WASHINGTON, DC – Today, the Joint Economic Committee released a brief entitled ‘Border Tax Adjustment Would Curtail Profit Shifting and Provide Other Benefits, With Limited Transition Effects’ which outlines the economic case for moving from a production-based tax to consumption based, while not adding new taxes.

Currently, we largely have a “Made in America” business tax. That means if you build it here, hire here, and invest here, you face U.S. tax burden. Meanwhile, many other countries tax based on where things are sold. This mismatch disadvantages American producers.

By adopting border adjustment reforms, the tax burden flips the focus to taxing products where they are used, not where it is made. This adjustment allows for businesses to pay tax on what they earn minus what they are spending, including full, immediate write-offs for investment. This reform is consistent with free market principles by removing tax distortions that favor foreign production. It removes unfair tax advantages and treats goods the same based on where they are sold. This makes it easier to build factories in the United States, buy equipment and create jobs.   

This brief highlights how adopting border adjustment reforms puts American producers first and levels the playing field for consumers and American businesses. Major points of the brief include:

• America’s current business tax is a “Made in America” tax, while many other countries tax consumption. This disadvantages American producers and creates opportunities for multinationals to shift profits offshore— costing the U.S. government 16 percent of corporate income tax revenues as of 2019.

• Border adjustment changes the U.S. business tax base from production to consumption. It does so by denying tax deductions for import costs and excluding export revenue from taxable income. This reform does not raise tax rates or add a new tax.

• Border adjustment is an efficient way to raise tax revenue and curtail profit shifting. It is economically equivalent to a tariff on all imports, including services, plus a same-percentage subsidy for all exports. The export subsidy neutralizes the trade distortions that tariffs create in isolation.

• Transition effects, including currency price changes or short-term effects on importer costs, are real but surmountable. The U.S. dollar has appreciated 27 percent over short periods without crisis, and tariff rates reached 28 percent in the past year. A full border adjustment would entail approximately 27 percent U.S. dollar appreciation, or temporary effective tariff rates much lower than 28 percent.

• The TCJA and the Working Families Tax Cuts Act (WFTCA) both moved in the direction of border adjustment, but they did not finish the job. FDDEI partially shields export income from taxation. Legislation can complete the border adjustment by enacting matching tariffs and expanding FDDEI.

Please read the full brief here.

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