The US Congress has taken up tax reform and one of the key proposals put forth by House Republicans is the imposition of a border adjustment tax (BAT). The idea is to tax consumption rather than production, which could boost US exports and to raise revenue for the federal government to pay for a corporate tax cut.

Critics say this would simply tax US consumers who are dependent on imports for their daily needs, from food to clothing. But boosters say consumers would not be hurt because the BAT would cause a rise in the US dollar, making imports cheaper, and everyone breaking even.

But new research from Willem Buiter of Citi Research contradicts that view. “Given the lack of robust empirical evidence,” said a recent report, “we believe it is not possible to have any confidence about even the direction of the response of the dollar to a BAT in the US – let alone about the magnitude.”

Many factors entering into currency moves are “unobservable” and are likely to change frequently and significantly. “So even if there were certainty that a possible future US corporate profit tax BAT would be completely neutral, and even if a currency investor were fully confident about the sign and magnitude of the response of the dollar exchange rate, should a BTA occur, it would be very difficult to determine how much of the BAT neutrality driven exchange rate appreciation or depreciation has already been priced into spot, forward, and options markets for the dollar and other currencies.

“Not only do we not know the magnitude of the exchange rate effect of a BAT,” the report concluded, “we don’t even know the sign or direction.”