Border-Adjustable Taxes Good For US Economy January 23, 2017

Last week, Speaker Paul Ryan (R-WI.) spoke in support of the current GOP tax reform proposal, 

Last week, Speaker Paul Ryan (R-WI.) spoke in support of the current GOP tax reform proposal, including border-adjustable tax provisions. The Speaker was responding to a question from Coalition for a Prosperous America (CPA) member Bill Jones at a Pennsylvania town hall meeting, also available on YouTube.  Speaking to Jones, who is CEO of Pennsylvania manufacturer Penn United Technologies, Ryan said: “By taking tax off our exports and placing it on our imports, we’re leveling the playing field and at the end of the day, we’re making China pay for our tax reform.”

The CPA welcomes and supports Republican efforts to incorporate border-adjustability into tax reform, which is widely expected to be a major legislative initiative this year. However there are legitimate concerns over the legality of the Republican proposals under World Trade Organization (WTO) rules, which apply different taxes for exports and domestically generated sales. Those are likely illegal under WTO rules, which explicitly rule out border-adjustable direct taxes.

The CPA supports two alternative forms of border-adjustable taxes and urges members of the Congress to consider these proposals. We advocate the adoption of a national value-added tax (VAT) as an effective, legal, and well-precedented form of border-adjustable taxation that encourages balanced trade. VAT is a tax levied on the value-added at each stage of production. However exports are exempt from VAT, giving our exporters a real competitive advantage in international markets. VAT has been used by dozens of countries around the world for half a century, is well-known and approved under WTO rules. 

CPA also supports reform to the U.S. corporate profit tax system. We advocate replacing the current system of taxation of global corporate profits (albeit with many deductions and loopholes) with a system known as sales factor apportionment (SFA). Under an SFA system, corporations would pay tax to the U.S. Treasury only on profits associated with U.S. sales. This system would apply equally to U.S. corporations and the U.S. subsidiaries of foreign-owned corporations. An SFA tax regime removes the incentive for corporations to shift profits to foreign jurisdictions, because U.S. tax liability would depend simply on a corporation’s total net taxable income, and the portion of its revenue derived from U.S. sales.  Profit tax based on SFA is also well-known, used by other nations and would have no problems with WTO rules. 

In all cases, CPA advocates tax reform that is revenue-neutral. When new border-adjustable taxes are introduced, other taxes would be reduced to ensure that the government’s total tax take does not change.

 “Border-adjustable taxes are a valuable tool to support U.S. business as it works towards closing our huge trade deficit,” commented CPA CEO Michael Stumo. “We welcome support for such tax reform from Republicans in the House and other policymakers and we urge them to consider a VAT and profit tax based on SFA as the most efficient and globally acceptable ways to support U.S. business and economic growth.”


For more on CPA Tax Strategy, go here