Congress should leave the border adjustment tax behind

BAT, RIP? That’s what some people are claiming. And with good reason.

The border adjustment tax (BAT), a controversial proposal to remake the corporate income tax, has divided prominent economists, tax experts, and industry groups. It’s time to move past the border tax distraction to focus on getting tax reform across the finish line.

The House GOP Blueprint is a good foundation for updating the tax code. Without the BAT, the plan lowers the corporate tax rate and allows full expensing. Following the lead of most other Western countries, the U.S. should move towards a simpler territorial tax system that only taxes profits earned here in the U.S. A true territorial system paired with other reforms, rather than the quasi-territorial border adjustment, would make U.S. businesses more competitive abroad and deliver much needed economic growth through new investment and jobs.

The border adjustment tax is an overly complex solution to a simple problem; the U.S. corporate income tax rate is too high.


The proposed border adjusted corporate tax would exempt export revenues and tax the full cost of imports. This change raises about $1 trillion over 10 years, used to partially finance other beneficial reforms, such as lowering the corporate income tax rate from 35 to 20 percent and full expensing, which allows firms to fully deduct capital expenses and would increase investment. These are worthy goals.

But at what cost? The proposed border adjustment presents unnecessary economic risks to the U.S. economy – potentially disrupting trade flows, increasing consumer prices, and distorting the value of international assets.

Advocates argue that the U.S. is one of very few countries that does not border-adjust its taxes, as if this is evidence enough that we need one, too. The absence of a border adjustment is promoted as the “made in America tax.” These claims, however, wrongly conflate the corporate income tax with Value Added Taxes (VAT) – which the U.S. thankfully does not have. Contrary to the rhetoric, if the U.S. were to impose this new corporate tax, it would be the only country in the world to border-adjust a tax of this type.

However, there is more than just a kernel of truth to the claims. There is a “made in America” tax, and it is our high corporate income tax rate, which is stubbornly assessed on worldwide income. The good news is that Congress can trash the true “made in America” tax without a BAT!

Another critical problem with the BAT is no one truly knows what the economic impact would be of a border adjustment on the U.S. economy.

Advocates of border adjustments rely on overly simplified academic assumptions to make the case that the new tax won’t harm the economy. However, much of the evidence from the real world indicates that any border adjustment, even if well designed, will distort and decrease trade flows. Research from 2005 concluded that border adjusted value added taxes (VAT) are associated with one-third fewer exports. If the BAT impedes trade -- as evidence from countries with VATs suggests – it will depress America’s potential for economic growth.

The border adjustment also opens the door to bigger government. 

Notwithstanding commitments to smaller government made by current political leadership, many fear that the BAT lays the groundwork for future governments to expand Washington’s reach. A border adjustment reduces the protective pressures of international tax competition and lays the foundation for a European style VAT – a new tax that big government advocates have wanted for decades.

Like a VAT, the border adjustment is also just a new source of revenue.

Washington is stuck in a destructive paradigm that forces all tax reform to be revenue-neutral, which inevitably leads to problematic proposals such as brand new taxes like the BAT.

The real root of the problem is a familiar one - uncontrolled spending which leads to systemic deficits and growing debt. If Congress is serious about addressing the debt, lawmakers should pair tax reform with sustainable spending reform. This is an idea that new research says 70 percent of Americans support.

The economic risks of a border-adjusted tax significantly outweigh the political benefit of promoting revenue-neutrality and continuing to grow the federal government. Congress should move forward without it.

A better approach would lower tax rates for individuals, businesses and investors; include full immediate expensing of capital; remove as many special credits, deductions and exemptions as possible; and simplify those that are left – much like the House Blueprint has done. 

The tax code is badly in need of an update. By pairing responsible spending reforms with tax reform, Congress and the president can develop a deficit-neutral tax reform package to meet the requirements of reconciliation without the border-tax distraction. The last thing we need is a new tax to pay for larger government.

Adam N. Michel is a policy analyst specializing in tax issues at The Heritage Foundation.

The views expressed by contributors are their own and are not the views of The Hill.