What’s Better Than a Border Adjustment Tax?

MUNICH – One of US President Donald Trump’s most significant reform proposals is aimed at the American tax system. His administration wants not only to lower the overall tax burden, but also to “rebalance” the tax system to encourage domestic production and exports, possibly with a destination-based cash-flow tax we may call a border adjustment tax (BAT). Unfortunately, the risks of such a radical reform would most likely overwhelm any rewards.

The United States currently taxes corporate profits at 35%. This is a high rate by international standards (though there are many deductions and loopholes); so congressional Republicans and some of Trump’s advisers now want essentially to replace the corporate income tax with a cash-flow tax that resembles a BAT.

Under this plan, imported goods and services would be taxed at a rate of 20%, while exports would be subtracted from the tax base, and thus not taxed at all. If the dollar remains stable, the costs of imports into the US would increase by 20%, and American exporters would enjoy a tax subsidy relative to domestic producers.

The proponents of a cash-flow BAT argue that it would merely level the playing field, because most of America’s trading partners refund their value-added tax on exported goods and services. But this is a false comparison. These refunds are not a hidden subsidy, but a logical part of a destination-based tax system, whereby taxes are levied in the country where a good is consumed.