Import tax levels the playing field

Breathless fear-mongering has begun. The House “border tax” would jack up retail prices, decimate consumers, bankrupt retailers and skyrocket the price of gasoline. Nice spin, but not reality.

Reality? It’s not a border tax; that would be a tariff and a bad idea. Instead, it’s a tax technique known as “border adjustment” that keeps the tax system from tilting the playing field of domestic competition or trade.

It is widely used around the globe — from Canada to Japan to throughout Europe — and when last checked every one had vibrant retail markets, low inflation and no sense of impending doom from their tax systems.

The idea is simple: Exempt U.S. exports from tax so that they enter foreign markets on a level playing field and pay only the taxes in the country where they are sold. Best products would win, unlike the current situation where the best product might have to pay both U.S. and foreign taxes in order to win. Similarly, impose the same tax that domestic products pay on imports so that U.S. prod- ucts do not start at a disadvantage.

The proposal also eliminates any tax-based advantage to moving production offshore and selling back into the United States. American production is no longer pushed out of America. At the same time, it eliminates incentives to shift U.S. profits to low-tax countries. Companies couldn’t profit from (legal) avoidance, and U.S. profits will stay in the U.S. to fund higher wages, greater investment and faster growth.

Opponents of tax reform focus on its effect on the dollar but try to have it both ways. Of course tax reform that transforms the snail-like growth rate will make the dollar stronger. But the complaint is both that it will not appreciate either enough or quickly and also that an appropriate, sharp adjustment will crater the global economy.

Reality check: The dollar is 25% higher than it was 30 months ago, and there are no signs of apocalypse.

Border adjustment is an unthreatening, key piece of much needed tax reform.

Douglas Holtz-Eakin is president of the American Action Forum and a former director of the Congressional Budget Office.