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Bridging The Gap
The Case for a Border-Adjusted Tax
  Tuesday 07 March, 2017
The Case for a Border-Adjusted Tax

The American corporate tax system is broken. Faced with one of the highest tax rates in the world, many multinational corporations in the United States move their operations and reported profits offshore or undertake “inversions” to relinquish their American tax nationality. Elaborate regulatory and enforcement measures have been unable to stop this. Vilifying companies for their behavior hasn’t worked, either.

Fortunately, bipartisan support for corporate tax reform has been growing in Washington. In place of the old system, Republicans in the House of Representatives have proposed adopting a tax — the destination-based cash-flow tax — that would be levied on the domestic cash flows of all businesses operating or selling here. (Your domestic cash flow is your revenues in the United States minus the wages, salaries and purchases you pay for in the United States.) This would mean introducing “border adjustments” to the current system — exempting exports from tax, but taxing imports.

This reform should appeal broadly, to Democrats and Republicans alike. The border adjustments would strongly discourage the shifting of profits and activities offshore and eliminate incentives for corporate inversions. (The proposal would also eliminate incentives for companies to borrow excessively and strengthen the tax benefits for investing in plants and equipment.) But there remains much misplaced criticism of the reform and its potential, and much misunderstanding about who the winners and losers will be if it is adopted.
Some critics, including President Trump at one time, have claimed that the new system would be too complicated. On the contrary, the tax would be much simpler than our current arrangement. By basing a company’s tax liability exclusively on its domestic cash flows, the new system would replace the much more complex calculation of a company’s income that takes place now, which must also account for offshore and cross-border transactions. And because the tax would eliminate incentives for companies to shift operations and profits offshore, it could dispose of the raft of complex tax and regulatory measures developed over the years to discourage such tactics.

Other critics, particularly those on the political left, have expressed concern that the tax isn’t progressive enough. But it promises to be more progressive than the current United States corporate tax system: Its burdens would fall squarely on the owners of corporate capital rather than — as happens to some extent now — on American workers, whose wages suffer from the flight of productive investment capital to lower-tax countries.

Importers have also criticized the tax, arguing that the border adjustments would lead to a major redistribution of income away from sectors of the economy based on import shares and toward those based on export shares. This is the biggest misconception about the tax. In truth, importing industries should expect on the whole to experience a shift in the composition of their costs rather than an overall increase in their costs. The reason is that under the new tax system, the dollar should appreciate relative to the currencies of our trading partners (in response to the changing incentives for American firms to export and import). A stronger dollar would make imports cheaper, offsetting the increase in taxes paid.
Of course, corporate tax reform would result in winners and losers. But the gains and losses would derive mostly from the increased profitability of American operations and the lost opportunities to avoid paying United States taxes.

Free-market critics of the tax have suggested that border adjustments are tariffs and would thus erect trade barriers. This is also untrue. The border adjustments would merely shift taxation from where products are made to where they are sold. This, again, would encourage companies to locate their productive activities and profits in the United States. (Countries around the world use such border adjustments every day as components of value-added taxes that are collected at the location of purchases rather than production.)
For the United States corporate tax to be a viable source of revenue, it must be reinvented. Intense tax competition for profits, production and jobs, in the form of other countries’ sharply declining corporate tax rates and a host of favorable tax provisions, has been little hindered by international efforts to slow the process.

The United States faces a choice: to mark time as our competitive position worsens, to join this race to the bottom or to take forceful action that replaces our corporate tax system with one that aligns with the national interest. Our decision should be clear. We need to adjust to new ideas like a destination-based cash-flow tax. In the end, the short-run economic adjustments required would be a small price to pay for an enduring, fair and rational tax system.
Source: https://www.nytimes.com/2017/03/06/opinion/the-case-for-a-border-adjusted-tax.html?ref=opinion

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