012, the BTCA is currently funded by a mixed group of seven “resource partner” institutions. Some partners have reported giving $1.5 million per year. Two are tax-funded:

  • United Nations Capital Development Fund
  • US Agency for International Development.

Two are charitable offshoots of major IT and payment players:

  • The Bill and Melinda Gates Foundation (fortune from Microsoft)
  • Omidyar Network (fortune from eBay and PayPal).

Three are giant commercial payment processors:

  • Citi (Citibank and its affiliates)
  • Visa
  • Mastercard

Mastercard was not an original founder but joined in 2013. The Ford Foundation was a founding member of the Alliance, but is not currently listed among its partners on the Alliance’s webpage.

The BCTA’s list of “members” includes 24 nation-states in the developing world, and 21 “International Organizations” including:

  • Clinton Development Initiative
  • European Bank for Reconstruction and Development
  • Inter-American Development Bank
  • International Fund for Agricultural Development
  • United Nations Development Programme
  • United Nations Population Fund
  • United Nations Secretariat
  • Universal Postal Union

The financial advantages of digitizing payments to tax-collecting governments are sometimes mentioned in BTCA reports or public relations materials, but I cannot find an instance where the interests of fee-collecting payment processors are mentioned.

The eagerness of the US government to suppress cash use in the developing world is puzzling on financial grounds, given that US currency notes are a very popular form of cash there. An estimated 55% of Federal Reserve Notes (by value) circulate abroad, mostly in the form of $100 bills. At the current level of FRN in circulation, this means an $827 billion interest-free loan to the US Treasury. Perhaps the Treasury is unaware of the efforts to quash the overseas use of cash by USAID, which operates as an independent agency within the foreign policy arena, although this seems unlikely. Or perhaps Häring’s hypothesis is right that USAID on this issue is captive to the interests of American payment firms or of the US surveillance establishment:

The business interests of the US-companies that dominate the global IT business and payment systems are an important reason for the zeal of the US-government in its push to reduce cash use worldwide, but it is not the only one and might not be the most important one. Another motive is surveillance power that goes with increased use of digital payment.

There is probably little point in urging Visa, Mastercard, and Citi to forego profits by severing their ties with efforts to limit the payment options of the world’s poor (although an organized boycott might get their attention). Likewise there is probably little point in telling governments to forego potential revenue by not forcing citizens to make their incomes more readily detectable.

There is some hope that well-meaning non-profits and government agencies are open to the argument that the restriction of payment options is not plausibly a means appropriate to the ends they seek. That is, suppressing cash will not plausibly make the poor wealthier or better off. The BTCA seems nowhere to consider this possibility. Transition to digital payments is there treated as a good thing without consideration of the costs or compulsion involved.

The BTCA’s report on “Accelerators to an Inclusive Digital Payments Ecosystem” stipulates that the goal is not just to improve digital payments, but to “promote cashless economies,” i.e. to eradicate the use of cash. After many non-coercive recommendations, it adds (#10): “Many countries are putting in place measures to encourage or require government entities, private businesses, and individuals to shift away from cash, sometimes in the form of policies that disincentivize cash usage.” A sidebar on the same page informs the reader of the success of the “Cash-less Nigeria” policy initiative in raising the volume of digital payments. A quick visit to the Central Bank of Nigeria’s website reveals that the policy consists of three restrictions on Nigerian citizens: it taxes cash withdrawals above a certain daily limit, outlaws unlicensed cash collection services, and prohibits banks from cashing large third-party checks.

The Omidyar Network’s website talks up the BTCA in these terms:  “The organization focuses on shifting away from cash payments in order to improve the livelihoods of those in low-income areas who lack access to more efficient digital payments.” But improving livelihoods normally means adding attractive options, not pushing people away from what they currently consider the most advantageous practices. Welfare improves when “shifting away from cash payments” is a side effect of the public voluntarily adopting new payment options that they now prefer, but not when the shift is compulsory, the result of restricting cash so that people will do what the policy-maker prefers.

Basic economics tells us that voluntary trade is mutually beneficial. Government policies that compel or ban actions cannot be presumed beneficial. On the contrary, government presumably harms individuals when it reduces their range of options, including their range of payment options. A special argument (such as a “network externality” argument, discussed below) is needed to rationalize how blocking an individual’s desired trades can promote the individual citizen’s interest as the individual sees it. Thus measures to require private businesses and individuals to shift from using cash to using a currently less preferred payment option are presumably harmful, contrary to the stated BTCA goal of promoting “the transition from cash to digital payments in a way that improves lives.” It is hard to find any BTCA argument seriously attempting to rebut the presumption.

In a well-produced video, a variety of BTCA spokespersons try to articulate a rationale for the Alliance’s anti-cash agenda. Luis Ubiñas, then President of the Ford Foundation offers: “We know that electronic transfers work. When those payments go to banks, people save. It might only be fifty cents. It might only be a dollar. But they save. The people take those savings and build businesses.” But these are purely internal and not external effects. If making payments via banks really does better serve the ends of would-be savers and business-builders, informing them of this fact should persuade such people to open and use bank accounts. It provides no rationale for denying anyone the option of using cash. The same is true of UN Capital Development Fund’s Christine Roth’s claims that electronic payments “decrease the costs of the transactions” and are “a safer way for recipients to access money.”

