The Border-Adjusted Tax Plan Is Bad for America

Milton Ezrati

Economics, Americas

Trump needs to stay the course.

Sometimes it seems economic headlines rise and fall in inverse proportion to the importance of the subject matter. The media, for instance, made a big flap when Trump withdrew the country from the Trans-Pacific Partnership trade deal, even though the treaty had never gone into effect, was declared dead late last year and changed reality not a whit. The fuss over the border wall with Mexico and a canceled state visit by Mexico’s president dealt with more substance than the death of TPP, though the wall, and even the floated and then retracted idea of a 20 percent tax on Mexican imports, will have to wait on Congress. Meanwhile, few headline writers seemed to notice when Trump threatened a promised growth revival by expressing approval of a Congressional Republican proposal for a border-adjusted tax to replace his own, much more effective, corporate tax reform.

The proposal that seems to have distracted Trump and his team is presumably designed to encourage exporting and discourage importing. It would replace the current corporate tax code with a flat tax on all imports and domestic sales, but offer a break on any products leaving the country for sale overseas. In many respects, it is an answer to the effect of value-added taxes that prevail in most of the rest of the world. These taxes allow other nations to tax all products and services sold within a country, but rebate the expense for exporters. This seeming export subsidy has passed muster with the World Trade Organization and, in the eyes of some, has put the United States, which has no value-added taxes, at an export disadvantage to competing nations.

The border-adjusted tax scheme would seem to answer that disadvantage. It was first proposed by Sen. Ted Cruz during the Republican primaries and has since gained considerable Republican support in the new Congress, presumably because the U.S. trade deficit has become a very fashionable focal point. In particular, it has the support of House Ways and Means Committee chairman Rep. Kevin Brady, of Texas. Brady has made clear that border adjustability will remain in any tax legislation going forward. Trump initially rejected the idea as too complex, but in recent discussions between the White House and House Speaker Paul Ryan, Trump’s team seems to have warmed to the proposal.