Border adjustment proposal is equal parts genius and crazy

The switch to a so-called ‘border adjustment’ system of corporate tax, which was included in the House Republicans’ ‘Better Way’ proposals earlier this year, is beginning to draw more attention in the markets because of the scope for some very big winners and losers. We admire the boldness of the idea which, by transforming corporate tax into a destination-based 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.