There are two closer approaches in the video to an argument that government intervention can enhance welfare. The first is Ubiñas’s statement that “These kinds of transformations don’t happen easily. For these kind of [electronic] transfers to happen the backbone has to exist.” If “the backbone” here means a clearing and settlement system for deposit transfers, it already does exist in any country with checking accounts. But suppose enlargement of the infrastructure is warranted. It isn’t sufficient to point out that a fixed investment needs to be made in advance of doing a new business. Businesses do that every day. What would need to be explained is why private enterprise cannot sufficiently provide “the backbone.”

The second approach is the declaration by William Sheedy, Group President for the Americas of Visa Inc., that in the developing world “electronic payments are not migrating fast enough, because you are not seeing the right blend of government, NGO, and private industry partnership.” USAID administrator Rajiv Shah made a similar assertion in 2012 remarks at the Ford Foundation: “It took the credit card industry fifty years to gain traction in the United States. But this slow rate of adoption teaches us that collective action is necessary to drive transformational change.” These statements unfortunately provide no reason for considering faster migration better given the costs of acceleration (on what basis does Shah know that the experienced rate of adoption was too slow?), nor for judging in which direction the “right blend” of private and collective action lies. Transformation change is not ipso facto worth the cost.

In an op-ed in the HuffPost, BTCA’s managing director Ruth Goodwin-Groen defended the push to restrict the use of cash as a tax-enhancer:

In 2015, a global agreement for financing the Sustainable Development Goals recognized domestic resource mobilization as essential to inclusive growth. This makes regular tax revenue more vital than ever to the future of many low-income countries. … There is growing evidence that enabling people and businesses to pay taxes digitally can increase government revenue and produce a wide range of other benefits for society.

Increasing the size of real resource transfers from the private citizens to the government, needless to say, does not presumptively provide a net benefit to society.

I can imagine a stronger argument for accelerating the digitalization of payments. It would propose that the practice of paying in cash rather than by bank transfer is a kind of prisoner’s dilemma or coordination failure due to a network externality: each individual sticks with cash so long as his trading partners do, and vice-versa. Cash is then the inferior of two alternative equilibria, to which the economy has been “locked in” by historical accident. Intervention can establish the digital-payments equilibrium that everyone agrees is better but has been blocked by the need for everyone to switch together. Such tragedies are rare in practice, however, and the argument seems hard to make in the case of digitizing payments. In every country where banks offer checking accounts, non-cash payments have established a foothold. At the margin of transactions between unbanked and banked individuals, payments can migrate from cash to digital transfer, and will migrate once digital payments become more beneficial or less costly than at present, without it requiring any individuals farther from the margin to switch. Making digital payments less costly is an entrepreneurial challenge, not a collective action problem. The case for compelling everyone to give up cash is an empty box.

To conclude, I remain puzzled as to what argument or evidence convinces presumably well-meaning players like the Gates Foundation and the Omidyar Network to embrace the implausible proposition that suppression of cash will improve the lot of the cash-using poor. Herding people into a system they find unattractive presumably makes them worse off and not better off as they see things. If anyone can point me toward a serious attempt to rebut the presumption that suppressing cash will reduce their welfare, I would be much obliged.

[Cross-posted from Alt-M.org]

President Trump issued an executive order on Friday that includes a ban on the entry of virtually all nationals from several countries. The same day, the New York Times published my argument that the portion of the ban that bars immigrants or legal permanent residents violates the law, which bans discrimination against immigrants based on national origin.

Andrew McCarthy of National Review Online was kind enough to take the time to publish a response (“Trump’s Exclusion of Aliens from Specific Countries Is Legal”). Because Mr. McCarthy’s article demonstrates significant confusion over my argument, the facts, and the laws at issue, it surprised me to see National Review editor Rich Lowry also cite it favorably. Despite the weakness of its analysis, the piece provides me an opportunity to clarify and reinforce some aspects of my argument that brevity required me to excise from the Times.

1. The Constitution gives the power to make immigration laws to Congress. Mr. McCarthy writes:

Under the Constitution, as Thomas Jefferson wrote shortly after its adoption, “the transaction of business with foreign nations is Executive altogether.” … In the international arena, then, if there is arguable conflict between a presidential policy and a congressional statute, the president’s policy will take precedence in the absence of some clear constitutional commitment of the subject matter to legislative resolution.

In other words, the president can ignore congressional limits in this area. He cites case law in which courts describe the president’s foreign affairs powers with respect to relations with foreign governments as expansive, but cites no case that concludes the president can ignore Congress to exclude immigrants. It is reminiscent of President Nixon’s famous argument that “when the president does it, that means it is not illegal.” It is Congress, not the president, that makes immigration law. “[O]ver no conceivable subject is the legislative power of Congress more complete than it is over… the admission of aliens,” ruled the Supreme Court in Oceanic Steam Navigation Co. v. Stranahan.

