September 24, 2015

How Much Government Revenue Would a MAC Charge on Foreign Investors Generate?

Estimating the revenues that a MAC charge could generate is exceptionally difficult because this policy tool has never been used in a large, wealthy, reserve-currency country. Policies involving charges of various kinds on some types of capital have been tried in smaller economies such as Chile, Brazil and Malaysia. But nothing like the MAC has ever been tried in the United States. We therefore have little basis for estimating the response of foreign speculators and investors to the MAC and thus potential MAC revenues.

Nevertheless, it is useful to know the range within which the revenues might fall – if for no other reason than to satisfy curiosity. To help meet this need, two models are presented here based on cases designed to bracket the range of revenue that the MAC might generate.


In brief, the MAC is likely to generate at least $1.0 billion per year in the short term and could possibly generate up to $1.0 trillion per year if high-speed, in-and-out trading is not moderated by the MAC.

In the longer term, as the MAC moderated excessive foreign capital inflows, MAC revenues would decline. However, this reduction would be offset partially or fully by taxes on the additional economic growth stimulated by a MAC-based competitive exchange rate -- even if tax rates were reduced as part of a much-needed reform of the US tax code.


Both cases assume a 50 bp MAC rate, which would be the starting level whenever the external trade deficit exceeded one percent of GDP. The rate would increase if the trade deficit increased, and would drop to zero once the trade deficit dropped below the trigger level – one percent of GDP.

The “Minimum Revenue MAC Model” assumes that even a 50 bp charge would dry up the frenetic flood of forex trading which is probably bringing nearly one trillion dollars per day in across U.S. borders. 

Much of this is simply computer-driven hyper-trading where machines are looking for just a few pips (essentially basis points) of spread been bid/ask rates. Such trading creates no social or economic value – it just creates a wedge between savers and investors that goes directly into the pockets of the traders. Such trading activity discourages savers by lowering the return to saving, and discourages investors by reducing the returns to real, productivity-enhancing investment. A charge of 50 bp would sharply reduce this casino-style activity, improving the stability of financial markets and the productivity of the economy.

Based on this assumption regarding cross-border forex trading as reported every three years by the Bank for International Settlements, the Minimum Revenue MAC Model assumes that the only cross-border capital flows will be those associated with covering the current account deficit for the year. The revenue base used in the model is 3.6 times the actual current account deficit because, based on actual results for the past five years, gross capital inflows on a year-to-year (NIIP) basis have been 3.6 times the net borrowing needed to cover the current account deficit.

MAC revenues will depend heavily on the frequency with which money comes into America, making the results sensitive to the actual maturity of the instruments sold to foreign investors to finance the public debt. The maturity of instruments coming due in the next three five years are of greatest interest because, beyond that, the external deficit should have dropped below one percent of GDP, forcing the MAC rate to zero. Since the existing stock of outstanding debt includes instruments with maturities over 20 years in addition to debt with much shorter maturities, the model results based on 60 month maturities may be the most relevant.  

Based on these assumptions, the Minimum Revenue MAC Model shows potential revenues $0.83 billion – an amount with almost no impact on the budget. However, as an example of the sensitivity of the projections to the maturity of government debt instruments, if the debt coming due had a maturity of three months and was rolled over with fresh borrowing at the same maturity, the MAC revenues could range up to about $16 billion, or about half a percent of Federal revenues.

The Maximum Revenue MAC Model assumes that the MAC will be applied to all cross-border foreign exchange inflows as reported by the BIS for 2013, scaled up to 2015 levels by the rate of growth observed between the previous 2010 report and the 2013 report. Furthermore, the model assumes that the MAC charge would not significantly reduce this cross-border flow, which currently adds up to roughly $250 trillion dollars per year (yes, that is about 15 times total U.S. GDP!). On this level of cross-border activity, even a very small 50 bp MAC charge would yield about $1.3 trillion per year, the equivalent of nearly 40 percent of the total federal government revenues anticipated for 2015. However, such revenues are beyond imagination.

Unless the forex traders totally ignore the MAC, which is highly unlikely, the current extraordinary levels of cross-border flows will drop off significantly once a MAC is in place, reducing MAC revenues accordingly. Nevertheless, the MAC’s direct revenue generation would be highly significant.

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