Will Today’s Hearing Portray the Border Adjustment as a Trade Policy or a Tax Policy?
May 23, 2017
Today, the House Committee on Ways and Means will hold a hearing on “Increasing U.S Competitiveness and Preventing American Jobs from Moving Overseas.” The hearing is expected to focus primarily on the border adjustment, a central feature of the tax plan released last June by Speaker Paul Ryan and Chairman Kevin Brady.
This will be the first Congressional hearing about the border adjustment, after months of contentious debate about the merits and drawbacks of the proposal. As such, it is worth paying attention not only to the specific arguments presented in the hearing, but also to the overall approach that lawmakers and witnesses adopt to discuss the border adjustment.
Over the last few months, two distinct narratives have emerged regarding the border adjustment. Some commenters have focused on the effects of the border adjustment on trade, seeing it as a policy aimed at favoring U.S. production over foreign competitors. Others (including the Tax Foundation) have maintained that the border adjustment isn’t really a trade policy at all, but is instead a tool for making the tax code simpler and more efficient.
The portrayal of the border adjustment as a trade policy is common among both opponents and supporters of the proposal. Some supporters of the border adjustment, for instance, see it as a way to give U.S. exporters a leg up in global competition. Meanwhile, many opponents of the border adjustment fixate on potential negative effects on U.S. businesses that import goods and services from abroad. The common assumption among both groups is that the border adjustment is a policy intended to favor domestic production over imported goods.
However, many economists have pointed out that the trade effects from the border adjustment are likely to be small in the long run. Consequently, supporters’ hopes that the border adjustment would reinvigorate U.S. production – as well as opponents’ fears that the policy would put importers out of business – are probably significantly overstated.
By contrast, the effects of the border adjustment on the U.S. tax system would be considerable. The border adjustment would upend the paradigm of the federal business income tax, shifting it from a source-based tax to a destination-based tax. It would greatly decrease the incentive of U.S. companies to avoid federal taxes by shifting their income abroad. Within the House GOP plan, it would replace most of the current international anti-abuse rules, greatly simplifying the U.S. tax code. Over ten years, it would raise over a trillion dollars of federal revenue, helping to fund significant reductions in the corporate tax rate.
As a result, throughout today’s hearing, it will be useful to pay close attention to the rhetoric that lawmakers and witnesses use to describe the border adjustment. Will they focus on the effects of the border adjustment on importers, exporters, and the trade deficit? Or will they spend more time discussing how the border adjustment would discourage tax avoidance, broaden the business tax base, and simplify the federal tax code?
For more on the border adjustment, click here.