Mr. McCarthy had no problem defending this view when the actions at issue were President Obama’s, which were also justified based on “security,” but now adopts it to defend President Trump’s. As my Cato colleagues wrote at the time, “it is not for the president alone to make foundational changes to immigration law—in conflict with the laws passed by Congress and in ways that go beyond constitutionally authorized executive power.”

2. President Trump cannot use the supposed “purpose” of a statute to override its plain meaning. Mr. McCarthy quotes the relevant portion of the Immigration Act of 1965 (8 U.S.C. 1152(a)) that amended the Immigration and Nationality Act of 1952, which clearly prohibits discrimination in the issuance of an immigrant visa based on national origin. But Mr. McCarthy states:

…the purpose of the anti-discrimination provision (signed by President Lyndon Johnson in 1965) was to end the racially and ethnically discriminatory “national origins” immigration practice that was skewed in favor of Western Europe. Trump’s executive order, to the contrary, is in no way an effort to affect the racial or ethnic composition of the nation or its incoming immigrants.

Mr. McCarthy gives no citation for this claim—which contradicts everything the president and his advisors have been saying about the intent being to ban Muslims—but regardless of Mr. Trump’s intention, the result of his actions does affect the ethnic composition of the country, which was indeed one of the actions that Congress in 1965 thought it was banning.

But Mr. McCarthy is again claiming that the president can ignore the plain meaning of the laws of Congress, this time based on its supposed “purpose.” But as my colleagues at the Cato Institute put it, “Unenacted legislative intentions are not law under the Constitution.” It is the text on the page that makes law. Mr. McCarthy condemned this type of legal reasoning as a “post-law” argument when President Obama reasoned this same way in the Obamacare case, King v. Burwell, yet he eagerly adopts it now to defend President Trump.

3. President Trump cannot just pick and choose which statutes to enforce. Mr. McCarthy cites the relevant portion of the Immigration and Nationality Act of 1952 (8 U.S.C. 1182(f)) that grants authority to the president to suspend “any class of aliens” he deems “detrimental to the interests of the United States.” He states that this provision allows President Trump to simply ignore the ban on discriminating based on national origin. But a basic rule of statutory construction holds that in the case of a conflict, the statute enacted most recently wins. In this case, that would be the 1965 amendments banning discrimination in the 1952 Act.

Moreover, as the Supreme Court said in Beals v. Hale, “statutes which apparently conflict with each other are to be reconciled, as far as may be, on any fair hypothesis, and validity given to each.” My view treats the 1952 Act as a general authority subject to a specific limitation by the amendments of 1965—the statutes are reconciled, and both still have validity—but adopting Mr. McCarthy’s view would void the restriction from 1965 act’s amendments. If President Trump can legally ban a nationality by vaguely deeming them a “detriment,” then the authority in the 1965 act would have no power at all to prevent discrimination.

4. President Trump cannot remake the immigration system by executive order. The Immigration Act of 1965 was more than just a single provision prohibiting discrimination. As Justice Scalia has written, statutory construction “is a holistic endeavor. A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme.” Turning to the rest of the Immigration Act of 1965 makes clear that Congress intended and did create an entire system—or statutory scheme—of unbiased immigration. The rest of 8 U.S.C. 1152 is intended to give each country an equal shot at the number of visas issued each year. This entire system cannot be undone by the actions of this president.

5. Congress never authorized discrimination based on national origin. Mr. McCarthy also notes that the president’s order draws its list of seven countries from a list drawn up by Congress and the president in 2015. That law required that temporary visitors who are nationals of these countries be interviewed and receive a visa before travelling to the United States.

This is certainly discriminatory, but this provision did not create a new rule that, as Mr. McCarthy infers, “expressly authorized discrimination on the basis of national origin when concerns over international terrorism are involved.” This law dealt with temporary visitor visas, so it had no impact whatsoever on the bar on discrimination in the issuance of permanent immigrant visas for people from these countries. Just to reiterate, the bar on national origin discrimination only applies to immigrants–people who are coming to the United States for permanent residency.

His confusion over this issue reappears when he discusses President Carter’s visa restrictions on temporary visas for Iranian nationals, and in any case, President Carter’s order is simply not comparable to President Trump’s. Mr. McCarthy claims that President Carter imposed the restrictions based on “terrorism.” This is just not true. “Militants occupying the embassy had been using a visa machine there to issue and validate visas,” reported the New York Times in 1980. “Henceforth no Iranians would be allowed to enter this country unless they had their visas revalidated by the State Department in consular offices.” This is nothing even remotely similar to what President Trump is doing: creating a presumptive ban on all immigrants based on their nationality even when there was no doubt about the legitimacy of their visas.

