So, What Is a Border Adjustment?
Source D. Ohmans
Date 17/01/29/11:56
So, What Is a Border Adjustment?
It’s a lot more complicated (and comprehensive) than a tariff

Edgard Garrido / Reuters

ON THURSDAY, WHITE House press secretary Sean Spicer said something sufficiently confusing that for a minute, people believed that the Trump administration intended to raise funds for a border wall by imposing a 20 percent tariff on all imports from countries with which the U.S. runs a trade deficit— including Mexico. It soon became clear that Spicer was not talking about a tariff per se, but something more like the House GOP’s border adjustment tax. (And then it later became clear that Spicer wasn’t even saying this was an actual plan, just an idea he was floating.)

President Donald Trump and his administration have used the term “border tax” in some confusing ways. It’s been used to refer to everything from a classic tariff, to a specialized tax on companies that offshore jobs, to the border adjustment—which is part of the House Republican’s tax reform proposal.

So what is the difference between a tariff and a border adjustment? A tariff can raise the prices of specific imports from specific countries, singling out a country like Mexico, for example. The border adjustment, by contrast, is a broader measure that would reconfigure corporate taxation, for all goods from anywhere outside the U.S.

“A tariff is a tax on certain foreign goods, whereas a border adjustment is a comprehensive attempt to shift U.S. tax from being a tax on production to a tax on sales,” explained Scott Greenberg, an analyst at the Tax Foundation, an independent research organization on tax policy.

In the House Republican’s tax reform plan, the border adjustments are similar to a Value Added Tax (VAT). Both foreign and domestically produced products would be taxed, but exports—things made in America that are not sold here—would be exempt from tax. Higher taxes on imports paired with lower taxes on exports will theoretically cancel each other out, as demand increases for U.S. exports (they’ll be cheaper) and the U.S. will demand fewer foreign goods (since they’ll be more expensive). Economists say this will result in a shift in exchange rates that will the offset taxes: In theory, the dollar will strengthen as a result of increased demand for cheaper American-made products. Then, as a result of a stronger dollar, American-made products won’t be so cheap and foreign goods will become cheaper since a stronger dollar increases purchasing power—offsetting the import tax.

The border adjustment is also part of a plan that would reduce the corporate income-tax rate (something Trump has already promised American business leaders), since companies would be taxed where their income is earned rather than where products are made.

"A border tax adjustment is not really a tariff, and it's not typically country specific or good specific. A border tax adjustment is part of a larger tax system where they're trying to tax consumption, and the adjustments are ways to make sure that the tax base is in fact domestic consumption," says Mihir Desai, an expert in tax policy and international finance and a professor at Harvard Business School and Harvard Law School.

Desai says that one of the advantages of passing off a border adjustment as a tariff might just be political convenience, characterizing a tax overhaul (which Republicans support) as a protectionist measure. But the border adjustment might be preferable to actual tariffs, which could lead to a trade war. “It's really not protectionist ... it's not specifically targeting a good or a country and punishing them. It's part of making a domestic consumption tax work, which is done all around the world. It is not a retaliatory punitory departure from global multilateral norms," says Desai.

The border adjustment is expected to raise as much as $120 billion in revenue for the U.S. government, according to economist Martin Feldstein. But it would be a big shift, and some worry about how smoothly the theoretical model would play out. According to New York Fed president William Dudley, a border adjustment would not only be “pretty dramatic,” but would lead to likely lead to changes in “the value of the dollar, the price of imported goods in the U.S. and I’m not sure that would all happen very smoothly,” said Dudley after a speech at the National Retail Federation earlier this month.

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