What is 'Border Adjustment Tax '?

Border adjustment tax is a short name for a proposed destination-based cash flow tax (DBCFT). It is a value-added tax on imported goods and is also referred to as a border-adjusted tax, destination tax or border tax adjustment. In this scenario, exported goods are exempt from tax while imported goods sold in the United States are subject to the tax.

BREAKING DOWN 'Border Adjustment Tax '

The border adjustment tax (BAT) levies a tax depending on where a good is consumed rather than where it is produced. For example, if a corporation ships tires to Mexico where they will be used to make cars, the profit the tire company makes on the tires it exports is not taxed. However, if a U.S. car company purchases tires from Mexico for use in cars made in the United States, the money the company makes on the cars (including the tires) sold in the United States is taxed. In addition, the company cannot deduct the cost of the imported tires as a business expense. The concept was first introduced by in 1997 by economist Alan J. Auerbach, who believed that the tax system would be in line with business goals and the national interest.

The Theory Behind the BAT

A tax on consumer goods typically increases consumer prices, but Auerbach's theory contends that the BAT would strengthen domestic currency and that the stronger domestic currency would effectively reduce the price of imported goods. This effectively cancels out a higher tax on imports.

This tax is designed to even out imbalances in money flows across borders and reduce corporations' incentive to off-shore profits. This makes the DBCFT a tax and not a tariff. Although it is a tax on imports and an export subsidy, the rate of border adjustments is paired and symmetric.  Thus, the effects on trade of these two components – the import tax and the export subsidy – are offsetting.  Applying them together imposes no trade distortions although adopting either separately would.

Critics of the tax argue that prices will rise on imported goods, from China for example, and that the result will be inflation. Proponents of the tax purport that the surge in foreign demand for U.S. exports will strengthen the value of the dollar. In turn, a strong dollar would increase the demand for imported goods, so that the net effect on trade is neutral.

If BAT were adopted, any company that sold goods in the United States, regardless of where the company bases its headquarters or production facilities would be subject to tax. If it does not sell goods in the United States, they would not be subject to the tax. If a product is manufactured in America and consumed abroad, that product would also be free of tax. Thus, the U.S. tax rate or tax burden is not a factor in the firm’s decision on where to locate.

Where the BAT Stands Now

In the United States, Auerbach's recommendations were presented by the Republican Party in 2016 in a policy paper that promoted a destination-basis tax system. In February 2017, the proposal was the subject of heated debate with Gary Cohn, director of the National Economic Council, opposing the tax system and a lobby group, Americans for Prosperity (AFP) funded by the Koch brothers, initiating a plan to fight the tax.

Proponents of the tax believe that the United States would become a desirable place for the location of businesses and investments and would stop businesses from locating abroad. This would create U.S. jobs and would mean that American workers do not have to pay for corporate tax cuts. 

RELATED TERMS
  1. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  2. Taxes

    An involuntary fee levied on corporations or individuals that ...
  3. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  4. Consumption Tax

    A consumption tax is a tax on the purchase of a good or service. ...
  5. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
  6. Hidden Taxes

    Taxes that are indirectly assessed upon consumer goods without ...
Related Articles
  1. Investing

    How Trump's Tax Plan Is Dividing Corporate America

    Dozens of U.S. exporters support the "border adjustment" tax proposal, but major retailers oppose the move.
  2. Insights

    The Biggest Loser: Border Adjustment Tax Edition

    These companies could see their stocks affected if a destination-basis tax is imposed.
  3. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  4. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  5. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  6. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  7. Insights

    Trump Administration Considers 20% Tax on Mexican Imports

    If Mexico won't pay for the wall, American consumers may have to.
  8. Taxes

    How the GOP Tax Bill Affects You

    Here's how the new tax bill changes the taxes you file in 2018.
  9. Taxes

    Internet Sales Tax Vs. Brick & Mortar Sales Tax

    Learn about the differences between sales taxes and Internet sales taxes, and the goods and services that typically incur each type of tax.
  10. Investing

    Manufacturing Giants Back US Tax Reforms

    The nation’s largest aerospace and defense companies sent a letter to congressional leaders backing controversial plans to overhaul the U.S. tax system.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  2. What are the differences between regressive, proportional, and progressive taxes?

    Learn the three basic types of tax systems--regressive, proportional, and progressive--used in the U.S., and how they affect ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center