6. President Trump cannot ignore court precedent based on national security. Mr. McCarthy waves off the D.C. Court of Appeals opinion in U.S. Department of State v. Legal Assistance for Vietnamese Asylum Seekers that enforced the ban on national origin discrimination by claiming that it “was unrelated to national security, and thus problematic.” But the 1952 act only requires that the entries be “detrimental.” There is no requirement that they be a “threat.” Either this power is unfettered by the 1965 amendments or it is not. Mr. McCarthy wants to have it both ways.

Moreover, the government used this exact defense in the Vietnamese case. “This case involves the power to exclude aliens from the Nation, a power that is integrally related to the conduct of foreign relations,” it wrote. The discriminatory policy was adopted, it said, “for important reasons of foreign policy.” Yet the D.C. Court of Appeals rejected the argument. “The appellees’ proffered statutory interpretation,” it found, “leaving it fully possessed of all its constitutional power to make nationality-based distinctions, would render 8 U.S.C. § 1152(a) a virtual nullity.”

Of course, this makes hash of Mr. McCarthy’s assertion that the president has no limits on his ability to restrict or regulate immigration.

This was a news headline in the Wall Street Journal yesterday: “States’ Revenue Shortfalls Exacerbate Budget Crunch.” The article said that, “Faced with weak revenue, sluggish growth and possible federal funding cuts, many governors and state lawmakers face a tough budget season.”

That made me laugh. “States as victims” is a common storyline in the mainstream media anytime that state budgets are not growing gangbusters. States need to balance their general fund budgets each year, and so it is true that state policymakers must be more responsible that the spend-and-borrow politicians in Washington. But news stories on the states rarely provide the important context of how much budgets have grown over time.

The chart below—based on NASBO data—shows general fund revenues since fiscal 2010, with projected revenues for fiscal 2017. To achieve annual balance, the “tough” task of state policymakers is simply to keep spending rising no faster than these revenues.

Does the chart look like a “crunch” to you with “weak” revenue? And if 33 percent revenue growth over seven years and 3.6 percent projected growth in 2017 creates a “shortfall,” what do you think the problem is?

In a committee vote the tightness of which surprised no one, this morning President Trump’s nominee for education secretary, Betsy DeVos, was approved on a purely partisan basis by the Senate Health, Education, Labor and Pensions committee. DeVos’s nomination now moves to the full Senate.

While the rhetoric surrounding DeVos has been heavily targeted at her competence, the main issue seems to be that Democrats generally oppose private school choice programs while Republicans generally do not. Even questions about the Individuals with Disabilities Education Act (IDEA) at DeVos’s confirmation hearing—would she support attaching IDEA rules to public funding that disabled students could take to a chosen school?—were primarily about choice.

Choice is fundamentally different from public schooling. With choice, families have real power—the power to leave a school not serving them and take their education dollars elsewhere. This is why Florida’s McKay scholarship program for children with disabilities—which DeVos tried to defend before being cut off in questioning at her nomination hearing—has very high satisfaction levels among parents using it. Public schools, in contrast, get taxpayer money no matter what, and require seemingly endless political, bureaucratic, and legal combat to hopefully—just hopefully—get improvements made.

Of course, choice needs freedom from stultifying rules and regulations to be meaningful. Specialization, competition, innovation—none can meaningfully exist without educators having the freedom to engage in new and different ways of delivering education.

The powerful inclination to wrap programs in incapacitating layers of red tape…er, “accountability”…is a major reason that the federal government should not try to deliver school choice, or govern education at all. (The Constitution is the other big one.) It is simply too dangerous to have one government—the federal government—supply choice nationwide. But there is good reason to fear that the Trump administration will try to do it nonetheless, based on Trump’s promise to make a  $20 billion choice “investment.”

Empowering parents with choice is the right way to deliver education. But the clear and present danger of freedom-smothering rules and regulations, as we’ve seen brightly illustrated by the debate over DeVos, accompanies any government funds. Which is why choice must not be delivered by Washington.

Following a day of feverish rumors to the contrary, the White House has flatly denied that it plans to reverse an Obama administration directive extending nondiscrimination protections to lesbian, gay, bisexual and transgender federal workers. “ ‘President Trump continues to be respectful and supportive of L.G.B.T.Q. rights, just as he was throughout the election,’ the White House said in a statement. “The president is proud to have been the first ever G.O.P. nominee to mention the L.G.B.T.Q. community in his nomination acceptance speech, pledging then to protect the community from violence and oppression.”

The White House did not rule out revisiting other decisions by its predecessor administration on gay rights, such as an order requiring federal contractors to adopt nondiscrimination policies, which pointedly did not provide conscience exemptions for private religious agencies. A year and a half ago in this space I myself took issue with what the Obama administration was up to on this front.

The effect of a contractor ban without religious objector provisions, I argued, would be to kick various religious agencies out of social service work in public settings in adoptions and foster care, as well as some prison, drug rehab, and various other settings. Ousting conservative religious groups from participation in social service adoption is likely to cut down on the number of successful placements made of children in public care, which would hurt the taxpayer, hurt adoptive parents, and, not least, hurt kids. The more genuinely pluralist approach, I argued, would be to acknowledge conscience exemptions while fully opening these systems to participation by contractors that gladly serve gays, persons of no given sect, religious unbelievers, and so forth. 

