The Border-Adjusted Tax Trap

Wall Street Journal letter to the editor.

It may feel like ancient history, but the border-adjusted or destination-based cash-flow tax (DBCFT) was central to Speaker Paul Ryan’s 2016 “Better Way” tax blueprint, the precursor to the 2017 Tax Cuts and Jobs Act. The plan would have transformed the corporate income tax by exempting exports and taxing imports. Proponents argued this would neutralize cross-border tax distortions through a fully offsetting currency appreciation, while critics warned it was a tariff in disguise with unpredictable global consequences.

The idea never made it into law, but Paul Ryan and Kyle Pomerleau recently resurfaced it as a replacement for Trump’s tariffs in their Wall Street Journal op-ed, A Tax-Reform Alternative to Trump’s Tariffs. Veronique de Rugy and I respond this week with a letter arguing that this proposal is misguided and unable to meet both the president’s trade aesthetics and economists’ predictions of seamless market adjustment.

You can read the full letter to the editor in the Wall Street Journal here: A Tax-Reform Alternative to Tariffs Is a Trap.

We make three points.

First, Trump loves tariffs, not because they’re good economics, but because he sees tariffs as a negotiating tool, a way to reward friends, and punish rivals. Replacing the International Emergency Economic Powers Act tariffs with a border adjustment tax may result in additional revenue, but it is unlikely to meet Trump’s economic and non-economic reasons for loving tariffs. Americans would likely end up paying higher tariffs and the new corporate income levy.

Second, the argument that a border-adjustment “would address Mr. Trump’s trade concerns by being a smarter way to tax imports and that currency appreciation will offset its effects are mutually exclusive.” As I’ve argued before:

Policymakers ultimately can’t have it both ways. The border adjustment is either tariff-like—and currencies do not fully adjust—or it is trade neutral and thus will not meet the policy priorities of mercantilist advocates, leaving them to desire additional tariffs in the future. The new border tax is bad either way.

Lastly, the “policy’s supposed fiscal virtue is precisely what makes it dangerous.” If the non-protectionist proponents of the border adjustment are correct, and the new tax is a highly efficient source of revenue with few, if any, economic distortions, it could become, as a Mercatus Center analysis describes, “an irresistible source of additional tax revenue for future policymakers.”

These highlights only scratch the surface of the border-adjustment debate. They leave out important nuances about exchange rate dynamics, implementation inconsistencies, and significant cross-border wealth effects. For a more comprehensive literature review, see my earlier piece: Reviewing the Case Against a Border-Adjusted Corporate Income Tax.