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There Are no Free Lunches

A recent OpEd article published by the Hill proposes taxing foreign investment to the United States. It refers to such a tax as a Market Access Charge (MAC). It argues that this plan will increase employment by increasing demand for goods and services made in the United States and simultaneously “pay” for infrastructure spending . While this may be true in a technical sense, if we understand paying for government programs in terms of the overall fiscal deficit. However, it is largely incorrect framing.

A tax on foreign investment to the United States supposedly increases demand for American made goods and services by discouraging foreign investment to the United States. When fewer foreigners buy US dollars to buy US financial assets, the dollar falls in value, making imports more expensive to Americans and making American exports cheaper on world markets. The end result is more demand for US goods and services. This is reasonable enough, and the claim that a tax on foreign investment would increase employment in America also seems reasonable.

But the estimated effect, while reasonable, might be incorrect. It is hard to know how foreign investors will react to a foreign investment tax. It may cause more net money to flow into America through financial transactions, for example. This is because taxing foreign investment into the US will reduce the after-tax interest that investors take out of the country. If this effect dominates and America ends up sucking more money in from abroad, our currency will increase in value and our net exports will fall.

Nonetheless, for the sake of argument, let’s accept the estimate which says a foreign investment tax will create jobs by increasing net exports.

The claim that a tax on foreign investment would “pay for” infrastructure relies on the federal budget deficit as a measure of whether something is paid for. A MAC would lower the deficit and could be paired with infrastructure spending to create a budget-neutral policy program.

However, the budget deficit on its own is unimportant. Nobody is impacted in their real lives by the budget deficit. In reality, both policy proposals have a cost on many Americans as they allocated resources for particular ends (the creation of infrastructure or the creation of goods and services for export (or to substitute for foregone imports)). The fact that the CAM is anticipated to create jobs means that there will be more upward pressure on wages which could create inflationary pressures. Policy makers could stabilize inflation by doing something (like raising interest rates) which will likely take away jobs elsewhere and will no doubt have some costs.


The author is making a mistake by trying to formulate a policy that can be adopted on the national level with no drawbacks to anyone within the nation. If such a policy did exist, it would have already been implemented. Economists like to say “there are no free cakes,” which means that one's ability to enjoy anything essentially always comes at the expense of someone else.

However people don’t like to hear this depressing news, so they often look for win-win policies to improve the lives of ordinary Americans. I would be much more impressed by a writer in the Hill proposing a policy which they admit has costs for a select, targeted group (like the rich) than trying to formulate a policy they will claim has only positive effects for all Americans.

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