Q. What is the proposed "border adjustment tax," and
what does it mean for businesses?
A. Donald Trump campaigned on the promise of
bringing manufacturing jobs back to the U.S. and called for
imposing tariffs on imported goods to accomplish this. The House
Republican leadership has responded by proposing the border
adjustment tax instead.
A border adjustment tax would replace the current corporate
income tax with a tax that is imposed on corporate income from
domestically-consumed goods and services only. A corporation's
taxable income would be equal to its revenue from sales in the U.S.
less the cost of domestic labor and domestically-sourced
Revenue from exports will not enter the equation, nor will the
expense of paying for foreign labor or goods. The net result will
be to tax profits from the sale of goods sold in the United States
(whether imported or domestically produced). This will have the
salutary effect of eliminating tax incentives for corporations to
locate operations and assets in tax haven jurisdictions.
The border adjustment tax proposal has generated a great deal of
controversy: Exporters generally favor it, while importers are
lining up in opposition. Businesses that have their operations,
suppliers and sales solely in the U.S. should be unaffected. For
exporters, reduced taxes should drop right to the bottom line,
increasing their short-term profitability.
But businesses that rely on imported goods (for instance,
retailers) cannot deduct the cost of those imports, and their taxes
may increase dramatically. Many economists believe that in the long
run, the border adjustment tax will cause the U.S. dollar to
strengthen, making imported goods less expensive and domestic goods
more expensive; and this change in the exchange rates will offset
both the tax advantages for exporters and additional taxes for
importers, leaving the border adjustment economically neutral for
That said, the economic disruption that could be caused by the
transition to a border adjustment tax could be substantial and the
as-yet unwritten transition rules will be critical to determining
the ultimate impact.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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