What is the Border Adjustment Tax?
The House Republicans' plan to upend how the U.S. collects corporate taxes
What is the Border-Adjusted Tax? Republicans are proposing a tax concept common in other countries but novel in the U.S. The idea is "border adjustment." Under the plan, companies wouldn't be able to deduct the cost of imports from their revenue, a move that today enables them to lower their overall tax burden. At the same time, exports and other foreign sales would be made tax-free. The plan would operate like a tax on the trade deficit and raise about $1 trillion over a decade, according to independent estimates, which could help pay for lower tax rates and other provisions.
What Does this Mean for Companies Inside and Outside of the U.S.? Let’s say a small business sells $10,000 of merchandise in a year. The goods cost the company $5,000 and labor for those goods cost $2,000, leaving $3,000 in profit. For purely domestic companies, the border adjustment doesn’t matter. But companies will see changes from the rate reduction, the ability to write off capital expenses immediately and the inability to deduct net interest.
For Companies Importing Goods From Outside The U.S.
A similar business in the U.S. instead gets its raw materials from Mexico. Under border adjustment, the company can't deduct the cost of those imports from its taxable income, a change that will raise its tax bill. Another factor is in play here, which is the value of the dollar.
Economists say the dollar will rise as a result of the change, which could offset the tax increase by making the same imports less expensive. (Some importers say the currency won't shift enough to make a difference.)
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