Border Adjustment Taxes

The Border Adjustment on corporate federal taxes is part of a large proposed revamp to the tax code.  The purpose of the package is to stimulate US production and exports, increase employment within US goods-producing industries, and come closer to a balance of federal revenues and expenditures.  The overall tax package will shift the emphasis of taxation from production to consumption, and will enlist more consumers as taxpayers, albeit at low tax rates.  

The tax revamp will lower the number of tax brackets and lower rates, e.g. a top business rate will probably be 15% to 20% instead of today’s 35%.  For business taxes, the changes will make it cost-effective to repatriate the $2.5 trillion US firms parked overseas to avoid double taxation.  The tax changes will remove some complexities such as the dozens of asset lives used to establish a depreciation deduction – essentially, permitting the expensing of capital expenditures. 

A special provision to encourage production for export is called the Border Adjustment tax.  In effect, it makes import costs non-deductible and export revenues non-taxable.  As the Tax Foundation writes:

“In order to make the corporate tax border adjustable, the revenue from sales to nonresidents would not be taxable, and the cost of goods purchased from nonresidents would not be deductible. So if a business purchases $100 million in goods from a supplier overseas, the cost of those goods would not be deductible against the corporate income tax. Likewise, if a business sells a good to a foreign person, the revenues attributed to that sale would not be added to taxable income.”

When the Border Adjustment tax removes US tax from what we export, it reduces the prices for U.S. goods and services offered for sale abroad.  That price reduction should boost the volume of imports those countries buy from us.  That should increase production and employment in US firms that manufacture the goods we export. 

A good example is Boeing’s aircraft.  The price for a Boeing Dreamliner 787 is about $225 million plus tax.  Under the border adjustment plan a foreign buyer could buy the airplane for 20% less than before the tax package is enacted.

Goods and services imported into the US will not be eligible for consideration as tax deductions.   That means importing firms will need to recover the import cost plus the federal tax applicable to that much net income.  That will make goods and services with imported elements more costly to the US consumer, and likely reduce sales volume for importing firms.  In theory, this will strengthen the US dollar and eventually offset much or all the price increase.  In addition, because of increases in U.S. manufacturing and lower tax rates, workers should see higher paying U.S. wages and give consumers more spending power, but the impacts may be somewhat uneven. 

To avoid being a tariff, boarder adjustment taxes need to apply only to imported commerce that is not being taxed when US firms export it overseas.  One example is reinsurance services.  Because these services are not being taxed when US firms provide them overseas, there is no need for an adjustment when these services are provided to U.S. firms. To do so would only raise consumer costs and not benefit employment.

In any case, the impacts of the proposed Border Adjustment tax have motivated different industries to voice support or opposition in line with how it will change their sales.  There will certainly be some displacement in jobs related to decreases in importing activities that will be somewhat offset by increases in exporting activities. 

The repatriation of U.S. companies holding profits overseas could bring over $2 trillion in earnings.  Since the federal government expects to harvest an extra $1 trillion through the Border Adjustment tax, it seems unlikely that government can cream skim that much and still expect total employment income to rise while most of the displaced workers find replacement jobs.  In any case, there will need to be a concerted employment program that turns retail workers into competent manufacturing workers.

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