Border adjustment: the good, the bad and the ugly

Although President-elect Donald Trump is concerned it would be “too complicated”, the House Republicans’ proposal to transform the corporate tax into a so-called destination based cash flow tax (DBCFT) still represents one of the most practical ways to further his aim of making trade “fairer” for America. Most controversially, the DBCFT would incorporate a so-called border adjustment, which means that when calculating taxable net income, exports would not be included in revenues and imports would not be included as a deductible cost. We admire the boldness of the idea which, by transforming corporate tax into a pseudo-value added tax, would reduce the incentive for multinational firms to shift profits to low-tax foreign jurisdictions. Unfortunately, the proposals would almost certainly break WTO rules and, assuming only a partial exchange rate adjustment, would lead to a marked increase in domestic price inflation. There would also be some very big winners and losers from this plan, with US retailers particularly hard hit. In the face of very strong opposition from lobbyists, our working assumption is that these radical proposals to transform the corporate tax system will eventually be dropped, particularly given Trump’s apparent reservations.