Complications from the Border-Adjusted Cash Flow Tax

In defending the border tax adjustment (BTA) in their tax reform proposal, House Speaker Paul Ryan and Ways and Means Committee Chair Kevin Brady say that one of its objectives—or side benefits—is to encourage exports and discourage imports. The plan, for example, would subject imports to the proposed 20 percent cash flow tax while exports would be exempt. Businesses, especially retailers and firms involved in global supply chains, are bound to be affected, and lobbyists for the potential winners and losers are lining up in droves to make their arguments in Congress.

The Ryan-Brady tax reform blueprint claims that the new tax adjustment would merely align US tax policy with that of its trading partners. “For the first time ever, the United States will be able to counter the border adjustments that our trading partners apply in their VATs [value added tax],” it asserts. 2 And in a recent speech to the US Chamber of Commerce, where many members are uneasy about the proposal, Chairman Brady argued that the tax rate would be the same for imports and domestic products. 

This border-adjusted tax is stunningly simple and based on a pro-growth principle: if your product or service is consumed in the United States it is taxed equally. It will bear the same rate of U.S. tax regardless of where it is produced, regardless of whether you’re a foreign company or a domestic one…. Many of our international companies already deal with border adjustable taxes in the more than 100 countries that currently impose them.

Does this argument hold water? The answer is no. The current proposal is unlike a VAT for an impor- tant reason: It excludes wages from the tax base. Products will in fact face different tax rates in the United States, depending precisely on where products were produced. The degree of overall discrimination will depend on the extent to which the real exchange rate adjusts.