Why the Border Adjustment Tax Is Already Losing Momentum

With a Republican House and Senate, corporate taxes under a Donald Trump presidency are almost certain to come down in 2017 and beyond. While many politicians have wanted more taxes from U.S. corporations, the reality is that the United States is already among the world’s highest tax rate nations for corporations, with a 35% income tax.

One such issue that the House Ways & Means Committee has presented as a way to get taxes down was to install a so-called border adjustment tax, a BAT for short. That effort is certainly far from lacking controversy. After hearing key comments from leaders, it seems quite evident that the effort to create a BAT already seems to be losing steam before it comes up for a vote.

First and foremost, it is important to understand what a BAT would be. The House Republican plan is to adjust taxes at the border, which effectively can be viewed as a means to subsidize exports leaving the United States while simultaneously taxing imports coming in to the country. This BAT has been touted as the top way to pay for a broader reform on U.S. corporate taxes. Trump’s plan was to get corporate taxes down to “hopefully as low as 15%,” but the real rate may remain higher than the goal.

One of the pro-growth initiatives of the House Ways & Means Committee is to end what it calls the “Made in America” tax on U.S. exports. This shift would reverse that for imports similar to what other nations have in their tax codes. Unfortunately, this is complicated and may have more risks and unknown outcomes in the years ahead.

What would occur under a BAT tax is that imports would be taxed at a proposed 20% rate and exports would excluded from taxes. This could pose serious issues for the U.S. dollar, and it would be easy to see how much of this could effectively be seen as an ultimate consumer tax.

As a reminder, the United States has run trade deficits, where the dollar value of exports has been far shy of the value of the dollar value of imports, for many years. From 2006 to 2015, the average U.S. trade balance of goods and services combined was more than $550 billion per year. What will matter more for any proposed BAT is in goods, and that is where the U.S. deficit is far worse. The Census tables showed that the U.S. trade balance for goods has been an average trade deficit of more than $730 billion per year over the same 10-year span. This adds up to real money through time, even for the world’s strongest economy.

In a Wall Street Journal interview on Friday, Trump said that the BAT in its current effort is just too complicated. He said:

Anytime I hear border adjustment, I don’t love it. Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.

Then there is the view of William Dudley, President of the Federal Reserve Bank of New York. He was speaking after his prepared remarks at the National Retail Federation in New York. Dudley is well regarded among economists inside the Fed due to his proximity to the financial markets. Dudley noted that a cross-border tax could change the value of the dollar and that it would raise import prices on goods and services.

Last week on a CNBC appearance, Representative Devin Nunes from California maintained that a new tax system would help in job growth and that it would create a system that puts the United States on par with other nations. Nunes said in a CNBC’s Power Lunch interview:

This plan is not controversial. Quite frankly, it’s a little offensive some major American companies that are importers who do business worldwide, are even raising concerns of this plan, because I don’t see them going to Germany or Mexico or China to raise these concerns. And Donald Trump has been exactly right to call people out on this.

The House Ways & Means Committee blog statement from November 2016 further explains how a “Made in America” tax is uncompetitive and needs to be changed:

The current code is uncompetitive and imposes many restrictions and burdens on U.S. businesses. Our Blueprint streamlines existing rules and eliminates outdated and unnecessary tax barriers so our businesses can sell American around the world. And because border adjustability ensures a level playing field, that streamlining is possible without the need for new complex rules that try to force companies to stay.

Even last June, the Ways & Means Committee said in its “A Better Way” blueprint for a new corporate tax plan:

This Blueprint achieves this by providing for border adjustments exempting exports and taxing imports, not through the addition of a new tax but within the context of the transformed business tax system. The Blueprint also ends the uncompetitive worldwide tax approach of the United States, replacing it with a territorial tax system that is consistent with the approach used by our major trading partners.

How this so-called effort for a BAT will play out remains to be seen. What does seem to be brewing is that keeping things simple will need to occur. Many people think of the border-adjustment tax as a value added tax (VAT), but in some ways it can be viewed in the exact opposite position. For now let’s just say that the argument for a border adjustment tax is simply a BAT versus a VAT.

Stay tuned.