Effects of a Border-adjusted Corporate Tax

Issue Briefs | Taxes

No. 209
Wednesday, May 17, 2017
by Richard B. McKenzie

U.S. firms pay the world’s highest corporate tax rate — a federal tax of 39.1 percent combined with an average 4.1 percent state tax on profits from domestic sales, or foreign sales (when and if the profits are repatriated). In contrast, the lower tax rate embedded in the prices of those goods produced in other countries and shipped to the United States often gives them a competitive advantage, whether due to other countries’ lower valueadded taxes (VAT) or much lower corporate tax rates.

House Speaker Paul Ryan and other Republican House members have proposed a lower corporate tax rate of 20 percent with a border adjustment. A border-adjusted tax (BAT) would apply to profits on domestic sales and on imports, but would not apply to profits from U.S. exports to other countries. According to the House Republicans’ tax plan, the BAT will “mean that it does not matter where a company is incorporated; sales to U.S. customers are taxed and sales to foreign customers are exempt, regardless of whether the taxpayer is foreign or domestic.”

Effect on Producers and Workers. Since U.S. producers would not pay the tax on profits from exports, the BAT will increase their efforts to sell goods and services abroad, and reduce the resources they devote to producing goods for the domestic market. The greater demand on domestic resources can be expected to increase producers’ domestic prices, which is how Mr. Trump expects real wages to rise for U.S. workers.

Employers who depend on imports (say, retailers) can expect their sales to fall as a result of the BAT — or tariff increases — imposed to deliberately raise the retail prices of imported goods. The collateral damage will be a reduction in the market demand for workers in these disfavored industries.

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