Further reaction is probably best postponed until things get past the rumor stage.

At noon on January 20th, Barack Obama stepped aside, leaving Donald Trump as the leader of the free world. In his inaugural address, Trump pledged to implement an ‘America First’ doctrine. But while the implications for trade and immigration are relatively clear, his speech brought us little closer to understanding what this will mean for foreign policy.

Indeed, thanks to the incoherence of the president-elect’s foreign policy remarks during his campaign, the range of potential outcomes is wide. But Trump’s past comments suggest four potential paths that his ‘America First’ Doctrine could take.

The first option is true isolationism. Though it remained unclear throughout the campaign the extent to which Trump truly understood the historical baggage that came with the term ‘America First,’ many commentators assumed that he would indeed pursue a classic isolationist policy. And Trump seems to mean it literally in some cases: only a week into office, he has already sought to erect trade and immigration barriers. He may also seek to withdraw from the world in military terms, abandoning alliances, and refusing to engage in even the diplomatic resolution of international problems which don’t directly concern the United States.

Yet elements of Trump’s own statements call this assumption into question. From his insistence on increased military spending to his promise in the inaugural address to eradicate radical Islamic terrorism ‘completely from the face of the Earth,’ Trump has repeatedly implied that he is likely to pursue a relatively hawkish foreign policy.

A second option for the Trump Doctrine could be described as ‘pragmatic power.’ In his rare scripted speeches devoted to foreign policy, Trump’s speechwriters did a good job of working his off-the-cuff remarks into a relatively coherent and pragmatic approach to the world.

While unscripted Trump calls NATO ‘obsolete’ and a rip-off, for example, his speeches highlighted the need for wealthy allied states in Europe to pay more towards their own defense. Rex Tillerson, Trump’s nominee for Secretary of State, seems to share this worldview, noting in his confirmation hearings that his background as an engineer leads him to seek logical solutions to international crises.

Yet this level of coherent pragmatism appears unlikely given Trump’s own reactive personality. Intensive efforts by aides to reshape Trump’s inflammatory statements into a broader, saner critique of flawed U.S. democracy promotion and regime change efforts are often swiftly undone by the President himself. Within one day of his inauguration, for example, Trump reiterated his remarks on ‘taking the oil’ while visiting the headquarters of the Central Intelligence Agency.

A third option for Trump’s America First Doctrine is thus a far less pragmatic ‘global crusade.’ Drawing on the views of key advisors like Michael Flynn and Steve Bannon, Trump could instead embrace a ‘clash of civilizations’ approach to the world. This would subordinate all other foreign policy crises to a campaign against radical Islam, a philosophy that he and various advisors believe includes elements as diverse as Iran, al Qaeda, ISIS and the Muslim Brotherhood.

Indeed, in his augural address, Trump promised to “unite the civilized world against radical Islamic terrorism.” To that end, Trump’s conciliatory approach to Russia – in which he often cites terrorism as a key joint concern – suggests a willingness to work together on counterterrorism.

However, it remains uncertain whether Trump – not known for his cerebral qualities —will explicitly pick any such coherent strategy. Instead, the ‘America First’ doctrine that appears most likely to emerge is a reactive form of Jacksonianism, or a modified version of Reagan’s ‘Peace Through Strength.’

Such a strategy would take a more hands-off approach to global affairs, and enact substantive trade and immigration restrictions. But at the same time, it would follow through on Trump’s promises to rebuild and expand the U.S. military, increase military spending, destroy ISIS, expand the military’s rules of engagement, and take a reactive, hardline stance on Iran, China, nonproliferation and a host of other issues any time he feels that America’s honor is threatened.

The differences between these four potential Trump Doctrines cannot be overstated, yet all four remain politically viable paths, a testament to the campaign’s scattershot foreign policy pronouncements. And the internal politics of the incoming administration – where advisors appear to have a dizzying selection of different views – also matter. Trump’s inaugural address – apparently written by Steve Bannon – may only reflect one faction within the administration.

Trump’s inaugural address provided a name for his foreign policy doctrine, yet its content remains largely a mystery. Few presidents have ever come to office with so little background in governance and so ill-defined a foreign policy worldview. A rocky first week, filled with crises, has only exacerbated the confusion. Only as President Trump begins to settle into his new role will we finally start to learn which ‘America First’ doctrine we can expect for the next four years.

People have been asking me about the final few people President Trump seems to be considering for Supreme Court nomination. I know them and especially their work to varying degrees and am confident that they’re each worthy of elevation. Here’s a summary of their judicial profile.

