Border Adjustment Tax - Explained
What is a Border Adjustment Tax?
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Table of ContentsWhat is a Border Adjustment Tax?How Does a Border Adjustment Tax Work?The Theory Behind the Border Adjustment TaxAcademic Research on Border Adjustment Tax
What is a Border Adjustment Tax?
Border adjustment tax is a value-added tax charged on imported goods while exported goods are exempted. This tax can also be referred to as a border-adjusted tax, destination tax or border tax adjustment. This tax is also known as a destination-based cash flow tax (DBCFT).
How Does a Border Adjustment Tax Work?
The border adjustment tax (BAT) was introduced in 1997 by economist Alan J. Auerbach. He stressed that the tax system should be in tangent with business goals and the national interest. The border adjustment tax refers to a tax levied on consumption rather than production. In other words, if there is a trade of tires between Mexico and the United States where a company in Mexico produces and sells, then the united states used these tires to make cars. The United States is taxed whereas the Mexico profit on selling the tires is not taxed.
The Theory Behind the Border Adjustment Tax
Auerbach's theory strongly affirms that BAT will strengthen the domestic currency and this, in turn, will reduce or the price of imported goods and leave out import tax. However, Taxing consumer goods will eventually lead to a hike in prices that consumers have to pay for goods and services. The DBCFT is more of a tax than a tariff because it was created to improve money flows and lead to a reduction in corporations' incentive to off-shore profits. DBCFT is basically a tax on imports and export subsidy, and their effects on trades are offsetting. Their application together will not affect trade, but focussing on one will result in a distortion in trade. Pioneers of this tax have strongly affirmed that the tax will result in an increase in demand for US exports, therefore strengthening the value of the dollar, increasing demand and the neutralizing net effect on trade. But criticisms of this tax claimed that the prices of imported goods will be high and this will cause a general increase in the price of goods and services (inflation). BAT entails that companies who sell in the United States must pay tax regardless of where the products are manufactured. On the contrary, if the company does not make sales in the United States, such a company will not be taxed. This also applies to American products consumed outside the U.S as the tax will not be deducted. Finally, the U.S tax rate does not contribute to a firms decision of location. Pioneers of this tax claimed that the tax will create more employment as businesses and investments will be established in the United States and not abroad. Likewise, workers don't have to pay the corporate tax. However, the tax was kicked against. It was first presented by the republican party in 2016 in a policy paper promoting destination basis tax systems. It was then presented in February 2017, it was the subject of the debate with Gary Cohn, director of the National Economic Council.