Should the MAC Tax Different Financial Inflows Differently?

Question: Some have suggested that the MAC should tax inflows of foreign-source money differently depending on its origin, ownership, currency, liquidity, form, proposed use, etc. For example, the version of the MAC that was presented to the Senate in 2019 exempted foreign-source money that was deposited in the United States in short-term accounts not paying interest. Does this differentiation make any sense?

Short Answer: Absolutely not.

Explanation: Money in one form can usually be converted almost instantly into money in a different form – and this can happen repeatedly with a single inflow. If exemptions from the MAC are made for one form of money (e.g. short-term funds in no-interest checking accounts), all money flowing into the United States will enter as short-term funds deposited in no-interest foreign currency checking accounts, then be converted (in ways that can be impossible to trade) into, for example, US dollars that are used to buy US assets, both financial and real, such as stocks, bonds, and real estate.

Other countries have tried to differentiate between "good capital" and "bad capital," but such schemes almost always fail because those involved can usually evade capital flow management instruments such as the MAC by getting their "bad" capital reclassified as "good" capital.

Offering exemptions or preferential rates for some foreign-source inflows and not for others would almost certainly destroy the MAC's effectiveness because:

(a) the MAC would have little or no impact on foreign demand for dollars and dollar-based assets;

(b) global demand would continue to drive the U.S. dollar above rates consistent with balanced trade;

(c) the overvalued dollar would continue to cause US trade deficits; and

(d) America would continue to suffer the serious consequences of imbalanced trade.

The costs of imbalanced trade include, for example, lost jobs, closed factories, excessive dependency on global supply chains that collapse under pressure, increasing income inequality, social and political polarization, loss of global technological and industrial leadership, and growing debt to foreign countries – debt that is turning America into the "Squanderville" that Buffett wrote about so pointedly nearly twenty years ago.

Conclusion:

All money coming into America from foreign sources should be taxed at a standard MAC rate regardless of currency, form, avowed purpose, etc.

P.S. If any exemptions are to be allowed – for example, money borrowed abroad by the US Government through the sale of Treasuries, or money used to pay for US exports– they should be granted on a rebate basis. The foreign-source money would pay the standard MAC charge upon entry, but as soon as the funds have been delivered to Treasury, or the exports have been shipped and certified by US  Customs, the MAC charge would be rebated with market interest. This rebate approach would minimize the risk of fraud.

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