Opinion

It’s Time For Congress To Implement A Border Tax Adjustment

Brian Reardon Brian Reardon is the President of the S Corporation Association and a former White House official at the National Economic Council.
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What if I were to tell you that there’s a tax policy that could help level the global playing field on trade, encourage investment and employment here in the United States, and help pay for pro-growth tax cuts for businesses and families alike?  What if this policy could attract supporters from both the left and the right, and would help to break the current log-jam on business tax reform that’s prevented Congress from moving forward in past years?

Would you be interested in something like that?

You’re not alone. Over 160 countries representing the vast majority of our export markets embrace this approach. The policy is called a “border tax adjustment” (BTA) and it is the key to reforming how we tax businesses to encourage investment and job creation here in the US.

The idea is simple.  For companies that employ people and make things here in the United States, we would exempt their sales from taxes when they export those goods overseas.  For companies that employ people and make things overseas, we would impose a tax on those goods when they import them here to the United States.

The net result is a tax code that eliminates perverse incentives for companies to shift their operations and intellectual property overseas.  What’s the point of hiding your intellectual property in low-tax Ireland if any products you import back into the United States are going to be subject to US taxes anyway?  Making a border adjustable tax part of a larger package of international tax reforms helps to ensure companies and their ideas stay here in the US.  It’s a big improvement over the status quo.

Sounds good?  It gets better.  Because the US runs a chronic trade deficit, applying a BTA raises revenue that can be used to cut tax rates and allow businesses to expense –immediately write off – the cost of any investments they make.  Expensing and rate cuts reduce the cost of capital for US companies seeking to build plants or buy equipment here – and they are especially valuable to small and mid-size companies that have little or no access to capital markets.  That means more investment and job creation in the communities that need them.

Finally, border tax adjustments help address the anti-trade sentiments that are prevalent in some parts of the country.  For politicians concerned with the loss of our manufacturing base and the exodus of good American jobs overseas, the BTA offers a concrete means of reversing these trends without starting a trade war.  Pro-trade politicians can support border tax adjustments because they help to promote tax-relief for American-made goods while helping to stem the growing tide against free trade and globalization among voters.

Economists have advocated for this policy for decades, but only recently have policymakers in Congress taken a hard look at its potential.  The so-called Brady Blueprint, crafted by House Ways and Means Chairman Kevin Brady, would make the BTA a central part of the overall plan, while House Speaker Paul Ryan frequently mentions the policy as an essential component to tax reform.

Opponents argue that BTAs will hurt retailers and consumers, who they say could end up shouldering the new tax on imports.  But as others have noted, currencies will adjust to counter the BTA, which means consumers will be protected, as any new tax on imports will be offset by the stronger dollar.  That is the underlying reason the WTO has allowed border adjustments for nearly 50 years.  Who will pay the tax?  Investors in foreign companies, many of whom send tax advantaged exports to the US.

Others argue a BTA will violate WTO rules and start a trade war.  That argument ignores that fact that the Brady bill turns our business tax into the equivalent of a consumption tax, which is permitted to be border adjusted under WTO rules.  It also ignores the prolonged, multi-year process any challenge brought before the WTO would face. Far from starting a trade war, the Brady blueprint constructively and proactively addresses an unfairness that’s been hurting American producers for decades.  If BTAs hurt your trading partners, and every other country uses them but us, what does that say about the status quo?

Congress is back and tax reform is front and center.  The Brady Blueprint seeks to make the US a more attractive place to invest and create jobs while promoting fair trade.  The border tax adjustment is the key to this effort – it eliminates incentives for companies to move investment and jobs overseas while financing lower rates and expensing provisions that make the US a more attractive place to invest.  It is the very heart of the House Blueprint and, without it, the rest of the package simply doesn’t work.  It is something you might be interested in.

Brian Reardon was special assistant for economic policy and a staff member of the National Economic Council under President George W. Bush and is an advisor to the American Made Coalition.