Scott Sumner  

How should we encourage exports? (And should we?)

A Poll of Economists on Price ... Tough Talk for Venezuela?...

Lots of non-economists think that economics is just common sense. Not so. It's not common sense that imports help an economy, or that price gouging is good and rent controls are bad. And the field of taxation also produces lots of surprising results. The following list refers to equal size, across-the-board taxes:

1. Consumption taxes = wage taxes.

2. Import tariffs = export taxes

3. Import subsidies = export subsidies

4. An import tariff plus an equal export subsidy cancels out

5. A fair tax system taxes only wage income, not capital income.

I'm going to use some of those ideas when considering a recent post by Noah Smith, which discussed research showing that firms that began exporting tended to have faster productivity growth. He suggested that we might want to use public policy to encourage exports. I agree, but am not in favor of his preferred method:

The U.S. currently does some export promotion, via the Export-Import Bank. But this tends to focus on large companies that are already competitive in world markets. A better approach would be to provide assistance for companies to start exporting, by providing them with targeted loans, information about foreign markets and assistance developing overseas sales operations.
When I think of the government doing something, I think of the department of motor vehicles. (I need to visit the California DMV Monday---wish me luck.) I don't trust government to run that sort of program efficiently.

Fortunately there is another way to boost exports---reduce taxes on imports. The beauty of this proposal is that it's likely to make the US economy more efficient even if the research Smith cites is 100% wrong. That's because trade barriers create inefficiency, what economists call "deadweight loss".

I also take issue with this claim:

Also, the U.S. should consider being less tolerant of countries that intervene in markets to keep their currencies cheap versus the dollar -- as China did back in the 2000s. This acts as a subsidy for those countries' exporters, but it's also effectively a tax on imports from the U.S. Getting tougher on currency manipulation could help U.S. companies start selling overseas.
I've recently done several posts arguing that "currency manipulation" is a myth. But even if I am wrong, currency manipulation is not at all like a subsidy to exports and a tax on imports. Indeed a subsidy on exports and a tax on imports would exactly offset, leaving no effect on trade. After all, exports are how China pays for imports. (That sort of tax/subsidy scheme would be like a 10 cent/gallon subsidy for gas stations combined with a 10 cent tax on gas consumers--no effect.)

People who worry about currency manipulation clearly do believe it affects trade. They believe that currency manipulation caused more exports and fewer imports today. (They rarely mention that this reverses in the long run, and it would cause China to export less and import more in future years.)

Taxes and subsidies are not the same as price changes, because taxes and subsidies drive a wedge between what sellers pay and what buyers receive, whereas price changes (including exchange rate changes) do not. They are completely different situations, and should not be confused with each other.

COMMENTS (14 to date)
Kevin Dick writes:

Any way you (or a helpful commenter) could provide bullet proof (or at least bullet resistant) citations for each of your 5 points?

I would like to promote these points with references. I did a little Googling of 1, but the citations I found have assumptions that aren't obviously true to me.

Gordon writes:

Scott, I assume your visit to the DMV is on Monday because you have an appointment on that day. However, if you don't have an appointment and you're going on Monday because that is your first opportunity to visit the DMV, you can see the waiting times at each of the DMV offices via their website. The closest office to me often has wait times over 2 hours while offices which are about a 30 minute drive away will have wait times under 30 minutes.

David R. Henderson writes:

@Kevin Dick,
IIRC from my grad school days in the early 1970s, Bhagwati’s book, Trade, Tariffs, and Growth (1969) is pretty good on #2 and #3.

Kevin Dick writes:

Thanks @David. It would be nice to have an online reference to point my friends to. But if it's that old, I can probably dig one up with some Googling.

On the consumption-wage tax equivalence, this is the paper that's causing me issues:

They claim equivalence holds only, "If the government varies the government-debt/capital-stock ratio so that each tax achieves the same steady-state capital per worker..."

I can't see why a government would naturally do that.

Thomas Hutcheson writes:

All of your equivalences are true only in specific models. I think the "fairness" of a wage tax works only in a wage earners do not save and capital owners do not eat model.

I do agree that in our US economy, a progressive consumption tax has the potential to be fairer than a progressive income tax with ad hoc adjustments not to discourage savings.

Scott Sumner writes:

Thanks Gordon.

Thanks David.

Kevin, It's true that these equivalences require certain assumptions, which do not always hold in the real world. But I find that many people don't understand why they hold at all, even as a first approximation.

I get commenters telling me "we should tax consumption, not wages", which sort of makes me wonder. . . .

Thomas, You said:

"I think the "fairness" of a wage tax works only in a wage earners do not save and capital owners do not eat model."

I don't agree with that claim.

Mark writes:

Regarding exporting and productivity, doesn't it seem almost obvious that it makes more sense that greater productivity leads to exporting than that exporting leads to productivity increases?

Sure enough, looking at the paper Smith cites as evidence for his claim that exporting boosts productivity, the authors say, in their abstract (full access isn't free): "Details aside, exporters are found to be more productive than non-exporters, and the more productive firms self-select into export markets, while exporting does not necessarily improve productivity."

