Border Adjustment Tax?
The world of American tax policy is confused. The tax gurus responsible for the Border Adjusted Tax, Alan Auerbach and Michael Devereaux, recently came to the defense of their proposed “Destination-Based Cash Flow Tax.” Many domestic businesses are attacking the plan. While defenders and potential allies cannot decide what this plan is intended to do. In fact, Auerbach and Devereaux corrected President Trump. As evidenced by the Joint Address to Congress, the President hinted this tax plan was targeted towards trade. Auerbach and Devereaux refute the argument. In other words, everyone’s confused about border adjustment tax proposal.
How did this proposal become an issue?
At the beginning, Speaker Ryan and Rep. Brady were sold on this plan in early Summer of 2016. But GOP control of the entire Federal government seemed unlikely at that time. So, many businesses with vested interests paid little attention. Well, they are paying attention now. And both sides of the argument are selling the same potential negative result: Job loss.
The National Retail Federation (NRF) produced a new ad to explain how much damage the Ryan-Brady Border Adjusted Tax would do to American Jobs. The American Made Coalition (AMC) created an ad to explain why we need the Border Adjusted Tax to end the supposed“Made in America tax” that has cost American Jobs. Now, both are telling the truth from a certain point of view. But this is increasing the confusion among American business owners and consumers because they are missing the real problem.
So what is the real problem?
The real problem has always been: the tax system gives to multinational corporations and takes from American domestic businesses. The current system allows Larger multinationals to pay half the effective tax rate of smaller domestic corporations. And the Border Adjustment Tax proposal is promising to end that distortion by replacing it with a distorted consumption tax.
Truly, the Border Adjustment Tax proposal is basically a consumption tax that relies on unproven economic theory. The theory is the dollar’s value will increase so it won’t hurt current importers and jobs or affect trade. Now promises range all over the political spectrum on how that will occur. And no one actually knows for sure. So yes, the NRF is right that jobs are at risk if this theory of economics doesn’t play out in the real world. But they aren’t telling the whole story.
What’s the other side?
American companies do currently face a disadvantage for selling overseas. The largest multinationals avoid this disadvantage by taking advantage of tax loopholes. But exported American products pay foreign consumption tax or Value Added Tax (VAT). Americans didn’t want a VAT and officially kept a world-wide tax on corporate income. So yes, AMC is right that exported “Made in America” products are disadvantaged, but only on companies that don’t keep the money overseas. Mostly, impacted countries are small corporations that can’t afford to store profits overseas.
Right now, the U.S. recognizes its antiquated system through the use of a deferment policy. Basically, the IRS doesn’t touch the money till it is brought back to the U.S. This loophole causes the very profit-shifting and tax avoiding that the Border Adjusted Tax promises to fix.
This is why Americans see the tax system as one big catch-22. But it’s not. Because the problem isn’t one or the other. And there is a smarter option.
And that is?
Instead of a Border Adjusted Tax on Imports, we can use a Destination-Based Profits Tax. There are many ways to explain this plan known as Sales Factor. But simply put: Instead of taxing imports at full price, we tax imports on only their profits. Importers should be treated the same as every other business. The only companies that would not do well under a Destination-Based Profit Tax are the companies that have been shifting profits away from our country in the first place. These Multinationals have owned the field in tax avoidance. That is the disbalance that needs to end. The fight between importers and exporters should never have started. Hopefully, enough people will promote a Destination-Based Profits Tax to end the feud.
But simply put: Instead of taxing imports at full price, we tax imports on profits and only the profits. Importers should be treated the same as every other business. The only companies that would not do well under a Destination-Based Profit Tax are the companies that have been shifting profits away from our country in the first place. These Multinationals have owned the field in tax avoidance. That is the disbalance that needs to end. The fight between importers and exporters should never have started. Hopefully, enough people will promote a Destination-Based Profits Tax to end the feud.