How do changes in imports and exports affect the level of taxes or government expenditure? The two deficits are supposed to be linked somehow right?


There is not necessarily a direct relationship between the current account - which can either be a surplus or deficit - and the government budget deficit.

The current account is a gross measurement of imports versus exports for a country. If a country is importing more goods than it is exporting then it is running a current account deficit. It is running a surplus if it is exporting more goods than it is importing.

In the US, the government derives most of its revenue from income and payroll taxes: enter image description here

If the US cut off all imports and exports the US government would still receive income because of the US citizens employed inside the country who are still paying income and payroll taxes.

If US taxes were based on import/export duties then the US government would be more sensitivity to the current account.

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