Donald Trump isn’t typically given to understatement, but arguably that might have been the case when the new U.S. president recently dismissed the controversial border adjustability feature in the Republicans’ corporate tax reform plan as being “too complicated”.
In a video posted this week, Jason Bellini of the Wall Street Journal explains how the proposed “border adjustment tax” (BAT) would work.
This fairly straightforward explanation aside, the new tax raises many complex and difficult-to-answer hypothetical questions, some of which were summarized in a recent article by Luis de la Calle, a former deputy trade minister for Mexico.
This new tax regime would be highly disruptive if implemented. It would impact U.S. sectors differently compared to today’s corporate income tax as the degree of imported goods and the intensity of exports are not uniform across them. It might change relative prices in unforeseen ways impacting resource allocation. It would also result in an appreciation of the dollar with respect to other currencies with the consequent losers (those short in dollars) and winners (those long). It could also result in significant trade frictions with countries around the world. If not done properly, it could be inconsistent with U.S. commitments in the World Trade Organization (WTO) and spark measures and countermeasures by several countries that could seriously harm the global economy. Moreover, border adjustability is more problematic with the subtraction method if the tax rate is not uniform across sectors or stages as the export rebate would be difficult to determine.
While advocates of the proposed BAT claim that it’s essentially no different to the way the U.S. exempts foreigners from domestic sales and excise taxes and other countries likewise exempt foreign firms from their value added taxes (VAT), this comparison involves treating a tax on corporate cash flow as equivalent to a consumption tax on sales.
However, according to Carolyn Freund of the Peterson Institute, “The cash-flow tax proposed in the House is discriminatory. The tax on domestically produced goods would be less than the tax on imports, and it would vary across sectors. Unlike the sales tax, the cash-flow tax with border adjustment would favor domestically produced goods. In particular, it would have the odd feature that home goods would be taxed on total value added, less the wage bill; in contrast, foreign goods will be taxed on total value added.”
A more daunting obstacle than possible WTO inconsistency or the enormous diplomatic problems it could pose for the Commerce and State Departments is the mounting opposition from import-dependent companies that include some the nation’s biggest private employers and powerful conservative lobby groups such as the politically influential Americans For Prosperity, largest of the grassroots activist organizations backed by billionaire industrialists Charles and David Koch.
“Anytime I hear border adjustment, I don’t love it”, Trump said earlier this month. Turns out he’s evidently far from alone in that sentiment.