House leaders are clinging tenaciously to the idea of including border tax adjustments as part of corporate tax reform, despite significant opposition among Republicans in both chambers of Congress. They have good reason — BTAs would provide the resources necessary to overcome political opposition to a revenue-neutral package and put the United States closer to tax parity with other industrialized countries.
At about 35%, the United States has the highest marginal corporate tax rate among large industrialized economies. Although credits and deductions — such as R&D credits and the oil depletion allowance — permit some firms to pay much less, many businesses still pay taxes near the statutory maximum.
This disparity generally benefits large multinational companies with substantial lobbying budgets and who can park profits offshore, and disadvantage smaller domestic firms that often compete directly with imports.
This situation distorts investment decisions and increases the trade deficit — or at least reduces the value of the dollar
against foreign currencies that would more nearly balance trade were Washington to substantially shrink its budget deficit and households to save more.
As the United States applies a worldwide principle of corporate taxation—profits on the domestic operations are taxed immediately and profits earned by subsidiaries abroad are taxed, net of foreign corporate taxes paid, when repatriated— U.S. firms are encouraged to park hundreds of billions in earnings on the books of subsidiaries abroad.
As other OECD governments generally rely more on value-added taxes and less on corporate taxes to finance their activities, effective corporate taxes are much lower in other OECD economies than in the United States.
Along with the facts that VATs are refundable on exports and foreign governments adhere to the territorial principle of corporate taxation—they only tax profits where activities are located in their jurisdiction—U.S. corporations are encouraged to locate production, supply chain management and other activities abroad. Some formerly U.S. firms have reincorporated in low-tax jurisdictions—a practice commonly called tax inversion.
To address these issues on a permanent basis with a simple majority in the Senate, Republican leaders must craft a plan that is revenue neutral. Otherwise, they need 60 votes and cooperation from eight Democrats, which is unlikely.
Jettisoning special breaks to lower tax rates without reducing revenue collected would encourage businesses to spend less on tax dodges and lawyers who dream up those schemes, and to invest more in sound projects that create good jobs and pay good wages. However, effective average corporate tax rates would still be higher in the United States than elsewhere.
Moreover it would be very tough to win even 51 Republican votes because on a taxes-paid-basis, revenue-neutral plans create as many losers as winners. Large multinationals, oil and gas companies, and others have a lot invested in the present system, and only a plan that lowers the federal take from domestic operations overall would likely stand up to lobbying by competing interests on members of Congress.
A proposal put forward by House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady would adopt the territorial principle and implement border tax adjustments — those would forgive taxes on exports and apply those to imports. As the latter exceed the former, such a plan, along with some other moves to ensure compliance with World Trade Organization rules, would create enough additional revenue to lower the top marginal rate to about 20%.
Essentially, this would convert the U.S. corporate tax into a VAT, roughly align U.S. corporate rates with those charged elsewhere, and make the United States a much more attractive place to invest.
This plan faces a lot of undeserved opposition from retailers who say it would raise prices on imported consumer goods by 20% and place them at a competitive disadvantage, but that’s nonsense.
BTAs would be levied on the import value of the good, which excludes domestic logistics costs and wholesale and retail markups. All retailers would pay the same tax on imports and have the same cost of goods sold. For many products, the combination of lower and more competitive corporate tax rates and BTAs should encourage alternative domestic production to emerge, and that should push down retailers’ product acquisition costs.
Overall, moving to a territorial system of corporate taxation with BTAs would result in lower more competitive U.S. corporate tax rates, attract more investment and jobs to the United States, and permit businesses to pay higher wages.