Neil Gorsuch is probably the most like Scalia. He has a well thought out conception of constitutional interpretation and the way that structure protects liberty. He’s most known for his opinions supporting religious liberty and pushing back on the administrative state. In a Trumpian world, his biggest weakness is that he went to Harvard Law. He was confirmed unanimously to the Tenth Circuit and should not face significant opposition.    Thomas Hardiman is a judge’s judge. He decides the issues before him generally in a way that should be pleasing to conservative legal elites and does not go beyond the four corners of the case. He brings no ideological agenda to his tasks and so may be less like Scalia in that respect—and also he’s probably more deferential to law enforcement that Scalia was. He also was confirmed unanimously and should face no significant opposition except that some activists will glom on to his strong defense of the right to keep and bear arms.    William Pryor is a courageous and forthright judge. He would generate the most controversy because of his extra-judicial writings and speeches, most notably in stern opposition to Roe v. Wade. He has been attacked from both the left and the right (unjustly in my view) and his previous confirmation was itself not without controversy. He is best known for his writings on religious liberty and the proper judicial role.     It would be impolitic of me to name my preference, but let’s just say that the American people would be served well by any of them (or the others who’ve been mentioned).

On Friday, the Heritage Foundation hosted a panel of experts to discuss prospects for infrastructure policy during the Trump administration. You can watch the event on C-SPAN.

I discussed why infrastructure activities should be devolved to the states and private sector, and why the Trump plan to subsidize equity investments in infrastructure is not a good approach.

There were numerous points of agreement on the panel, which included Michael Sargent of Heritage, Robert Puentes of the Eno Center, and Marc Scribner of CEI. We all favored greater private investment in traditionally public infrastructure, and we all agreed that the Trump administration should put a high priority on air traffic control reform this year.

I make the case for privatizing air traffic control in a new op-ed in The Hill.

Last Friday, President Trump issued a misguided executive order affecting migration from seven majority-Muslim countries. In December 2015 Trump called for a “total and complete shutdown of Muslims entering the United States,” until (as his fans never tire of pointing out) elected officials “can figure out what is going on.” News from last week confirms that Trump’s rhetoric related to Muslims was not just campaign bombast; it was a serious policy proposal. Another immigration proposal touted during the campaign was also codified into policy by executive order last week, with Trump directing the Department of Homeland Security (DHS) to expand an interior immigration enforcement program that will grow the federal government’s role in state and local law policing while harming police departments’ relationships with the communities they are tasked to serve. 

Under §287(g) of the Immigration and Nationality Act, local and state police departments can enter into agreements with Immigration and Customs Enforcement (ICE) to enforce federal immigration laws. Thirty-four law enforcement agencies in 16 states are now taking part in the 287(g) program. Up until 2013 this program included “task force” agreements, which allowed participating officers to arrest suspected immigration law violators in the field, and “jail enforcement” agreements. Under “jail enforcement” agreements officers at state and local correctional facilities can seek to identify aliens via interviews and checking their biographic details against DHS databases.

Currently, only jail enforcement agreements are in place. The Obama administration abandoned the “task force” agreements at the end of 2012 amid worries about their negative effect on police-community relationships and accusations of racial profiling.

Trump said that he would “expand and revitalize” 287(g) during a speech last August. An executive order signed last week makes it clear that the Trump administration is serious about such a revitalization and expansion, including a reinstatement of “task force” agreements.

Section 8(b) of the executive order in question reads (emphasis mine): 

Sec. 8. Federal-State Agreements. It is the policy of the executive branch to empower State and local law enforcement agencies across the country to perform the functions of an immigration officer in the interior of the United States to the maximum extent permitted by law. 

[…] 

(b) To the extent permitted by law and with the consent of State or local officials, as appropriate, the Secretary shall take appropriate action, through agreements under section 287(g) of the INA, or otherwise, to authorize State and local law enforcement officials, as the Secretary determines are qualified and appropriate, to perform the functions of immigration officers in relation to the investigation, apprehension, or detention of aliens in the United States under the direction and the supervision of the Secretary. Such authorization shall be in addition to, rather than in place of, Federal performance of these duties. 

Under jail enforcement agreements 287(g) was reserved for custodial situations (excluding the field). The executive order allows DHS to authorize state and local police departments to “perform the functions of immigration officers” not only for the detention of aliens but also their apprehension. This is a sad return to agreements that pose threats to federalism and social cohesion.

As was noted in a November 2012 American Immigration Council (AIC) study, “287(g) agreements have resulted in widespread racial profiling.” A Department of Justice (DOJ) investigation found that Maricopa County (Arizona) Sheriff’s Office, which took part in the 287(g) program, had “poisoned the relationship between law enforcement and Latinos, hindering general law enforcement efforts within the Latino community.”

The same AIC study cites a DOJ investigation into Alamance County (N.C.) Sheriff’s Office and an ACLU study of Gwinnet County, Georgia, both of which highlight racial profiling.

The International Association of Chiefs of Police has stated, “local police agencies depend on the cooperation of immigrants, legal and illegal, in solving all sorts of crimes and in the maintenance of public order. Without assurances that they will not be subject to an immigration investigation and possible deportation, many immigrants with critical information would not come forward, even when heinous crimes are committed against them or their families.”

