What Is Border Adjustment Tax?
The term “border adjustment tax” refers to a proposed destination-based cash flow tax (DBCFT).It is a tax on imported commodities that is also known as a border-adjusted tax, destination tax, or border tax adjustment. In this situation, exported items are tax-free, however imported goods sold in the United States are taxed.
Understanding Border Adjustment Tax
The border adjustment tax (BAT) taxes goods based on where they are consumed rather than where they are produced. For example, if a firm delivers tires to Mexico to be utilized in the manufacture of automobiles, the profit the tire company generates on the tires it exports is not taxed. However, if a vehicle manufacturer in the United States acquires tires from Mexico for use in cars manufactured in the United States, the money the firm earns on the automobiles (including the tires) sold in the United States is taxed. Furthermore, the cost of the imported tires cannot be deducted as a business expenditure. Alan J. Auerbach, an economist, initially proposed the notion in 1997, believing that the tax system should be aligned with corporate aims and the national interest.
The Theory Behind the BAT
A tax on consumer items normally raises consumer prices, but Auerbach’s theory believes that the BAT would strengthen the home currency, thus lowering the price of imported goods. This basically wipes out a higher import tax.
This tax is intended to balance out imbalances in cross-border money flows and limit firms’ motivation to off-shore profits. As a result, the DBCFT is a tax rather than a tariff. Despite the fact that it is both an import tax and an export subsidy, the rate of border adjustments is paired and symmetric. As a result, the impacts of these two components – the import tax and the export subsidy – on commerce are neutralized. Using both together results in no-trade distortions, but using either independently does not.
Critics of the levy believe that it would raise prices on imported products, such as those from China, resulting in inflation. Proponents of the tax argue that an increase in overseas demand for US goods would boost the dollar’s value. In turn, a strong dollar increases demand for imported products, resulting in a net impact on trade that is neutral.
If BAT were implemented, any firm that sold products in the United States, regardless of where the company’s headquarters or manufacturing facilities are located, would be liable to tax. If it does not sell products in the United States, it is exempt from the tax. If a product is created in America and consumed elsewhere, it is also tax-free. As a result, the firm’s choice to locate in the United States is unaffected by the tax rate or burden in the United States.
Where the BAT Stands Now
In the United States, the Republican Party highlighted Auerbach’s proposals in a policy document that backed a destination-based tax system in 2016. In February 2017, the idea sparked a heated controversy, with Gary Cohn, head of the National Economic Council, opposing the tax scheme and Americans for Prosperity (AFP), a lobbying organization sponsored by the Koch brothers, launching a campaign to oppose the tax.
Proponents of the tax think that the United States will become an attractive site for enterprises and investments, preventing firms from relocating elsewhere. This would generate employment in the United States and eliminate the need for American workers to pay for corporate tax cuts.
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