It seems we might just as well start giving poor people Lamborghinis to help them get rich, based on the observation that many rich people have Lamborghinis. This kind of reasoning seems pervasive among neo-mercantilists.

Jerry Brown writes:

I very much wish you luck at your visit to the California DMV, I have spent hours waiting at the DMV in Connecticut (in the past, it has gotten somewhat better) that seemed like days upon days. But not on Mondays because our DMV is or was closed on Mondays. Best of luck to you on your visit. If you have to wait, maybe you can bring your laptop and reply to the rest of my comment :)

Of the 5 points you mention near the beginning of your article, I don't understand how you come to your conclusions on #1, #4, and especially #5.

Consumption taxes do not equal wage taxes. This seems obvious to me. Everyone consumes or they die- not everyone makes a wage.

As far as an import tariff cancelling out an export subsidy- why is that? Does that hold even if an economy is not at full employment? Is there no shift in income/wealth/utility from consumers of imports to producers of exports when an equal tariff on imports is matched by an export subsidy?

And once you bring the word 'fair' into a point like #5, you pretty much open it up to all kinds of reasonable disagreements. I happen to think that our society benefits both the owners of capital and the earners of wages and that it is fairer to tax both according to how much they benefit from the society we live in.

Like I said, I hope you don't waste a terrible amount of time at DMV. But if you do happen to find yourself in that situation, then explaining these things to me might lessen that absolute waste. Or just bring a good book to read.

Khodge writes:

Using the tax code for anything other than raising money is always bad. Much like using medical "insurance" to redistribute wealth, those who play the game best win.

As mentioned, the Export-Import Bank money goes to big business, making "big" just one more barrier to entry as they become the players who win the games.

Scott Sumner writes:

Jerry, You said:

"I happen to think that our society benefits both the owners of capital and the earners of wages and that it is fairer to tax both according to how much they benefit from the society we live in."

Yes, and the way to do that is to simply tax consumption, or alternatively, just tax wage income. A tax on capital income essentially taxes the same wage income twice.

Jerry Brown writes:

For the sake of argument I will give you your idea that taxing capital income amounts to double taxation, but just for the moment.

That has no bearing on my earlier statement- "I happen to think that our society benefits both the owners of capital and the earners of wages and that it is fairer to tax both according to how much they benefit from the society we live in."

It is entirely possible that the owners of capital and therefore the recipients of capital income benefit far more from the protections and advantages society provides them than an average wage earner does. I would say it is highly likely that they do. If you are willing to concede the point that it is more fair to tax according to what you get from society, then you have to admit that possibility.

Jerry Brown writes:

The other point I was trying to make in my original comment was that consumption taxes do not really equal wage taxes anyways. This seems pretty obvious to me because while everyone consumes some things, not everyone works and makes a wage. And not even just children or retired people. So I disagree with your point #1 in the post and disagree with that part of your reply.

The Original CC writes:

Scott, while we're on the topic of taxes, how'd you like to do a post explaining the "tax interaction effect". No one else seems able to explain this except by saying in effect, "Look at the model and check out the term on the RHS of equation 6."

Peter Gerdes writes:

Seems to me all of those things you mention are common sense. At least they are common sense if one thinks of the real economy, physical stuff people want, time/effort/resources spent making stuff and how to distribute stuff.

Seems to me most of the way economics conflicts with common sense is a result of people thinking in terms of prices rather than stuff. Think in terms of stuff and its obvious that the country which gets stuff from other countries is better off than the country which ships its stuff to other countries (in the short run). Similarly, ignore the bright flashing distraction of the declaration that things can only cost so much *money* and think in terms of distributing stuff and its pretty obvious that price gouging is often good (possible exception for resources which are very inelastic? in the short term) and rent controls usually bad (though tradable rent controls would be just a useful financial instrument).

Your claims about taxation, however, are less commonsensical. In part, because they are overly simplistic. Your import/export equivalences only hold at time horizons long enough for imports and exports to equalize, consumption taxes don't quite equal wage taxes (consider individuals whose only income is capital gains) and point 5 is simply outright wrong.

It is defensible in an ideal world of perfect taxes but it is far too easy for people to disguise wages as capital gains (just work hard for your wholly owned company and then realize the fruits of your labor as capital gains when it is sold). Besides, while such taxes would be more economically efficient that is not the only desiderata people have for their tax system.

Similarly, the practical problem with consumption taxes is the ease with which consumption can be hidden. Buying a fancy *new* painting should qualify as consumption but have your company perform the transaction and hang it in your office and you've escaped the consumption tax. Companies like google would turn the at work benefits (sodas, food, clothing schwag) up to 11 to avoid such taxes. You could move to a VAT which avoids some of these issues but it has its own issues.

But the most difficult issue with consumption taxes is making them progressive without creating temporal smoothing problems (saving for 5 years and parting the 6th shouldn't be penalized).

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