A border-adjustment tax (also known as a border-adjusted tax, destination tax,
destination-based cash flow tax
A destination-based cash flow tax (DBCFT) is a cash flow tax with a destination-based border-adjustment. Unlike traditional corporate income tax, firms are able to immediately expense all capital investment (called "full expensing"). This ens ...
or a border tax adjustment) is a tax on goods based on location of final consumption rather than production. It allegedly eliminates incentives for companies to reduce their tax bills through
tax inversion
A tax inversion or corporate tax inversion is a form of tax avoidance where a corporation restructures so that the current parent is replaced by a foreign parent, and the original parent company becomes a subsidiary of the foreign parent, thus mov ...
and
intangible asset
An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, exclusive franchises, Goodwill (accounting), goodwill, trademarks, and trade names, reputation, Research and development, R&D, Procedural knowledge, ...
relocation.
History
The concept of a border-adjustment tax was originally the subject of a 1997 article by economist Alan J. Auerbach. Auerbach worked with Michael Devereux, who had introduced with Stephen R. Bond, the term destination-based corporate tax. Auerbach described a system that he claimed would align business incentives with the national interest.
Currency adjustment
While it may appear that this would increase consumer prices, Auerbach's theory holds that a border-adjustment tax would strengthen the domestic currency by a proportion corresponding to the tax rate. The stronger domestic currency would effectively reduce the price of imported goods, effectively cancelling out the higher tax on imports.
Trade effects
In theory, a border-adjustment tax is trade neutral: the stronger domestic currency would make exports more expensive internationally, lowering demand for exported products while reducing the costs incurred by domestic firms in purchasing goods and services in foreign markets, helping importers. Thus, the anticipated strengthening of the domestic currency effectively neutralizes the border-adjustment tax, resulting in a trade-neutral outcome. However other studies indicate that currency adjustments may not always flow through to price adjustments, shifting the incidence of the tax to consumers and/or producers.
United States
In the United States, the
Republican Party in 2016 included most of Auerbach's recommendations in their policy paper "''A Better Way — Our Vision for a Confident America''",
which promoted a move to "a destination-basis tax system."
As of February 2017, the proposal was the subject of heated debate - with
Gary Cohn
Gary David Cohn (born August 27, 1960) is an American businessman and philanthropist who served as the 11th director of the National Economic Council and chief economic advisor to President Donald Trump from 2017 to 2018. He managed the administ ...
, Director of the
National Economic Council opposing it
and the
Koch brothers
The Koch family ( ) is an American family engaged in business, best known for their political activities in the Koch network and their control of Koch Inc, the 2nd largest privately owned company in the United States (with 2019 revenues of $ ...
-funded
Americans for Prosperity
Americans for Prosperity (AFP), founded in 2004, is a Libertarian conservatism, libertarian conservative political advocacy group in the United States affiliated with brothers Charles Koch and the late David Koch. As the Koch family's primary pol ...
(AFP) lobby group, unveiling their plan to fight the tax.
See also
*
Destination-based cash flow tax
A destination-based cash flow tax (DBCFT) is a cash flow tax with a destination-based border-adjustment. Unlike traditional corporate income tax, firms are able to immediately expense all capital investment (called "full expensing"). This ens ...
References
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Taxes by type