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Border Adjustable Tax
Jesse Richman, 2/17/2017

The Tax Foundation has put out an analysis of the House Border Adjustable Tax plan.  This highlights some of the key elements of the plan, but may be incomplete in particular ways.  The full analysis is available here:  https://files.taxfoundation.org/20170215084119/Tax-Foundation-SR234.pdf 

They make a number of valuable points about the plan.  However, some of the arguments made depend upon assumptions which may not necessarily be relevant in the current situation. 

One key assumption is that trade is balanced (at least in the longish run).

"Both an origin-based tax and a destination-based tax are trade-neutral and switching from one to another does not impact the trade balance. This is because exports and imports are two sides of the same coin. Exports are needed to pay for imports and imports are the returns to exports. As such, taxing exports ends up reducing imports and taxing imports ends up reducing exports."

If trade is balanced, then of course this is right.  On the other hand, the US has run a remarkably robust trade deficit since the Carter administration -- four decades.  In the context of a situation in which trade is not balanced, it is worth thinking about the effects of the particular proposal.  The current corporate tax system taxes exports but not imports.  This will tend to discourage exports.  The proposed change will tax imports but not exports.  This will tend to discourage imports.  If one assumes that trade is balanced, then of course a border adjustable tax will have no effect on the trade balance.  But if in fact a country is running a trade deficit, switching the incidence of corporate taxation in a way that taxes imports instead of exports is a prudential measure likely to improve the trade balance.  It switches from a tax code that taxes exports to a tax code that taxes imports.  This is a VERY GOOD IDEA likely to improve the trade balance.

The paper makes a number of good points about the benefits of the proposal.  

"There are actually some non-economic advantages that may make the switch to a destination-based tax worthwhile. Paired with other aspects of a DBCFT, the border adjustment would make many strategies of profit shifting under current law impossible. It would also be possible to lift some of the complex anti-base erosion provisions that typically come with origin-based tax systems. Lastly, a border adjustment in a DBCFT raises a significant amount of revenue in the budget window, which can be used to finance other important reforms such as full expensing and lower marginal tax rates."

Under the current tax system, multinational corporations engage in extensive tax shifting and tax shelter strategies.  I would argue that the presence of these strategies is bad for the economy in multiple ways, including the way that they give multinationals with the resources to engage in them an advantage over smaller firms without those resources.  The full discussion of the range of advantages is worth examining.

The authors also note one loophole that it will be important to close: "A legitimate issue of tax avoidance is the issue with direct cross-border business-to-consumer sales, especially of services and digital goods.  Unless addressed, a foreign software company could sell its software directly to a customer in the United States. In this case, there is no business that is denied a deduction, and the tax could be avoided."  This is an important issue, and closing it could prove somewhat challenging.  One solution would be to try to ban such sales unless full corporate taxes are paid on the US-earned income.  Enforcement might be difficult, however.

Overall, this is a good analysis, but in some ways it is limited by reliance on the assumption that trade will balance in the short term.

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