‘Border adjustment’ plan raises consumer prices
A proposal for something called a “border adjustment tax” doesn’t get as much attention as President Trump’s latest Twitter outburst. But it should.
The border adjustment tax, which House Republicans are pushing as a centerpiece of their tax reform plan, is yet another troubling indication of how far the GOP has gone in rejecting the sunny globalism of President Reagan in favor of self-defeating protectionism.
Protectionist proposal invites retaliation
The border adjustment concept gets kind of complicated, but the plan essentially taxes imports, including parts used in manufacturing, and exempts exports. More precisely, imports would be taxed at 20% and revenue derived from exports would be deductible. In that regard, the border adjustment plan resembles similar taxes adopted by other nations and sanctioned by the World Trade Organization.
Here’s the catch. Unlike the other nations, the United States does not have a value-added tax (a bit like a national sales tax), and no VAT is contemplated in the Republican plan. That means domestically made goods would not be subject to the 20% tax. Instead, the profits they generated would be subject to the corporate income tax, which would be cut from 35% to 20%.
You don’t need a degree in economics to see the asymmetry of this. An imported product would face a 20% tax on its full value, while a domestic product would face a 20% tax only on the profits it generates.
Call this what it is: blatant protectionism. The authors of the plan try to hide this disparity with a common form of obfuscation, giving something a new name. The corporate income tax would be renamed the “destination-based cash flow tax.”
In theory, taxing imports more than domestically made goods would help the U.S. economy as companies moved to manufacture their wares in the USA to avoid the tax. The plan is certainly preferable to President Trump’s threats to slap tariffs on products imported by individual companies and countries that displease him. And, according to the Tax Foundation, it would raise an estimated $1.1 trillion over 10 years to offset the revenue lost by slashing the corporate income tax.
That’s the upside. The downside is that consumers would pay more because prices would rise to either cover the 20% import tax or pay the additional labor costs of making things in America. That’s why retailers, car dealers, oil refiners and other groups are mobilizing to fight the border adjustment tax.
Moreover, any economic boost would undoubtedly be shortlived. Adoption of the border adjustment tax would raise the value of the U.S. dollar, and foreign nations would impose retaliatory tariffs on American-made products, killing U.S. jobs that depend on exports.
Complex tax and trade policy is not as titillating as Trump’s latest tweet about a department store and his daughter’s product line. But it’s going to have much more impact on your life.