A 2009 Police Foundation paper also mentioned the negative effect 287(g) had on police-community relations: “[Police executives] were concerned that public safety would suffer because of destroyed trust and cooperation with immigrant communities. Participation in the 287(g) program, or at least the media coverage and fear generated by it, would undermine years of community-policing efforts, which in turn would compromise public safety,” adding that “the costs of the 287(g) program outweigh the benefits.”

The problems associated with using local police to enforce federal law was expressed bluntly by New Orleans mayor Mitch Landrieu, who shortly after the executive order was signed issued a statement saying in part, “the NOPD will not be coerced into joining Trump’s deportation army via the 287(g) program. Doing so would require the NOPD to pull officers focused on fighting crime off the street.”

It has been a little more than a week since Donald Trump took the Oath of Office. In that short time, he has demonstrated that he intends to convert his campaign rhetoric into policy. When it comes to 287(g) this will result in worsened police-community relations, a growth in federal government power, and local and state police officers siphoning resources towards immigration enforcement, all of which should be avoided. 

President Trump reportedly spoke with the king of Saudi Arabia on Sunday about imposing safe zones in Syria, presumably for the purpose of protecting civilians from rebels and Syrian and Russian bombardment. Such a policy carries a lot of risk, would likely violate international and U.S. law, and is strategically unwise.

Safe zones have a mixed record at best for protecting civilians. In the 1990s, Iraqi Shia in United Nations’ safe zones turned out to be not so safe from Saddam Hussein. Bosnian Muslims were unprotected in Srebrenica, the city now associated with a terrible massacre despite an established safe zone there. Even beyond the logistical challenge of setting up safe zones in the middle of a chaotic civil war, keeping the civilians safe inside is no piece of cake. Humanitarian relief would have to be supplied, which requires an additional commitment of resources and coordination. And it would be difficult to prevent Syrian rebel groups from infiltrating, targeting, or otherwise taking advantage of them. On-the-ground forces would be required to police the area and distinguish between militants and civilians seeking refuge. Moreover, safe zones would require, at the very least, sustained use of airpower to protect the skies over them and the territory around them. The Syrian air force and the Russian air force are already crowding those skies. U.S. intervention would be subject to direct challenge, or at the very least massively increase the chances of accidental confrontation.

Americans should also consider the legality of such a move. Establishing safe zones requires imposing on the territorial integrity of another sovereign nation and defending those zones with military force. Under international law, that’s illegal in the absence of host nation permission or an authorization from the UN Security Council. There is little chance Syria is going to give such permission to the United States and Saudi Arabia, and given Russia’s alliance with the Syrian regime, a Security Council authorization will not be forthcoming.

The Trump administration would be on similarly shaky ground as far as domestic U.S. law is concerned. U.S. military action in Syria during the Obama and now Trump administrations has no specific authorization from Congress. It has so far been justified legally by reference to the 2001 and 2002 Authorization for the Use of Military Force (AUMF), which authorized action against those groups and individuals who carried out the 9/11 attacks and then against Saddam Hussein’s Iraq. Neither authorization could plausibly justify imposing safe zones and no-fly zones in Syria, operations that would clearly be unconnected to those past missions.

The practical and legal considerations here certainly present obstacles. But it’s in the realm of strategy that the plan for safe zones really falls flat. Pursuing such a dangerous mission, so fraught with practical complications and the potential for mission creep, without specifying the greater strategic end that it is supposed to serve, is profoundly irresponsible. And what strategic objective might safe zones achieve? Even if they are successful in protecting some civilians, they won’t resolve the underlying political issues in Syria that are driving the conflict in the first place. In fact, they will more likely complicate them. Furthermore, establishing safe zones in the absence of the political will and resolve necessary to fully enforce them undermines the case for imposing them in the first place. If the American public and their elected officials don’t fully understand the potential consequences and support the prospect of an expanded mission in case of unexpected contingencies, imposing safe zones in Syria is the height of strategic folly.

To date, proposals to set up safe zones in Syria appear to be proposals to “do something,” or at least to appear to be doing something, even if that something ignores the likely adverse consequences and is unconnected to viable strategic goals. 

President Trump created a stir by dismissing as “too complicated” the border adjustability feature in the House Republican corporate tax reform. Yet a few days later his press secretary Sean Spicer suggested the seemingly rejected border tax could pay for a Mexican border wall.   

Meanwhile, the President suggested the dollar is “too strong” even though (1) Commerce Secretary Wilbur Ross boasted about Trump having talking the Mexico peso down 35% and (2) Martin Feldstein and other economists pushing border adjustability predict that the plan would push the dollar 25% higher. 

To call border adjustability too complicated is starting to look like a huge understatement. 

In the House Republicans’ tentative “Better Way” plan, border adjustment means corporations could no longer treat expenses of imported materials, parts, or equipment as a cost doing business. Manufacturers of electrical machinery or plumbing parts could not deduct the cost of copper (36% of which is imported).  Retailers could not deduct the cost of imported goods. Refiners would pay a 20% tax on crude oil from Canada.

