Border-adjustment tax
 | The examples and perspectives in this article may not represent a worldwide view of the subject. (February 2017) |
A border-adjustment tax (also known as a border-adjusted tax, destination tax, destination-based cash flow tax or a border tax adjustment) is a tax on goods based on location of final consumption rather than production.[1] It allegedly eliminates incentives for companies to reduce their tax bills through tax inversion and intangible asset relocation.[2][3][4]
History
[edit source]The concept of a border-adjustment tax was originally the subject of a 1997 article by economist Alan J. Auerbach.[5] Auerbach worked with Michael Devereux, who had introduced with Stephen R. Bond, the term destination-based corporate tax. Auerbach described a system that he claimed would align business incentives with the national interest.[2]
Currency adjustment
[edit source]While it may appear that this would increase consumer prices, Auerbach's theory holds that a border-adjustment tax would strengthen the domestic currency by a proportion corresponding to the tax rate. The stronger domestic currency would effectively reduce the price of imported goods, effectively cancelling out the higher tax on imports.[citation needed]
There is consensus among many economists that conventional economic theory indicates that exchange rates will change in such a way as to cancel out the effects of price changes which follow the introduction of a BAT.[6] Therefore, there should be no effect of a BAT on the trade balance. There are two key assumptions behind the standard theory: Exchange rates and a full border adjustment.[6]
Full border adjustment assumes imports and exports of every good and service are taxed or completely exempted from tax, respectively. For instance, the United States has a flexible exchange rate system. Before examining how the exchange rate adjustment would occur in detail, it may be useful to revisit how the standard theory about the effects of exchange rates and a BAT is understood.[6]
A border-adjustable tax plan is inherently unpredictable because it’s unknown whether global exchange rate valuations would adjust perfectly and how floating countries with managed exchange rates would react.[7] If currencies didn’t adjust enough, a 20% rate for corporations would produce a “tax wedge of 25% between domestic and foreign prices, which would drastically increase prices for consumers in what may end up a regressive fashion.” If currencies were adjusted completely so that there was no impact on trade, there would still be large losses in value for some and windfalls for others.[7]
Trade effects
[edit source]In theory, a border-adjustment tax is trade neutral: the stronger domestic currency would make exports more expensive internationally, lowering demand for exported products while reducing the costs incurred by domestic firms in purchasing goods and services in foreign markets, helping importers. Thus, the anticipated strengthening of the domestic currency effectively neutralizes the border-adjustment tax, resulting in a trade-neutral outcome. However other studies indicate that currency adjustments may not always flow through to price adjustments, shifting the incidence of the tax to consumers and/or producers.[8]
United States
[edit source]In the United States, the Republican Party in 2016 included most of Auerbach's recommendations in their policy paper "A Better Way — Our Vision for a Confident America",[9] which promoted a move to "a destination-basis tax system."[10]: 27 [11] As of February 2017, the proposal was the subject of heated debate - with Gary Cohn, Director of the National Economic Council opposing it[12] and the Koch brothers-funded Americans for Prosperity (AFP) lobby group, unveiling their plan to fight the tax.[13]
See also
[edit source]References
[edit source]- ↑ Parker, Tim (2017-01-06). "Border Adjustment Tax". Investopedia. Retrieved 2017-02-13.
- 1 2 Steve Lohr (December 12, 2016), "New Approach to Corporate Tax Law Has House G.O.P. Support", The New York Times, retrieved February 17, 2017
- ↑ "Pfizer Ends AstraZeneca Bid But The Tax Issues It Raised Live On". Forbes. May 26, 2014.
- ↑ Sander Levin (July 22, 2014). "Inversions Highlight Unfairness of the Tax Code". The New York Times. Retrieved February 18, 2017.
- ↑ Auerbach, Alan J. (1997-01-01). "The Future of Fundamental Tax Reform". The American Economic Review. 87 (2): 143–146. JSTOR 2950901.
- 1 2 3 "Current Legislative Activities". www.congress.gov. Retrieved 2026-07-13.
- 1 2 "Border Adjustment Tax". Mercatus Center. Archived from the original on 2026-03-09. Retrieved 2026-07-13.
- ↑ Pomerleau, Kyle (2017-02-15). "Understanding the House GOP Border Adjustment - Tax Foundation". Tax Foundation. Retrieved 2017-04-06.
- ↑ Ryan Ellis (January 5, 2017), "Tax Reform, Border Adjustability, and Territoriality: When tax and fiscal policy meets political reality", Forbes, retrieved February 18, 2017
- ↑ "A Better Way— Our Vision for a Confident America" (PDF). Republican Party (United States). June 24, 2016. Archived from the original (PDF) on January 16, 2017. Retrieved January 17, 2017.
- ↑ William G. Gale (February 7, 2017). "A quick guide to the 'border adjustments' tax". Brookings Institution. Retrieved February 17, 2017.
- ↑ Patti Domm (February 17, 2017), Border adjustment tax is on 'life support,' and tax reform may come later ... and with less punch, CNBC, retrieved February 17, 2017
- ↑ Matthew Townsend (February 17, 2017), Ryan Insists Tax Overhaul Coming as Koch Group Assails Plan, Bloomberg News, retrieved February 17, 2017