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Follow the Money: The GOP’s Proposal for a ‘Border Adjusted Tax’

“What does the proposed ‘border adjusted tax’ system of the new GOP administration mean for America, and the world?”

By Tristan Baylor 

   Certainly if it were any other year in politics, the prospect of a comprehensive corporate tax reform would garner more popular media attention than it currently has. With the GOP controlling both the Executive and Legislative branches, Paul Ryan (R-WI) and Kevin Brady’s (R-TX) tax blueprint, released before the election in 2016, will likely be used as a template to draft tax reform legislation in the House. The blueprint aims to rework the current corporate taxation system into a format that supports a significantly lower overall rate on corporate earnings, but which also contains a novel approach termed a “destination-based cash flow tax,” the main feature being a “border adjusted” corporate tax. This article aims to provide an interpretive framework for the border-adjusted tax, arguably the most curious and interesting feature of the blueprint.


     According the the Tax Foundation, the “destination-based” principle of a “destination-based cash flow tax” comes from the border-adjustment, which provides that “the tax is levied based on where the good ends up (the destination), rather than where it was produced (the origin).” A rough framework for how the new plan differs from the current corporate tax plan is the following: in the new plan domestic profits would be taxed 20 percent, while the current code taxes worldwide profits of U.S. headquartered companies at 35 percent. Let’s take the example of American company Boeing. Under the new system, if Boeing purchases 6,000 USD worth of materials from an overseas-supplier, the cost of those imported goods would be taxed. Under the current plan, this cost would not be taxed, or would be deductible from its global profits. Conversely, under the new system, if Boeing exports a plane overseas, the revenues from that sale would not be taxed. However, in the current system, that export revenue would count as part of global profit, and would be taxable.


     Value-added taxes (VAT), used by most European countries, follow the same principle, and the GOP plan wants to apply this concept to corporate taxation. A VAT is also destination-based tax, since the tax rate is based on the location of the customer. Like the BAT, it taxes the consumption of goods rather than income. In this way, a value-added tax (VAT) gives a good context in which to think about the border-adjusted tax (BAT).


     However, it is important to note that the BAT is not exactly a VAT tax. While they share many similarities, VAT taxes do not allow businesses to deduct payroll tax, while the BAT would. Since the BAT would tax imports but not exports, few have started to label it a tariff. While the BAT sounds like a tariff, it is not, and would not give the U.S. a trade advantage. This is because, as a PricewaterhouseCoopers tax brief explains, “either prices or exchange rates would adjust quickly to offset these effects.” Citing a paper from Krugman and Feldstein, the brief goes on to explain that “uniform and symmetric border tax adjustment on all goods and services will not change domestic consumption, domestic production, or the nation’s trade balance,” but does grant that, in the short-run, the adjustment of prices and exchange rates could lag.


     There are some valid criticisms of the border-adjustment that must be taken into account when considering its viability as part of corporate tax reform. The basis of the theoretical “neutrality” of the plan comes from an assumption that the U.S. Dollar will strengthen in response of implementing the plan. Scott Sumner, a professor of Economics at George Mason University, argues that three possibilities will follow the implementation of the new tax plan: “A. The dollar appreciates by 25%. B. The dollar is unaffected. C. The dollar appreciates by 12.5%.” In Case A, Sumner argues that trade will be unaffected though “foreigners with dollar denominated debts” could see their debt rise by 25% in local currency terms. However, countries with their currency pegged to the dollar could always intervene to limit the volatility. In case B, Sumner argues there would be a large trade shock, and equilibrium would only be restored over time “through a painful process of reducing wages and prices in foreign countries, until the real exchange rate moved back to equilibrium.” Case C may bring a hybrid of case A and B, and could potentially create a lot of downside in emerging markets, especially in countries where currencies are pegged to the dollar.


     Since Speaker of the House Paul Ryan has declared that tax reform is one of the Administration’s top priorities of 2017, it is likely we will see a draft tax legislation hammered out in Congress soon. Whether the border-adjustment is included in the final plan is uncertain – the incoming administration may not want to use its limited political capital on such a radical policy. If included, it would be the most major, unique feature of any business tax reform in multiple decades.



Olson, P., Kumar, R., Lyon, D., & Merrill, P. (n.d.). The House Republicans Blueprint: A destination-based cash-flow tax (Rep.). PricewaterhouseCoopers.

Pomerleau, K., & Entin, S. J. (n.d.). The House GOP’s Destination-Based Cash Flow Tax, Explained. Retrieved from

Sumner, S. (n.d.). The Shocking Truth about Border Tax Adjustments | EconLog | Library of Economics and Liberty. Retrieved from

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