Exports, by contrast, would not count as income for U.S. tax purposes. Big exporters might even qualify for a federal check. “Any border adjustment should include cash refunds for exporters,” writes economist Alan Viard.   

This “border adjustability” is said to be comparable to the way we exempt foreigners from our sales and excise taxes and other countries likewise exempt us from their equivalent value added taxes (VAT). But that analogy depends on treating a tax on corporate cash flow (essentially income minus expensed investments) as equivalent to a tax on sales. I plan to discuss the VAT analogy in a separate blog.

Tax Policy Center economist Bill Gale notes, “Many economists—but very few non-economists—believe that the international trade effects of border adjustments will be small.” Indeed, the architects of the House GOP plan, as well as potential winners and losers among business leaders, depict the House GOP tax proposal as an export incentive and import penalty. So does economist Diana Furchtgott-Roth who writes, “Border adjustability taxes are essentially tariffs under another name.” Carolyn Freund of the Peterson Institute likewise shows how a “Maryland-produced sweatshirt will face a lower tax rate than the Chinese-produced sweatshirt, exactly as if a tariff were applied.” Foreign trading partners will surely see it the same way.  

How can economists disagree? “In a simple textbook model,” explains Alan Viard, “a border adjustment would trigger a real increase in the value of the dollar that would raise the cost of U.S. exports and reduce the cost of U.S. imports by an amount that would exactly offset the direct effects of the border adjustment.”

This textbook model claims the so-called “destination-based cash-flow tax (DBCFT)” will not affect the U.S. trade deficit because, as Paul Krugman explains,  “wages and/or the exchange rate would change.” Rather than dealing with changing wages, border adjustment enthusiasts claim the real exchange rate of the dollar would supposedly rise “exactly” enough to make U.S. exports sufficiently expensive to foreigners to “exactly” offset the export subsidy. And the dollar prices of foreign imports would likewise fall by “exactly” the right amount to compensate for the importers’ extra 20% tax, neither more nor less.  

“If the dollar doesn’t rise quickly enough or high enough,” notes The Wall Street Journal, “a border-adjusted tax is expected to penalize big retailers and other large corporations reliant on lower-cost foreign production.” Even if we could be certain of the real exchange rate rising by 25%, past experience does not suggest that is likely to happen in fewer than four years, or that import prices would fall proportionately or uniformly.

As the graph shows, the broad trade-weighted measure of the dollar’s real exchange rate rose 27.5% from 1995 to 2002, but the GDP deflator for import prices fell just 8.3%. 

Be careful what you wish for. As Krugman notes, “there might be a lot of short-to-medium financial consequences from a stronger dollar.” Indeed. 

Recall 1981-85, when the real dollar also rose 27.1% from 1981 to 1985 and the GDP deflator for import prices also fell more modestly, by 12.1%. Deflation of dollar-based commodity prices proved so devastating to dollar-indebted LDCs that five major central banks made a concerted effort to push the dollar back down between the Plaza Accord of September 1985 and the Louvre Accord of February 1987.

Those who predict a border adjustable corporate tax will be exactly neutralized by exactly perfect changes in exchange rates and import prices seem to be saying it would have no effect on trade. That can’t be right. If it had no effect on trade, then it would have no effect on exchange rates. After all, the reason the dollar is assumed to rise is because (1) subsidizing exports will make foreigners demand more dollars to buy more U.S. exports, and (2) taxing imports will make dollars more scarce by shrinking U.S. imports. To argue that trade will not be affected in the long run, theorists must first agree that the balance of trade will indeed be greatly distorted in some undefined short or medium run.  

“Border adjustments do not distort trade,” write Alan Auerbach and Douglas Holtz-Eakin, “as exchange rates should react immediately to offset the initial impact of these adjustments.”  

Unfortunately, what “should” happen in a simple textbook model is not a plausible prediction of what will happen—immediately or otherwise. The tax-induced drop in imports would happen immediately, but any resulting change in exchange rates and prices would happen later.

How much later? Nobody says because nobody knows.

Any economist who asserts a predictable and tight connection between exchange rates and all import prices is substituting theory for facts. And any economist who could predict exchange rates would quickly become a billionaire by betting on foreign exchange futures.

The “Better Way” plan would allow firms to write-off the cost of new capital equipment immediately, but corporations would no longer be able to deduct interest expense. Firms with big debts are not necessarily the same firms with big capital investments, so this alone builds potential political conflict among interest groups supporting or opposing reform. Expensing and disallowing interest deductibility will be tricky bridges to negotiate. Trying to add border adjustability for direct taxes would be a bridge too far.

The corporate tax needs to be reduced more than it needs to be “reformed.” Holding a lower corporate tax rate hostage to complicated and divisive border adjustments could easily make it impossible for an overly-ambitious House GOP tax package to win the approval of business leaders, foreign trading partners or the U.S. Senate.  

 

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