Issues, Tax

The ‘Border Adjustment Tax’: Great Tax Reform – That Gets Us Great Trade Reform

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Our nation’s tax code is a nightmare mess of thorny brambles.  Interwoven with other thorny brambles.  Behind a high wall of thorny brambles.  It is anti-citizen.  And it is anti-anything-productive citizens choose to do – up to and especially including engaging in anything having to do with business.

Many, many facets of our tax code are anti-Constitution.  For instance – do you like the Fourteenth Amendment’s equal-protection-before-the-law clause?  The tax code doesn’t.  There are seven different individual/family tax rates.  Get that?  One law – seven different rates.  Not even close to equal protection.

Image Credit: Johnacastro2012 CC0 1.0 Public Domain

Image Credit: Johnacastro2012 CC0 1.0 Public Domain

Then there are the anti-American-productivity facets.  Do you like doing business?  Or being hired by a business?  Or purchasing things from business?  Our tax code doesn’t.  In a global marketplace – where our businesses are competing against not just businesses across town and from Des Moines and Dallas, but also places like Dubai and Dublin – our government saddles our businesses with the world’s highest corporate tax rate (35%).  Which is…unhelpful.

Now-President Donald Trump is now-President Donald Trump in large part because Candidate Trump repeatedly pointed out that so many things our government does to the citizenry is just this awful.  And Trump rightly saw this as why businesses have spent the last several decades moving out of America.

Trump wants to bring businesses back.  A fantastic way to get there – is through tax reform.  Simplification of the ridiculous code.  Reduction of the ridiculous rates.  And another great reform idea: the Border Adjustment Tax.

What will the Border Adjustment Tax address?  This:

“Perhaps the more pressing issue, however, in light of the recent run on corporate inversions — in which U.S. corporations move offshore through the use of a foreign holding corporation — is that the current tax system and its burdensome 35% rate encourages corporations to flee the U.S. in search of lower taxes. The system, it could be argued, further encourages such behavior by providing a tax deduction for imported goods.

“To illustrate, assume that of the $4M X Co. spent to produce the inventory it sold during the year, $2M of that inventory was imported from overseas before ultimately being sold to U.S. consumers. That $2M would be deducted from taxable income as part of cost of goods sold in the above example, giving the corporation a $700,000 benefit ($2M * 35%).

“If there’s one thing we’re sure of, it’s this: we no longer want to incentivize imports and discourage exports; as is, it’s presumed we’ve got a $5 TRILLION trade imbalance, meaning over a ten-year window, we import $5T more in product than we export. That ain’t good.”

Indeed it ain’t.  The Border Adjustment Tax is a really good repair of this government-created mess:

“Under (this) tax reform, this system would not tax the exports of American companies, but would tax the gross value of any imports into the country. The new rate of tax on corporations is expected to be 20 percent, so that would also be the de facto rate of tax on imports.

“U.S. companies would immediately be on equal footing with their international competitors, the great majority of whom benefit from territorial taxation and border adjustability today.  American firms would be further advantaged by tax reform’s low 20 percent tax rate on corporations (down from a global high 35 percent today), and full business expensing of asset purchases (replacing multi-year depreciation deductions).

“Instead of taxing exports and not imports, we’d be taxing imports and not exports. Instead of reading about corporate inversions and outsourcing, we’d be reading about jobs and firms moving into the U.S. to take advantage of the favorable tax rules here.”

Bringing back businesses is a fantastic idea – that Trump and Congressional Republicans want.  And, we would think, what even Democrats would want.  (After all – more businesses…mean more businesses to tax [and regulate].)

So let’s have Congress pass and President Trump sign huge, sweeping tax reform – that includes this Border Adjustment Tax.  As soon as is humanly possible.

Shall we?

This is a guest post by Seton Motley Founder and President of Less Government

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