Economic Issues Relating to the House-Passed Tax Reform Bill (H.R. 3838) : Scheduled for Hearings Before the Senate Committee On Finance On January 29-30 And February 4-6, 1986 Jcs-2-86

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To the extent at tax incentives are effective in increasing investment in indus- ies producing tradable commodities, the trade balance may im- ove. However, under the present system of flexible exchange tes, such trade gains may be temporary. All other factors held [ual, the price of the dollar is likely to increase as foreign dollar serves are drained to pay for additional purchases of U.S. com- odities. The rise in the dollar is compounded if foreign demand r the dollar increases because fore...ign investors are able to benefit rectly, or indirectly, from U.S. tax incentives. Dollar appreciation creases U.S. demand for imports and reduces foreign demand for :ports. Thus, tax incentives may improve the trade balance in tar- (ted sectors at the expense of increased imports or reduced ex- )rts from sectors that do not benefit from tax preferences.
The tax code also influences trade generally through rules re- irding the taxation of foreign investments in the United States id the taxation of U.S.


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