Economy & Budget

Republicans taking a BAT to trade policy may be met with resistance

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If the casual observer has heard anything about the border adjustment tax (BAT), they could be forgiven for believing that it is simply a tax on imports. In the age of Trump, when snap tariffs are routinely threatened, this is hardly an irrational assumption. However the idea of a BAT is far more complex than this and is embedded in a larger plan to radically transform the corporate tax code.

The Republican-backed idea is to rework the corporate income tax into a “destination-based cash flow tax” (DBCFT). Rather than a tax on profits, it would become a tax on revenue from all sales of goods and services in the U.S., less wages and other U.S. expenditures.

{mosads}Accordingly, revenue from exports would be tax free.  However, relative to the current system, imports would be implicitly taxed since they could no longer be deducted when calculating tax liability. In effect, the DBCFT would abolish the corporate income tax and replace it with something that more resembles a tax on consumption — like a value-added tax (VAT) in other countries. 


Supporters and opponents alike often believe that this system will support the international competitiveness of American exports and penalize imports. For net exporters, it looks like a boon to dramatically reduce their tax liability. For importers and retailers, it looks like a massive tax-hike. This appearance has led many politicians to seize on it as a way to reduce the trade deficit. 

There is reason to believe that this is not simply good old-fashioned protectionism. Economists argue that the value of the U.S. dollar will adjust upward, increasing the price of U.S. exports, making imports cheaper and negating the net effect on trade.

The (not inconsiderable) implications of a rapidly strengthening dollar aside, there remains another reason why the BAT may still radically impact international trade, which should give policymakers pause before they plunge into such a radical experiment: The BAT may not be consistent with World Trade Organization (WTO) rules.

Proponents of the new tax framework often wave away this objection with the argument that border adjustments are not new in the tax field, and that they have been standard practice for years in other countries. This is, at best, a mischaracterization. 

Nearly all value-added taxes around the world do indeed contain border adjustments. This is because, in WTO parlance, a VAT is an indirect tax — it is assessed so that the cost is carried by the consumer. So as to not treat foreign goods and domestic goods differently, consumers pay the same VAT on imports as on domestic goods.

Accordingly, goods that are exported face the VAT in whatever country they are purchased and not the VAT where they were produced. To enable this, producers are rebated the VAT liabilities they accumulated during production when they export.   

Direct taxes — like an income tax — are assessed on entities. The way these costs are passed on to consumers is far more complicated, so they are not allowed to be border-adjusted. 

The United States learned this the hard way in 2000, when a WTO panel found against a U.S. tax mechanism that allowed corporations to exempt export sales from their income tax liability on the grounds that it was an illegal export subsidy. 

Just how the WTO will interpret this novel DBCFT system is not clear, since it doesn’t fit neatly into either category. Ultimately, since it is focused on what is consumed domestically, it could be assessed by the WTO like an indirect tax. If so, the wage deduction could prove to be a fatal flaw with respect to WTO compliance, since domestic producers could claim it but foreign producers could not. 

Apart from the House Republican tax “blueprint” published last summer, we don’t know what the final outlines of the tax package will be in the House, let alone what the Senate will do to it afterwards.  But the stakes are high: if they get it wrong, the U.S. could be hit with up to $385 billion in trade retaliation.

Some proponents, like Rep. Kevin Brady (R-Texas), claim they want the system to be WTO compliant. Others, hint darkly that they might welcome non-compliance. 

With an U.S. administration already skeptical on trade and the WTO, and spoiling for a fight over sovereignty, a WTO standoff over the BAT has the potential to ignite an explosive confrontation.  It’s not at all clear the BAT “benefits” are worth it.


Logan Finucan is a policy analyst for Access Partnership, a consultancy with expertise in the areas of government relations and regulatory affairs. Finucan’s areas of expertise include international trade regulations, data protection laws, Internet governance, and multilateral processes.

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

Tags Border-adjustment tax direct tax economy Kevin Brady Tax reform value-added tax

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