Gluskin Sheff Economist Gives Thumbs Down to Border Tax

TL;DR

Economist argues against border tax, sees it as protectionism.

Transcript

I don't think that anybody uh would be satisfied with a border adjustment tax unless of course you're in the Navaro uh camp and much of the Trump trade team that believes that trade deficits are something that's bad for the economy uh I actually found historically that when the US runs uh trade deficits GDP growth tends to be more than a half a per... Read More

Key Insights

• David Rosenberg views the border adjustment tax as a form of trade protectionism disguised as corporate tax reform, likely to be poorly received by markets and economists.
• Historically, U.S. GDP growth tends to be higher when running trade deficits compared to trade surpluses, challenging the notion that trade deficits are inherently negative.
• Market optimism is currently priced in, but a clear, simplified corporate tax reform plan is necessary to sustain this optimism and validate current market prices.
• A significant concern is whether tax reform will be revenue-neutral or lead to an increased fiscal deficit, which could trouble markets and conflict with Federal Reserve policies.
• The Federal Reserve has indicated it will not accommodate any fiscal deficit increases resulting from tax reform, adding pressure to maintain fiscal balance.
• Rosenberg suggests that without significant economic or geopolitical changes, markets may remain patient for up to a year, despite a lack of immediate tax reform progress.
• Other factors, such as deregulation and executive orders, could influence markets and economic conditions beyond just corporate tax reform.
• The discussion highlights the complexity and potential consequences of U.S. tax reform on both domestic and global economic landscapes.

Questions & Answers

Q: Why does David Rosenberg oppose the border adjustment tax?

David Rosenberg opposes the border adjustment tax because he views it as a form of trade protectionism wrapped in corporate tax reform. He believes that it would not be well-received by markets or economists and argues that historically, trade deficits have correlated with higher GDP growth, challenging the notion that deficits are inherently negative.

Q: What historical economic trend does Rosenberg mention regarding trade deficits?

Rosenberg mentions that historically, when the U.S. runs trade deficits, GDP growth tends to be more than half a percentage point higher than when running trade surpluses. This observation challenges the common belief that trade deficits are detrimental to economic health and suggests that deficits can coincide with economic growth.

Q: What does Rosenberg believe is necessary for sustaining market optimism?

Rosenberg believes that sustaining market optimism requires a clear and simplified corporate tax reform plan. Such a plan should lower tax rates, broaden the tax base, and avoid increasing the fiscal deficit. Without these elements, the current optimism priced into markets may not be validated, potentially leading to market instability.

Q: What is Rosenberg's view on the fiscal deficit and tax reform?

Rosenberg is concerned about the potential for tax reform to increase the fiscal deficit. He notes that starting from a 3% deficit-to-GDP ratio and a high federal debt-to-GDP ratio, any further increase could be problematic. The Federal Reserve's unwillingness to accommodate increased deficits adds pressure to maintain fiscal discipline in the reform process.

Q: How does the Federal Reserve's stance impact tax reform discussions?

The Federal Reserve's stance impacts tax reform discussions by adding a critical constraint. The Fed has stated it will not accommodate any increase in the fiscal deficit resulting from tax reform. This position necessitates careful consideration of fiscal balance in any proposed tax changes, complicating the reform process and influencing market expectations.

Q: What timeframe does Rosenberg suggest for market patience regarding tax reform?

Rosenberg suggests that markets may remain patient for up to a year without significant tax reform progress. He believes that while immediate action within six months may not be critical, a lack of progress beyond a year could lead to market impatience, especially if coupled with economic downturns or geopolitical events.

Q: What other factors could influence markets beyond corporate tax reform?

Beyond corporate tax reform, factors such as deregulation and executive orders could significantly influence markets. These actions by the administration could have positive or negative effects, impacting economic conditions and market dynamics independently of tax reform efforts, thereby shaping overall economic and market outlooks.

Q: What does Rosenberg identify as critical to validating current market prices?

Rosenberg identifies the need for a comprehensive and effective tax reform plan as critical to validating current market prices. The plan should simplify the tax system, lower rates, and broaden the tax base without increasing the fiscal deficit. Achieving these goals would support the optimism currently priced into markets and sustain economic confidence.

Summary & Key Takeaways

• David Rosenberg criticizes the proposed border adjustment tax, labeling it as trade protectionism under the guise of corporate tax reform. He argues that such a tax could negatively impact markets and is not the optimal solution for addressing trade deficits or stimulating economic growth.

• Rosenberg emphasizes the need for a clear and simplified corporate tax reform plan that broadens the tax base and lowers rates without exacerbating the fiscal deficit. The Federal Reserve's stance against accommodating increased deficits adds complexity to the reform process.

• Despite current market optimism, Rosenberg suggests that patience may prevail for up to a year without significant tax reform progress. However, other factors, such as deregulation and geopolitical events, could influence market dynamics and economic conditions.