Adjusting to the Border Adjustment Tax

The newly unified Republican government has raised hopes of fundamental tax reform, particularly corporate tax reform. The most concrete and politically relevant plan is the broad outline presented in the House Republican Tax Reform Task Force Blueprint. The plan would radically transform US corporate taxation by shifting from an origin-based corporate income tax to a destination-based cash flow tax (DBCFT). Under such a system, the location of consumers, not producers, determines whether activity is taxable. The plan shifts the tax base to being destination-based through a border adjustment tax (BAT) that exempts exports from taxation and subjects imports to a new 20 percent corporate tax rate.

Because the United States is projected to run a trade deficit for the foreseeable future, the border adjustment is projected to bring in over $1 trillion in net new tax revenue over the next decade. The House GOP’s corporate tax reform plan uses that revenue to lower rates and otherwise reform the tax code while maintaining something approaching revenue neutrality.

In a new policy brief by the Mercatus Center at George Mason University, Stan A. Veuger, a resident scholar at the American Enterprise Institute, discusses the transition to a border adjustment and the unintended consequences that come along with it. Veuger recommends policymakers recognize the imperfections of the BAT and compare the current system of corporate taxation to realistic alternatives.