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Border Adjustment Tax: What We Know (Not Much) and What We Don’t (All the Rest)

February 23, 2017
By Jason J. Fichtner, Veronique de Rugy, Adam N. Michel

This paper, written by Mercatus Center senior research fellows Jason Fichtner and Veronique de Rugy, examines how the 2016 House Republican Tax Reform Task Force Blueprint’s “destination-based cash flow tax” (DBCFT) may affect businesses and consumers.

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This paper, written by Mercatus Center senior research fellows Jason Fichtner and Veronique de Rugy, examines how the 2016 House Republican Tax Reform Task Force Blueprint’s “destination-based cash flow tax” (DBCFT) may affect businesses and consumers.

DBCFT, as currently understood, would have unknown and unforeseen consequences, Fichtner and de Rugy write.

“Depending on the assumptions and historical examples, reasonable people can disagree about the question ‘would exchange rates fully adjust to offset border adjustments,” Fichtner and de Rugy write. “However, it seems clear that this type of border adjustable tax plan is an economic gamble. We cannot know in practice if any resulting exchange rate revaluation would uniformly adjust across the world or how more closely managed currencies would react. If exchange rates don’t immediately fully adjust, then at a 20 percent corporate tax rate, the United States could be creating a 25 percent tax wedge between domestic and foreign prices—dramatically increasing the prices of US consumer goods.

“If the resulting distortions are passed on as price increases on imported consumer goods, this tax change could be very regressive, with the increased tax burden falling more heavily on lower-income Americans,” Fichtner and de Rugy write. “Even under a full currency adjustment, with no effect on trade flows, the adjustment itself could be a great source of wealth loss for some and windfall gains for others. This policy-caused disruption would ultimately have unknowable distributional effects on individuals and businesses through revaluation of global investments.”

DBCFT is a new and unpredictable idea, Fichtner and de Rugy write.

“A DBCFT would be a new and novel way to tax corporate income,” Fichtner and de Rugy write. “Proponents are overstating the positive effects of a DBCFT based on ambiguous results in the research literature while understating some likely negative distortions caused by the changes. In addition, there are many unanswered questions about the effects of a DBCFT that must be better understood before this reform is enacted.”