Taxing imports and exempting exports sounds like a simple plan to protect U.S. jobs. However, this part of the House GOP tax reform plan is proving to be a controversial proposal that could split Congress just enough to stall the entire tax reform effort. Not only is Congress divided, but U.S. corporations are lining up on either side of the debate on a border-adjusted corporate income tax.
A coalition of businesses has already formed a special alliance to oppose border adjustment, Americans for Affordable Products. The group has about 440 members, including major retailers like Wal-Mart, Target and Overstock, as well as numerous individual industry groups, such as the National Retail Federation and the Consumer Technology Association. The group’s mission statement explains its opposition this way: “We oppose any Border Adjustment Tax (BAT) because it will increase the cost of clothing, food, medicine, gas, and other essential items that Americans rely on.”
Of course, on the other side, a group of multinational U.S. exporters has formed its own organization to support the tax, the American Made Coalition. Its members include such heavyweights as Boeing, Caterpillar, and Dow Chemical. This coalition argues that the border adjustment provision would make U.S. products more competitive, stating on its homepage, “Our broken tax code encourages the import of foreign-made goods while penalizing products made in and exported from America.”
How Border Adjustment Would Work
House Speaker Paul Ryan, R-Wisc., along with Rep. Kevin Brady, R-Tx., Chairman of the House Ways and Means Committee, are the main proponents of the tax blueprint which contains the border adjustment provision, named the “Destination-Based Cash Flow Tax.” The House GOP plan would:
1. Reduce the corporate income tax rate to 20% and revise the tax to be border-adjustable.
2. Only revenue raised from business transactions in the U.S. would be taxed.
3. Tax would be levied based on where the good ends up (destination), rather than where goods are produced (origin).
4. Revenue from sales to nonresidents would not be taxable, and the cost of goods purchased from nonresidents would not be deductible.
In short, there would be no tax on exports but a tax on imports, which is similar to what other countries do with the VAT tax. For example, if a business purchases goods from an overseas supplier, the cost of those goods would not be deductible against the corporate income tax. If the business sells goods to a foreign person, the revenues would not be included in the corporation’s taxable income.
Trump’s Position Unclear
President Trump has given conflicting signals about whether he will incorporate border adjustment into his own tax reform plan. The President has yet to release a formal tax reform proposal. As a candidate, Trump’s reform plan did not include border adjustment but did propose a reduction of the corporate tax rate from 35% to 15%.
In public statements in February 2017, Trump said border adjustment could boost U.S. jobs. More recently, Trump quibbled with the name of the tax. “I don’t like the word ‘adjustment’, because our country gets taken advantage of, to use a nice term, by every other country in the world,” Trump made this statement to Fox Business News in an interview in April. “Let’s call it an import tax. Let’s call it a reciprocal tax,” he said. “Nobody gets angry when you say reciprocal tax.” These remarks suggest that Trump may back some type of border adjustable tax as part of his trade policy.
Problems From Abroad
Even if Congress and the President come to agreement on a border adjusted corporate tax and advance it through the legislative process, a bigger problem looms. The border-adjusted tax could be opposed by the World Trade Organization (WTO) as an export subsidy. The current WTO rules allow border adjustment for indirect taxes, such as a VAT, but do not permit border adjustment of direct taxes, like a corporate income tax. In addition, under WTO rules, a tax with a border adjustment cannot discriminate against imports. If the WTO rejects a U.S. border adjusted tax, then the issue becomes whether or not the U.S. will continue its voluntary relationship with that organization. Interestingly, President Trump threatened to pull out of the WTO during the campaign. If he adopts the border adjustable tax idea, the U.S. may be headed for a trade war.
Over and over again, the Trump Administration and Congress have promised that action on tax reform will happen this year, in 2017. Recently, however, their efforts have been side-tracked by the Obamacare repeal effort. It could be seen as a failure to deliver on campaign promises if Congress and the President do not at least start work on some type of tax reform in 2017. My take? Watch for some definitive action on tax reform this Summer, with or without a border adjustable tax.
Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, a tax Professor with Georgia State University’s J. Mack Robinson College of Business, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments.