What Is A Border Adjustment Tax?
The phrase “border adjustment tax” has been in the news recently, with it being a part of the GOP’s “A Better Way” Blueprint (available here). What exactly, though, is a border adjustment tax? While there are several tax aspects to the GOP Blueprint, for brevity this posts regards only border adjustments.
In a nutshell, a border adjustment tax means that a tax is levied on imports (goods made overseas but sold in the United States) and exports are not taxed (goods made in the United States but sold elsewhere).
The rationale behind a border adjustment is that, under the current corporate tax system, United States-based exports implicitly bear the costs of U.S. taxation, while, on the other hand, imports do not. Consequently, this results in a de facto penalty on exports while subsidizing imports.
Border adjustments would be new for U.S. taxation; but, it’s not a novel concept in taxation generally. Many countries have taxes known as “value-added taxes” (VATs). At bottom, a value-added tax is a consumption tax (meaning its effectively borne by the end consumer), which is generally collected as a percentage of sales price. In effect, then, the tax is levied at each stage of production. Double-taxation is avoided, though, as there is effectively an offsetting credit for the VAT at the previous production level. Value-added taxes are prevalent in the European Union, for example.
Border adjustments are common in VAT regimes to account for goods or services that are consumed in the country but produced elsewhere (formally, this is known as a destination-based VAT system). Because the tax should ultimately be paid to the country of consumption (i.e., the destination), this requires adjustments at the borders for imports and exports—hence, the phrase “border adjustment.”