The current US corporate income tax code is extraordinarily complex. It tends to favor larger companies. It also tends to favor companies who can squirrel away their profits overseas. Even worse, it really favors companies that can afford to hire lobbyists to create loopholes and to hire lawyers and accountants necessary to exploit the loopholes.
The US has the highest corporate tax rate in the developed world, which is especially harmful to mid-size and smaller firms. Even with the high tax rate, the US collects much less in taxes (on a relative basis) than its peers, as shown in the figure below.
A border adjustment tax would reduce (or eliminate) the corporate income tax. It would alter the current corporate tax structure by essentially imposing a tax or levy of 20 percent on all imports – including components and parts used in assembly – while exempting US exporters from any taxes. In other words, US companies would no longer have to report revenue generated by their overseas sales as taxable income. At the same time, they could no longer claim expenses incurred by importing goods and materials as deductible from their federal tax obligation.
The proposed border adjustment tax may be the most revolutionary idea in corporate tax reform in decades. If approved, it would transform the corporate income tax code into something similar to the European value-added tax or VAT. Overnight, the tax would create new categories of corporate winners and losers and will most likely drive up prices for US consumers.
- Winners: Export-driven companies, including manufacturers of electronic equipment, machinery, aircraft, munitions, cars, and tobacco. Indirect winners would be small and medium sized business that benefit from a vastly simplified tax code.
- Losers: Any business that relies heavily on imports including retailers, foreign car dealers, toy manufacturers, and oil refineries. Major retailers like Walmart and Target that get many of their products from Asia and other markets with cheap labor would be hard hit by the border adjustment.
There’s a chance that the BAT may be DOA. Republican senator Lindsey Graham has said that he can’t find even 10 votes in the US Senate for the current boarder adjustment tax proposal.
Nevertheless, the current US corporate tax system is a massive drag on business growth and doesn’t even do a good job at what it’s supposed to do – generate tax revenues. At this point it’s difficult to conceive of a scheme that could be any worse than the corporate tax system currently in place.
In case you were wondering … here are the top imports and exports by state. It seems Wisconsin spends a lot of money on imported sweaters.