Border Adjustability Could Bring Transitional Challenges, But Trade Balance Won't Change, Analysis Says
The destination-based, border-adjustable tax reform framework proposed by House GOP lawmakers could bring implementation challenges but shouldn’t alter the U.S.'s overall trade balance, the nonpartisan Tax Foundation said in a report (here). Though border adjustment calls for exemption of exports from taxation, the plan might actually overtax exports in some situations, it said. It is too early to decipher whether consumers and producers could bear additional short-term cost burdens resulting from an expected tax increase brought by the plan, because transition rules remain unclear, the report says. “For example, lawmakers could phase in the border adjustment over a number of years,” the report says. “The downside of this, however, is it would reduce the provision’s effectiveness as a base broadener.”
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The Tax Foundation characterized border adjustability in the context of the overall House GOP tax reform plan as “a serious policy worthy of consideration.” Origin-based and destination-based taxes are trade-neutral and switching from one to the other doesn’t impact trade balances, the report says. Taxing imports reduces exports and vice versa, the Tax Foundation said. The analysis arrived at a conclusion similar to that in a November study produced by conservative think tank American Action Forum President Douglas Holtz-Eakin, which found that the U.S. dollar will appreciate enough to offset any potential decrease in imports (see 1612140046). The Tax Foundation report's author, Kyle Pomerleau, added that the dollar’s anticipated appreciation relative to foreign currencies would “eliminate” the change in prices created by border adjustability, meaning U.S. imports and exports would cost the exact same post-tax reform as currently.
Pomerleau’s analysis echoed concerns frequently cited in the trade community that the plan might not be consistent with World Trade Organization rules. A House Ways and Means Committee spokeswoman said the tax legislation will be written in a way that is consistent and compliant with WTO rules. "We will prevail and meet the challenge that they bring,” she said.